<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
POWER INTEGRATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 3674 94-3065014
(STATE OR THEIR (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
477 N. MATHILDA AVE.
SUNNYVALE, CA 94086
(408) 523-9200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
HOWARD F. EARHART
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER INTEGRATIONS, INC.
477 N. MATHILDA AVE.
SUNNYVALE, CA 94086
(408) 523-9200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
BRUCE E. SCHAEFFER, ESQ. GAIL CLAYTON HUSICK, ESQ.
GRAY CARY WARE & FREIDENRICH J. MICHAEL ARRINGTON, ESQ.
A PROFESSIONAL CORPORATION DANIEL P. DILLON, ESQ.
400 HAMILTON AVENUE WILSON SONSINI GOODRICH & ROSATI
PALO ALTO, CA 94301-1825 PROFESSIONAL CORPORATION
(650) 328-6561 650 PAGE MILL ROAD
PALO ALTO, CA 94304-1050
(650) 493-9300
----------------
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 (the "Securities Act") 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 4,600,000 shares $12.00 $55,200,000 $16,727.28
</TABLE>
================================================================================
(1) Includes 600,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purposes of computing the registration fee
pursuant to Rule 457(a).
----------------
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 SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 11, 1997
PROSPECTUS
SHARES
[POWER INTEGRATIONS LOGO]
COMMON STOCK
Of the 4,000,000 shares of Common Stock offered hereby, 2,100,000 shares are
being sold by the Company and 1,900,000 shares are being sold by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $10.00 and $12.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol POWI.
--------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
- --------------------------------------------------------------------------------
Total (3)................ $ $ $ $
</TABLE>
================================================================================
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $1,000,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
600,000 additional shares of Common Stock solely to cover over-allotments,
if any. If all such shares are purchased, the total Price to Public,
Underwriting Discount, and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997, at the office of the agent of Hambrecht &
Quist LLC in New York, New York.
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
, 1997
<PAGE>
(LOGO OF (GRAPHIC OF Patented TOPSwitch devices
POWER INTEGRATIONS, INC. COMPONENTS achieve a high level of
APPEARS HERE) CONTAINED IN A integration, combining a
TOPSWITCH controller, MOSFET and
APPEARS HERE) other electronic
components in a single IC.
(GRAPHIC OF IC APPEARS
HERE)
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
TOPSwitch and the Power Integrations logo are trademarks of the Company.
This Prospectus contains trademarks of other companies.
<PAGE>
(LOGO OF LARGE, DIVERSE MARKETS AND APPLICATIONS
POWER
INTEGRATIONS,
INC.
APPEARS HERE)
TOPSWITCH ICS ENABLE COST-EFFECTIVE INTEGRATION
OF AC TO DC SWITCHING POWER SUPPLIES.
(GRAPHIC OF TOPSWITCH IC AND A TYPICAL POWER SUPPLY AND THE PRODUCTS
THAT INCORPORATE SUCH POWER SUPPLIES UTILIZING TOPSWITCH ICs,
INCLUDING CELLULAR PHONE CHARGERS, DESKTOP PCs, VCRs AND
SET-TOP DECODERS APPEAR HERE)
- ----------------------------------
Based on a common, scalable architecture, Power Integrations' TOPSwitch ICs
operate over a wide power range. Customers incorporate TOPSwitch ICs into a
broad array of switching power supplies to address a large number of
high-volume markets.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes appearing elsewhere in this
Prospectus. The Common Stock offered hereby involves a high degree of risk.
See "Risk Factors."
THE COMPANY
Power Integrations, Inc. (the "Company") designs, develops and markets
proprietary, high-voltage analog integrated circuits ("ICs") for use in AC to
DC power conversion. The Company has targeted high-volume power supply
markets, including the cellular telephone, personal computer, cable and direct
broadcast satellite and various consumer electronics markets. The Company is
initially focusing on those markets that are sensitive to size, portability,
energy efficiency and time-to-market. The Company believes its patented
TOPSwitch ICs, introduced in 1994, are the first highly integrated power
conversion ICs to achieve widespread market acceptance. The Company introduced
an enhanced family of ICs, TOPSwitch-II, in April 1997.
Virtually every electronic device that plugs into a wall socket requires
some type of power supply to convert high-voltage, alternating current ("AC")
into low-voltage, direct current ("DC"). A large segment of the power supply
market in the 0.5 to 150 watt power range consists of switching power supplies
("switchers") which typically use a high-voltage discrete semiconductor along
with other components to perform the power conversion. Discrete solutions,
which emerged in the 1970's, have not kept pace with the rapid integration
trends in the electronics industry and require numerous components and a high
level of system complexity compared to a more highly integrated IC solution.
The limitations of discrete switchers have become more pronounced as a result
of increasing consumer demand for smaller and lighter electronic devices,
government guidelines promoting energy efficiency and manufacturers'
continuing efforts to reduce costs and simplify system designs. However, prior
attempts to replace discrete switchers with integrated switchers through the
use of high-voltage analog ICs did not achieve widespread acceptance because
they were not as cost-effective as discrete alternatives.
The Company's objective is to be the leading provider of high-voltage power
conversion ICs that cost effectively enable the integration of AC to DC
switching power supplies. The Company's strategy is to target high-volume
switching power supply markets with its families of TOPSwitch products. End
users include Motorola, Samsung Electronics and Nokia in the cellular
telephone market, certain of the world's largest PC manufacturers, and Pace,
Nokia and API (Sun Moon Star) in the cable and direct broadcast satellite
market. The Company also sells its products into a wide variety of other
markets which include PC peripherals, televisions, VCRs, industrial meters and
kitchen appliances. As these and other markets emerge as significant
opportunities for the Company's TOPSwitch products, the Company intends to
focus its resources on the development and penetration of these markets.
To accelerate its market penetration, the Company has dedicated
approximately 15% of its workforce to applications engineering and offers its
customers comprehensive application design support including extensive
application notes and production-ready reference design boards. The Company
sells its products to OEMs and merchant power supply manufacturers through a
direct sales staff and a worldwide network of independent sales
representatives and distributors. The Company has established strategic
partnerships with Matsushita Electronics Corporation and OKI Electric Industry
Co., Inc. in order to attain high-volume manufacturing resources, broad market
penetration and royalty revenues.
The Company was incorporated in California in March 1988, and will
reincorporate in Delaware prior to the consummation of this offering. The
Company's executive offices are located at 477 N. Mathilda Avenue, Sunnyvale,
California 94086. Its telephone number is (408) 523-9200. Its e-mail address
is [email protected] and its World Wide Web site is located at
http://www.powerint.com. Information contained on the Company's Web site shall
not be deemed to be part of the Prospectus.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company.......................... 2,100,000 shares
Common Stock offered by the
Selling Stockholders............. 1,900,000 shares
Common Stock to be outstanding
after the offering............... 10,487,270 shares (1)
Use of proceeds................... For working capital and other general
corporate purposes as well as the repayment
of $3.0 million of subordinated debt. See
"Use of Proceeds."
Proposed Nasdaq National Market
symbol........................... POWI
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF (UNAUDITED)
OPERATIONS DATA:
Net revenues.......... $ 1,944 $ 5,763 $ 7,126 $18,415 $23,943 $11,497 $17,115
Gross profit (loss)... (114) 1,999 2,802 6,044 8,397 3,913 7,005
Income (loss) from
operations........... (5,406) (3,167) (2,723) (363) (585) (162) 1,304
Net income (loss) .... $(5,409) $(3,532) $(2,752) $ (803) $(1,341) $ (499) $ 884
Pro forma net income
(loss) per share..... $(0.14) $(0.05) $ 0.09
Pro forma weighted
average common and
common equivalent
shares (2)........... 9,580 9,513 10,400
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..... $ 8,343 $25,826
Working capital....................................... 9,367 27,792
Total assets.......................................... 22,435 39,918
Long term debt and capitalized lease obligations, net
of current portion................................... 4,092 2,034
Stockholders' equity.................................. 9,478 29,961
</TABLE>
- --------
(1) Excludes 1,680,375 shares of Common Stock issuable upon exercise of
outstanding options at June 30, 1997 with a weighted average exercise price
of $1.02 per share and 474,198 shares of Common Stock issuable upon
exercise of outstanding warrants at June 30, 1997 with a weighted average
exercise price of $3.65 per share. See "Capitalization" and "Management--
Stock Plans" and Notes 6, 7 and 9 of Notes to Consolidated Financial
Statements.
(2) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute per
share amounts.
(3) Adjusted to reflect the sale of 2,100,000 shares of Common Stock offered by
the Company hereby at an assumed public offering price of $11.00 per share
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
----------------
Except as otherwise noted, all information in this Prospectus assumes (i) no
exercise of the Underwriters' over-allotment option, (ii) the reincorporation
of the Company in Delaware, (iii) the amendment of the Company's Certificate of
Incorporation prior to the effective date of this offering effecting a 1 for
6.8 reverse stock split, (iv) the conversion of all outstanding shares of
Preferred Stock of the Company into an aggregate of 7,446,923 shares of Common
Stock upon the consummation of this offering and (v) no exercise of outstanding
warrants.
4
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. The following risk factors
should be considered carefully in addition to the other information in this
Prospectus before purchasing the shares of Common Stock offered hereby.
Unpredictable and Fluctuating Operating Results. The Company's quarterly and
annual revenues and operating results have varied significantly in the past,
are difficult to forecast, are subject to numerous factors both within and
outside of the Company's control, and may fluctuate significantly in the
future. Although the Company achieved profitability in the quarter ended June
30, 1997, there can be no assurance that the Company will continue to be
profitable in future periods. The Company believes that period-to-period
comparisons are not necessarily meaningful and should not be relied upon as
indicative of future operating results. The Company believes that the growth
in revenues and operating income in the first six months of 1997 compared to
the first six months of 1996 resulted in large part from a combination of
factors relating to transitions in the Company's strategy, increasing market
acceptance of the Company's TOPSwitch products and customer ordering patterns.
Similar growth rates are not expected in future periods.
The Company's revenues and operating results are substantially dependent
upon the volume and timing of orders received by the Company from its
customers. The Company's lengthy sales cycle limits its visibility regarding
future financial performance. The Company is also subject to the risks to
which the markets for its customers' or end users' products are subject and to
technological or other changes in those markets, which may affect customer
buying patterns. In addition, the ordering patterns of some of the Company's
existing large customers have been unpredictable in the past, and the Company
expects that customer ordering patterns will continue to be unpredictable in
the future. Not only does the volume of units ordered by particular customers
vary substantially from period to period, but purchase orders received from
particular customers often vary substantially from early oral estimates
provided by those customers to the Company for planning purposes. The
Company's business is characterized by short-term customer orders and shipment
schedules, and customer orders typically can be canceled or rescheduled
without significant penalty to the customer. The Company has in the past
experienced customer cancellations of substantial orders for reasons beyond
the Company's control, and significant cancellations could occur again at any
time in the future.
The Company's revenues and operating results are also subject to competitive
pressures on selling prices. Historically, average selling prices of products
in the semiconductor and the high-voltage AC to DC power supply industries
have decreased over the lives of the products. If the Company is unable to
successfully introduce new products with higher average selling prices or is
unable to reduce manufacturing costs to offset expected decreases in the
prices of its existing products, the Company's operating margins will be
adversely affected.
The Company's operating results are also substantially dependent upon the
volume and timing of orders placed by the Company with its foundries. Due to
the absence of substantial noncancellable backlog, the Company must plan its
production and inventory levels based on internal forecasts of customer
demand, which is unpredictable and may fluctuate substantially. Because of
recent increases in demand for its products, the Company is currently seeking
to increase the level of its inventories. If the Company underestimates the
number of units required to meet customer demand and fails to maintain
adequate inventory levels, the Company may lose significant revenue
opportunities and may lose market share to competitors. On the other hand, if
the Company overestimates the number of units required to meet customer
demand, the Company's operating results may be materially and adversely
affected as a result of costs associated with carrying excess inventory and
with obsolescence. Excess inventory and obsolescence costs could be further
increased by any returns from the Company's distributors or customers.
Other factors which may affect the Company's revenues and operating results
include the availability of raw materials; fluctuations in manufacturing
yields, whether resulting from the transition to new foundries or
5
<PAGE>
from other factors; changes in product mix; the Company's ability to introduce
new products and technologies on a timely basis; introduction of products and
technologies by the Company's competitors; market acceptance of the Company's
and its customers' products; the timing of investments in research and
development and sales and marketing; cyclical semiconductor industry
conditions; fluctuations in exchange rates, particularly exchange rates
between the U.S. dollar and the Japanese yen; changes in the international
business climate; and economic conditions generally.
The Company's operating results in a future quarter or quarters are likely
to fall below the expectations of public market analysts or investors. In such
an event, the price of the Company's Common Stock will likely be materially
and adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Limited History of Profitability; Accumulated Deficit. Since inception the
Company has incurred significant losses and negative cash flow. At June 30,
1997, the Company had cumulative net losses of $25.9 million, with net losses
of $2.8 million, $803,000, $1.3 million and $71,000 for 1994, 1995, 1996 and
the first quarter of 1997, respectively. Although the Company was profitable
on an operating basis in each quarter during the nine-month period ended June
30, 1997, and achieved a positive net income for the quarter ended June 30,
1997, there can be no assurance that the Company will achieve profitability in
any future quarterly or annual periods, and recent operating results should
not be considered indicative of future financial performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Concentration of Applications. A limited number of applications of the
Company's products, primarily in the cellular phone battery chargers and
desktop PC stand-by markets, currently account for the majority of the
Company's revenues. Although the exact dollar amounts and percentages of sales
for use in particular markets are difficult to ascertain because such sales
occur through distributors or indirectly through sales to power supply
manufacturers, during the six-month period ended June 30, 1997, approximately
30% of the Company's revenues were attributable to use of the Company's
products in power supplies for cellular phone battery chargers and
approximately 15% of the Company's revenues were attributable to the use of
the Company's products in desktop PC stand-by power supplies. The Company
expects that its revenues and operating results will continue to be
substantially dependent upon these markets for the foreseeable future. The
cellular phone and desktop PC markets can be highly cyclical and have been
subject to significant economic downturns at various times, characterized by
diminished product demand, accelerated erosion of average selling prices and
production overcapacity. The Company may experience substantial period-to-
period fluctuations in future operating results due to general conditions of
these markets. The Company's revenues and operating results are subject to
many of the risks to which the markets for these applications are subject, and
may also be impacted by technological or other developments in these markets.
In particular, recent advances in battery technology which offer competitive
advantages to the OEMs of cellular telephones permit such OEMs, including
Motorola, Inc. and its subsidiaries ("Motorola"), to lower, or consider
lowering, the wattage level of the power supplies used to recharge batteries.
As the output power drops below approximately 5 watts, older technological
alternatives to switchers can be more cost effective than any of the Company's
current products. While the Company continues its efforts to enhance the cost
effectiveness of TOPSwitch-based switchers, there can be no assurance that the
Company will be successful in its efforts, and, in the absence of a successful
competitive response by the Company, demand for the Company's products would
be materially adversely affected. Similarly, if a competitor of the Company
successfully and cost effectively combines desktop PC stand-by power supplies
with the main PC desktop power supplies prior to such combination by the
Company, demand for the Company's products could be materially adversely
affected. The Company believes that its future success will depend in part
upon its ability to penetrate additional markets for its products, and there
can be no assurance that the Company will be able to overcome the marketing or
technological challenges necessary to do so. To the extent that a competitor
penetrates additional markets before the Company is able to do so, or takes
market share from the Company in its existing markets, the Company's strategy
to be the leading provider of high-voltage power conversion ICs, and the
Company's revenues, financial condition and operating results would be
materially adversely affected. See "Business--Markets."
6
<PAGE>
Customer Concentration. The Company's end user base is highly concentrated
and a relatively small number of OEMs, directly or indirectly through merchant
power supply manufacturers, accounted for a significant portion of the
Company's revenue in 1996 and the six months ended June 30, 1997. Motorola is
presently the Company's largest end user. Although the exact dollar amounts
and percentages of sales to Motorola are difficult to ascertain because most
of such sales occur through distributors or indirectly through sales to
merchant power supply manufacturers which, in turn, sell power supplies to
Motorola, the Company estimates that direct and indirect sales to Motorola
accounted for in excess of 25% of the Company's net revenues for the six
months ended June 30, 1997. As Motorola continues to shift to cellular phone
chargers with power ranges below 5 watts and, in certain lower end products,
trades form factor and functionality for additional cost savings, Motorola may
increase its usage of solutions based on older technologies rather than
switchers. As a result of these factors, the Company has received indications
that the growth rate of orders from Motorola is likely to slow, and there is
no assurance that direct or indirect orders from Motorola will not decline
from levels experienced in prior quarters. If the Company's current efforts to
enhance the cost-effectiveness of solutions utilizing TOPSwitch are not
successful in preventing this slowing of growth or decline in orders, the
Company's business, financial condition and operating results will be
materially and adversely affected, unless the Company is able to offset any
such reduction with orders from other customers.
The Company estimates that its top ten customers, including distributors
which resell to Motorola and other large OEMs and merchant power supply
manufacturers, accounted for 64% and 70% of the Company's net revenues for
1996 and the six months ended June 30, 1997, respectively. The Company expects
that it will continue to be dependent upon a relatively limited number of
customers for a significant portion of its net revenues in future periods,
although none of them is presently obligated to purchase any specified amounts
of products or to provide the Company with binding forecasts of product
purchases for any period. The Company's products are typically one of many
components used in a larger product produced by the Company's customers.
Demand for the Company's products is therefore subject to many risks beyond
the Company's control, including, among others, competition faced by the
Company's customers in their particular industries, market acceptance of the
products of the Company's customers, technical challenges which may or may not
be related to the components supplied by the Company, the technical, sales and
marketing and management capabilities of the Company's customers, and the
financial and other resources of the Company's customers. Certain divisions
within Motorola have developed products intended to compete with TOPSwitch, as
has Samsung Electronics ("Samsung"), another customer of the Company's
products. The Company believes that it has been successful in competing
against such internally developed products to date, but there can be no
assurance that it will not in the future lose sales as a result of such
competing products. The reduction, delay or cancellation of orders from
Motorola or one of the Company's other significant customers, or the
discontinuance of the Company's products by the Company's end users, could
materially and adversely affect the Company's business, financial conditions
and results of operations. The Company has experienced such effects in the
past and there can be no assurance that any of the Company's customers will
not reduce, cancel or delay orders in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Dependence on Outside Manufacturing and Assembly. The Company outsources all
of its semiconductor manufacturing and product assembly except for testing and
finishing. The Company has supply arrangements for the production of wafers
with Matsushita Electronics Corporation and an affiliate of Matsushita
("MEC"), and OKI Electric Industry Co., Ltd. ("OKI"). Although certain aspects
of the Company's relationships with MEC and OKI are contractual, many
important aspects of these relationships depend on the continued cooperation
of these strategic partners and, in many instances, the parties' course of
conduct deviates from the literal provisions of the contracts. There can be no
assurance that the Company and its strategic partners will continue to work
together successfully in the future or that either MEC or OKI will not seek an
early termination of its wafer supply agreement with the Company.
The Company's wafer supply contracts with OKI and MEC terminate in June 1998
and June 2000, respectively. There can be no assurance that the Company will
be able to reach an agreement with either company to extend the term of its
respective wafer supply agreements. The Company's failure to reach, in a
7
<PAGE>
timely fashion, an extension of either agreement or to enter into an
arrangement with another manufacturer, could result in material disruptions in
supply. Certain contractual provisions limit the conditions under which the
Company can enter into such arrangements with other Japanese manufacturers or
their subsidiaries during the term of the agreement with MEC. In addition, the
Company's products do not require leading edge device process geometries. As
device process geometries become increasingly smaller and as demand for such
smaller geometries increases, MEC and OKI may decide at some point to convert
all of their manufacturing processes to smaller geometries in response to
these industry trends. In the event of a supply disruption with OKI or MEC, if
the Company were unable to qualify alternative manufacturing sources for
existing or new products in a timely manner or if such sources were unable to
produce wafers with acceptable manufacturing yields, the Company's business,
financial condition and operating results would be materially and adversely
affected. The Company estimates that it would take between 9 to 12 months from
the time an alternate manufacturing source is identified for such source to
produce wafers with acceptable manufacturing yields in sufficient quantities
to meet the Company's needs.
The Company typically receives shipments from MEC or OKI in approximately 12
to 14 weeks after placing orders, and lead times for new products can be
substantially longer. To provide sufficient time for assembly, testing and
finishing, the Company typically needs to receive wafers from MEC or OKI 4 to
6 weeks before the desired ship date to the Company's customers. As a result
of these factors and the fact that customers' orders can be made with little
advance notice, the Company has only a limited ability to react to
fluctuations in demand for its products, which could cause the Company to have
an excess or a shortage of inventory of a particular product. From time to
time in the past, the Company has been unable to fully satisfy customer
requests as a result of these factors. Any significant disruptions in
deliveries would materially and adversely affect the Company's business and
operating results. Although the Company provides OKI and MEC with rolling
forecasts of its production requirements, the ability of MEC or OKI to provide
wafers to the Company is limited by the available capacity of the foundry in
which it manufactures wafers for the Company. An increased need for capacity
to meet internal demands or demands of other customers could cause MEC and OKI
to reduce capacity available to the Company. MEC and OKI may also require the
Company to pay amounts in excess of contracted or anticipated amounts for
wafer deliveries or require that the Company make other concessions in order
to acquire the wafer supply necessary to meet the Company's customers'
requirements. Any such concessions could materially adversely affect the
Company's business, financial condition or operating results.
The Company depends on MEC and OKI to produce wafers, and independent
subcontractors to assemble finished products, at acceptable yields and to
deliver them to the Company in a timely manner. The manufacture of the
Company's TOPSwitch products utilizes a standard CMOS process with a
proprietary, highly sensitive implant process step. To the extent the wafer
foundries do not achieve acceptable manufacturing yields or they experience
product shipment delays, the Company's financial condition or results of
operations would be materially and adversely affected. The Company's IC
assembly process requires a sole source high-voltage molding compound that is
difficult to process. This compound and its required processes, together with
the other non-standard materials and processes needed to assemble the
Company's products, require a more exacting level of process control than
normally required for standard packages. Unavailability of the sole source
compound or problems with the assembly process can materially and adversely
effect yields and cost to manufacture. Good production yields are particularly
important to the Company's business and financial results, including its
ability to meet customers' demand for products and to maintain profitability.
As the Company continues to increase its product output, there can be no
assurance that the Company's foundries and assemblers will not experience a
decrease in yields. Moreover, there can be no assurance that acceptable yields
will be maintainable in the future.
Because the Company depends on MEC and OKI, both located in Japan, for the
manufacture of all of its finished silicon wafers and on foreign assembly
subcontractors of its products, the Company is directly affected by the
political and economic conditions of the countries in which its wafers are or
are expected to be manufactured. To the extent that these conditions result in
any prolonged work stoppages or other inability of the Company to manufacture
and assemble its products, the Company's business, financial condition or
8
<PAGE>
results of operations could be materially adversely affected. The Company's
contracts with MEC and OKI are denominated in Japanese yen, exposing the
Company to the risk of increase in the value of the yen against the U.S.
dollar resulting in increased costs for finished wafers which could not be
readily passed through to the Company's customers.
MEC currently manufactures and sells its versions of the Company's TOPSwitch
families of products under the right (exclusive during the term of the
contract of other Japanese companies, except OKI, and their subsidiaries)
granted by the Company to manufacture and sell products using the Company's
technology to Japanese companies worldwide and to subsidiaries of Japanese
companies located in Asia. In certain circumstances, these products are
redistributed by the Japanese customers to their manufacturing operations in
other regions. Beginning in April 1997, the Company agreed not to sell its
products in Japan to new customers. The Company receives royalties on sales by
MEC, although such royalties are substantially lower than the gross profit the
Company would receive on direct sales. In addition, the royalties paid by MEC
are denominated in Japanese yen and are subject to risks inherent in exchange
rate fluctuations. Although the Company engages in sales, marketing and
support activities to encourage sales by MEC, should MEC fail to adequately
promote and deliver the Company's products, the Company's ability to take
advantage of the potentially large Japanese market for its products could be
severely limited. OKI has a similar, non-exclusive license arrangement with
the Company but it does not currently manufacture and sell products to third
parties. See "Business--Intellectual Property and Other Proprietary Rights."
Should the Company fail to negotiate acceptable royalty-bearing extensions to
its contracts with MEC or OKI (if OKI begins to actively exercise its license
rights), substantial effort and expense would be required for the Company to
establish itself in this market directly or though a different partner, and
there can be no assurance that customers for MEC's or OKI's products would not
be lost to the Company during such a transition. In addition, the licenses to
MEC and OKI for many important aspects of the Company's technology are
perpetual, and there can be no assurance that MEC or OKI will not use such
technology rights, together with the information and expertise it gains in its
relationship with the Company, to develop or market competing products
following any termination of its relationships with the Company or after
termination of its royalty obligations to the Company.
Risks of International Sales. Sales to customers outside of the United
States were $2.9 million, $11.3 million, $16.8 million and $13.2 million in
1994, 1995 and 1996 and for the six months ended June 30, 1997, respectively,
which represented 57%, 65%, 72% and 79% of total revenues for such periods.
These sales involve a number of inherent risks, including imposition of
government controls, currency exchange fluctuations, potential insolvency of
international distributors and representatives, reduced protection for
intellectual property rights in some countries, the impact of recessionary
environments in economies outside the United States, political instability and
generally longer receivables collection periods, tariffs and other trade
barriers and restrictions, and the burdens of complying with a variety of
foreign laws. Furthermore, because substantially all of the Company's foreign
sales are denominated in U.S. dollars, increase in the value of the dollar
would increase the price in local currencies of the Company's products in
foreign markets and make the Company's products relatively more expensive and
less price competitive than competitors' products that are priced in local
currencies. The Company is exposed to additional risks to the extent that the
products of its customers are subject to foreign currency or other
international risks. There can be no assurance that these factors will not
have an adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition or operating
results.
New Products and Technological Change. The Company's future success depends
in significant part upon its ability to develop new ICs for high-voltage power
conversion for existing and new markets, to introduce such products in a
timely manner and to have such products selected for design into products of
leading manufacturers. The development of these new devices is highly complex,
and from time to time the Company has experienced delays in completing the
development of new products. Successful product development and introduction
depends on a number of factors, including accurate new product definition,
timely completion and introduction of new product designs, availability of
foundry capacity, achievement of manufacturing yields and market acceptance of
the Company's and its customers' products. There can be no
9
<PAGE>
assurance that the Company will be able to adjust to changing market demands
as quickly and cost-effectively as necessary to compete successfully.
Furthermore, there can be no assurance that the Company will be able to
introduce new products in a timely and cost-effective manner or in sufficient
quantities to meet customer demand or that such products will achieve market
acceptance. The Company's or its customers' failure to develop and introduce
new products successfully and in a timely manner would materially adversely
affect the Company's business, financial condition or operating results.
Certain customers may defer or return orders for existing products in response
to the introduction of new products. Although the Company maintains reserves
against any such returns, there can be no assurance that such resources will
be adequate.
Lengthy Sales Cycle. The Company's products are generally incorporated into
a customer's products at the design stage. However, customer decisions to use
the Company's products (design wins), which can often require significant
expenditures by the Company without any assurance of success, often precede
volume sales, if any, by a year or more. If a customer decides at the design
stage not to incorporate the Company's products into its product, the Company
will not have another opportunity for a design win with respect to that
product for many months or years. Because of such lengthy sales cycle, the
Company may experience a delay between increasing expenses for research and
development and its sales and marketing efforts and the generation of volume
production revenues, if any, from such expenditures. Moreover, the value of
any design win will largely depend upon the commercial success of the
customer's product. There can be no assurance that the Company will continue
to achieve design wins or that any design win will result in future revenues.
Failure by the Company to timely develop and introduce products that are
incorporated into its customers' products could have a material adverse effect
on the Company's business, financial condition or results of operations.
Product Quality, Performance and Reliability. The fabrication and assembly
of ICs is a highly complex and precise process. The Company expects that its
customers will continue to establish demanding specifications for quality,
performance and reliability that must be met by the Company's products. ICs as
complex as those offered by the Company often encounter development delays and
may contain undetected defects or failures when first introduced or after
commencement of commercial shipments. The Company has from time to time in the
past experienced product quality, performance or reliability problems. There
can be no assurance that defects or failures will not occur in the future
relating to the Company's product quality, performance and reliability that
may have a material adverse effect on the Company's operating results. If such
defects and failures occur, the Company could experience lost revenue,
increased costs (including warranty expense and costs associated with customer
support), delays in or cancellations or reschedulings of orders or shipments
and product returns or discounts, any of which would have a material adverse
effect on the Company's business, financial condition or operating results.
Competition. The high-voltage power supply industry is intensely competitive
and characterized by extreme price sensitivity. Accordingly, the most
significant competitive factor in the target markets for the Company's
products is cost effectiveness. The Company's products face competition from
alternative technologies, primarily discrete switchers. The Company believes
that at current pricing, the TOPSwitch families of products offer favorable
cost performance benefits compared to discrete switchers in many high-volume
applications over the power range of approximately 0.5 watts to 150 watts.
However, any significant erosion in the price of discrete components, such as
high voltage Bipolar and MOSFET transistors and PWM controller ICs, could
adversely affect the cost effectiveness of the TOPSwitch products. Also, older
alternative technologies to switchers are more cost-effective than switchers
that use the Company's TOPSwitch products in certain power ranges for certain
applications. If power requirements for certain applications in which the
Company's products are currently utilized, such as battery chargers for
cellular telephones, drop below certain power levels, these older alternative
technologies can be used more cost effectively than TOPSwitch-based switchers.
The Company is continuing its efforts to use its extensive system level
expertise to enhance the cost effectiveness of TOPSwitch-based switchers in
the lower power ranges. There can be no assurance that the Company will be
successful in these efforts.
Recently, the Company's TOPSwitch product families have begun to meet
additional competition from hybrid and single high-voltage ICs similar to
TOPSwitch. These competing products are being developed or
10
<PAGE>
have been developed and are being produced by companies such as Motorola, SGS-
Thompson Microelectronics ("SGS"), Samsung and Sanken Electric Company, Ltd.
("Sanken"). The Company expects competition to increase as Motorola, SGS,
Samsung, Sanken and possibly other companies develop and introduce new
products. To the extent these competitors' products are more cost-effective
than the Company's products, the Company's business, financial condition and
results of operations could be materially and adversely affected. Many of the
Company's emerging competitors, including Motorola, SGS, Samsung and Sanken,
have significantly greater financial, technical, manufacturing and marketing
resources than the Company. In the context of a market where a high-voltage IC
is designed into a customer's product and the provider of such ICs is
therefore the sole source of the IC for that product, greater resources and,
in particular, greater manufacturing resources, may be a significant factor in
the customer's choice of the IC because of the customer's perception of
greater certainty in its source of supply. See "Risk Factors--Customer
Concentration."
The Company's ability to compete in its target markets also depends on such
factors as the timing and success of new product introductions by the Company
and its competitors, the pace at which the Company's customers incorporate the
Company's products into their end user products, availability of wafer
fabrication and finished good manufacturing capability, availability of
adequate sources of raw materials, protection of Company products by effective
utilization of intellectual property laws and general economic conditions.
There can be no assurance that the Company's products will continue to compete
favorably or that the Company will be successful in the face of increasing
competition from new products and enhancements introduced by existing
competitors or new companies entering this market. Failure of the Company to
compete successfully in the high-voltage power supply business would
materially and adversely affect the Company's business, financial condition
and results of operations. See "Business--Competition."
Dependence on Proprietary Technology. The Company's future success depends
in part upon its ability to protect its intellectual property, including
patents, trade secrets, and know-how, and to continue its technological
innovation. There can be no assurance that the steps taken by the Company to
protect its intellectual property will be adequate to prevent misappropriation
or that others will not develop competitive technologies or products.
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. While the Company has not
received formal notice of any infringement of the right of any third party,
questions of infringement in the semiconductor field involve highly technical
and subjective analyses. Litigation may be necessary in the future to enforce
the Company's patents and other intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity, and there can be no assurance that the Company would prevail in
any future litigation. Any such litigation, whether or not determined in the
Company's favor or settled by the Company, would be costly and would divert
the efforts and attention of the Company's management and technical personnel
from normal business operations, which would have material adverse effect on
the Company's business, financial condition and results of operations. Adverse
determinations in litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require
the Company to seek licenses from third parties or prevent the Company from
licensing its technology, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Moreover, the laws of certain foreign countries in which the Company's
technology is or may in the future be licensed may not protect the Company's
intellectual property rights to the same extent as the laws of the United
States, thus increasing the possibility of infringement of the Company's
intellectual property.
Dependence on Key Personnel. The Company's success depends to a significant
extent upon the continued service of its executive officers and other key
management and technical personnel, and on its ability to continue to attract,
retain and motivate qualified personnel, such as experienced systems
applications engineers. The competition for such employees is intense. The
loss of the services of one or more of the Company's engineers, executive
officers or other key personnel or the Company's inability to recruit
11
<PAGE>
replacements for such personnel or to otherwise attract, retain and motivate
qualified personnel could have a material adverse effect on the Company's
business, financial condition or operating results. The Company does not have
long-term employment contracts with any of its employees. The Company does not
have in place "key person" life insurance policies on any of its employees.
See "Business--Employees" and "Management."
Management of Growth. The Company has experienced a period of rapid growth
and expansion which has placed, and continues to place, a significant strain
on its resources. To accommodate this growth, the Company will be required to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the improvement of its accounting and other
internal management systems, all of which may require substantial management
efforts. There can be no assurance that such efforts can be accomplished
successfully. In addition, any future periods of rapid growth or expansion
could be expected to place a significant strain on the Company's limited
managerial, financial, engineering and other resources. Relationships with new
customers generally require significant engineering support. As a result, any
increases in the number of customers using the Company's technology will
increase the strain on the Company's resources, particularly the Company's
engineers. Any delays or difficulties in the Company's research and
development process caused by these factors or others could make it difficult
for the Company to develop future generations of its products and to remain
competitive. In addition, the rapid rate of hiring new employees could be
disruptive and adversely affect the efficiency of the Company's research and
development process. Any failure to improve the Company's operational,
financial and management systems, or to hire, train, motivate or manage its
employees could have a material adverse effect on the Company's business,
financial condition and operating results.
Concentration of Share Ownership and Voting Power; Anti-Takeover
Provisions. Upon the closing of this offering (assuming no exercise of the
Underwriters' over-allotment option), officers, directors and affiliates of
the Company will beneficially own approximately 27.0% of the Company's
outstanding Common Stock. As a result, these stockholders as a group will be
able to substantially influence the management and affairs of the Company and,
if acting together, would be able to influence most matters requiring the
approval by the stockholders of the Company, including election of directors,
any merger, consolidation or sale of all or substantially all of the Company's
assets and any other significant corporate transactions. The concentration of
ownership could have the effect of delaying or preventing a change in control
of the Company, reducing the likelihood of any acquisition of the Company at a
premium price. See "Principal and Selling Stockholders."
Upon the closing of this offering, the Company's Board of Directors ("Board
of Directors" or "Board") has the authority to issue up to 3,000,000 shares of
Preferred Stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by the stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be
issued in the future. The issuance of shares of Preferred Stock, while
potentially providing desirable flexibility in connection with possible
acquisitions and for other corporate purposes, could have the effect of making
it more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. The Company has no present intention to issue
shares of Preferred Stock. In addition, certain provisions of the Company's
Amended Certificate of Incorporation, which will become effective upon
consummation of this offering, may have the effect of delaying or preventing a
change of control of the Company, which could adversely affect the market
price of the Company's Common Stock. These provisions provide, among other
things, that stockholders may not take action by written consent, that the
ability of stockholders to call special meetings of stockholders and to raise
matters at meetings of stockholders is restricted and that certain amendments
of the Company's Certificate of Incorporation, and all amendments of the
Company's Bylaws, require the approval of holders of at least 66 2/3% of the
voting power of all outstanding shares. In addition, the Company is subject to
the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which will prohibit the Company 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 the business combination is approved in a prescribed
manner. The application of Section 203 also could have the effect of delaying
or preventing a change of control of the Company.
12
<PAGE>
Broad Management Discretion over Use of Proceeds. The primary purposes of
this offering are to increase the Company's equity capital, to create a public
market for the Company's Common Stock and to facilitate future access by the
Company to public capital markets. A significant portion of the anticipated
net proceeds to the Company from this offering has not been designated for
specific uses. Accordingly, management of the Company will have broad
discretion with respect to the use of these funds. See "Use of Proceeds."
Shares Eligible For Future Sale; Registration Rights. Sales of substantial
amounts of Common Stock in the public market after this offering could
adversely affect the prevailing market price of the Common Stock. Immediately
upon the effectiveness of this offering, 4,059,403 shares will be freely
tradeable. Commencing 180 days following the date of this offering, an
additional 7,379,309 shares will become freely tradeable upon the expiration
of agreements not to sell such shares, subject to compliance with Rule 144
promulgated under the Securities Act of 1933, as amended. Hambrecht & Quist
LLC may in its sole discretion and at any time without notice, release all or
any portion of the securities subject to such agreements. Immediately after
this offering, the Company intends to register approximately 2,582,227 shares
of the Company's Common Stock reserved for issuance under its stock option and
purchase plans. See "Shares Eligible for Future Sale."
As of the effective date of the Registration Statement, the holders of
6,258,212 shares of the Company's Common Stock will be entitled to certain
registration rights with respect to such shares. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have an adverse
effect on the market price for the Company's Common Stock. If the Company were
required to include in a Company initiated registration shares held by such
holders pursuant to the exercise of their piggyback registration rights, such
sale might have an adverse effect on the Company's ability to raise needed
capital. See "Description of Capital Stock--Registration Rights."
No Prior Market; Expected Volatility of Stock Price. Prior to this offering
there has been no public market for the Common Stock of the Company. The
initial public offering price will be determined by negotiations between the
Company, the Selling Stockholders and the Representatives of the Underwriters.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. There can be no assurance that
an active public market will develop or be sustained after this offering or
that the market price of the Common Stock will not decline below the initial
public offering price. Future announcements concerning the Company or its
competitors, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, proprietary rights
or other litigation, changes in earnings estimates by analysts or other
factors could cause the market price of the Common Stock to fluctuate
substantially. In addition, stock prices for many technology companies
fluctuate widely for reasons which may be unrelated to operating results.
These fluctuations, as well as general economic, market and political
conditions such as recessions or military conflicts, may materially adversely
affect the market price of the Company's Common Stock. Moreover, the trading
prices of many high technology stocks are at or near their historical highs
and reflect price/earning ratios substantially above historical norms. There
can be no assurance that the trading price of the Company's Common Stock will
remain at or near its initial offering price to the public. See
"Underwriting."
Immediate and Substantial Dilution to New Investors. The initial public
offering price is substantially higher than the book value per outstanding
share of Common Stock. Investors purchasing Common Stock in
this offering will, therefore, incur immediate dilution of $8.14 in net
tangible book value per share of Common Stock from the initial offering price
and may incur additional dilution upon the exercise of outstanding stock
options. See "Dilution."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,100,000 shares of
Common Stock offered by the Company hereby at an assumed initial public
offering price of $11.00 per share are estimated to be $20,483,000
($26,621,000 if the Underwriters' over-allotment option is exercised in full).
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders. See "Principal and Selling Stockholders."
The Company intends to use the net proceeds of this offering primarily for
working capital and general corporate purposes. The Company anticipates that
approximately $3.0 million of the net proceeds will be used to repay the
outstanding balance of the Company's subordinated debt to Hambrecht & Quist
Transition Capital, LLC, which bears interest at an annual rate of 12% and
which matures on November 15, 1999. See "Underwriting." The Company may in the
future use a portion of the net proceeds to make acquisitions of businesses,
products or technologies intended to broaden the Company's current product
offerings. The Company has no present plans, agreements or commitments and is
not currently engaged in any negotiations with respect to any such
transactions. The amount actually expended by the Company for working capital
purposes will vary significantly depending upon a number of factors, including
future revenue growth, the amount of cash generated by the Company's
operations and the progress of the Company's product development efforts.
Pending such uses, the Company expects to invest net proceeds in short-term
investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid or declared any cash dividends. It is the present
policy of the Company to retain earnings to finance the growth and development
of the business and, therefore, the Company does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. In addition, the
Company's bank credit facility contains covenants that prohibit the Company
from paying dividends without prior bank approval.
14
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of June 30, 1997, (ii) the pro forma capitalization to reflect the
conversion upon the closing of this offering of all outstanding shares of
Preferred Stock into shares of Common Stock, and (iii) the pro forma
capitalization as adjusted to reflect the sale of 2,100,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $11.00 per share and the application of the estimated net proceeds
therefrom. This table should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------
(UNAUDITED)
AS
ACTUAL PRO FORMA ADJUSTED
------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Note payable to a certain shareholder (1):
Current portion........................... $ 942 $ 942 $ --
Long-term portion......................... 2,058 2,058
------- ------- -------
Total Note payable to a Shareholder...... 3,000 3,000 --
------- ------- -------
Shareholders' equity:
Convertible Preferred Stock, $0.001 par
value, 54,000,000 shares authorized,
45,863,796 shares issued and outstanding
as of June 30, 1997; 48,863,796 shares
authorized, none issued and outstanding
pro forma and as adjusted............... 35,271 -- --
Common Stock, $0.001 par value,
100,000,000 shares authorized, 940,347
shares issued and outstanding as of June
30, 1997; 40,000,000 shares authorized,
pro forma; 10,487,270 shares issued and
outstanding as adjusted (2)............. 602 35,873 56,356
Deferred compensation.................... (531) (531) (531)
Cumulative translation adjustment........ (11) (11) (11)
Accumulated deficit...................... (25,853) (25,853) (25,853)
------- ------- -------
Total shareholders' equity............. 9,478 9,478 29,961
------- ------- -------
Total capitalization................. $12,478 $12,478 $29,961
======= ======= =======
</TABLE>
- ------------
(1) See Note 4 of Notes to Consolidated Financial Statements.
(2) Excludes 1,680,375 shares of Common Stock issuable upon exercise of
outstanding options at June 30, 1997 with a weighted average exercise
price of $1.02 per share and 474,198 shares of Common Stock issuable upon
exercise of outstanding warrants at June 30, 1997 with a weighted average
exercise price of $3.65 per share. See "Capitalization" and "Management--
Stock Plans" and Notes 6, 7 and 9 of Notes to Consolidated Financial
Statements.
15
<PAGE>
DILUTION
As of June 30, 1997, the Company had a net tangible book value of
approximately $9.5 million or $1.13 per share of Common Stock. Net tangible
book value per share represents the amount of total tangible assets of the
Company reduced by the amount of its total liabilities and divided by the
total number of shares of Common Stock outstanding (reflecting the conversion
of all preferred stock into 7,446,923 shares of Common Stock upon the closing
of the offering made hereby). Without taking into account any other change in
such net tangible book value after June 30, 1997, other than to give effect to
the sale by the Company of 2,100,000 shares offered hereby at an assumed
initial public offering price of $11.00 per share and receipt of the estimated
net proceeds therefrom, the pro forma net tangible book value of the Company
as of June 30, 1997, would have been approximately $30.0 million, or $2.86 per
share. This represents an immediate increase in such net tangible book value
of $1.73 per share to existing stockholders and an immediate dilution of $8.14
per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $11.00
Net tangible book value per share before the offering .......... $1.13
Increase per share attributable to new investors................ 1.73
-----
Pro forma net tangible book value per share after the offering.... 2.86
------
Dilution per share to new investors............................... $ 8.14
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the differences between the existing stockholders and the new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(1).................... 8,387,270 80.0% $36,626,000 61.3% $4.37
New investors (1)....... 2,100,000 20.0 23,100,000 38.7 11.00
---------- ----- ----------- -----
Total................. 10,487,270 100.0% $59,726,000 100.0%
========== ===== =========== =====
</TABLE>
The above computations assume no exercise of options after June 30, 1997. As
of June 30, 1997, there were outstanding options to purchase 1,680,375 shares
of Common Stock at a weighted average exercise price of $1.02 per share and
outstanding warrants to purchase 474,198 shares of Common Stock at a weighted
average exercise price of $3.65 per share. To the extent outstanding options
are exercised, there will be further dilution to new investors. See
"Management--Stock Plans" and Notes 6, 7 and 9 of Notes to Financial
Statements.
- ------------
(1) Sales by Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 6,487,270 or approximately 61.9%
of the total number of shares of Common Stock outstanding after this
offering (or 58.5% if the Underwriters' over-allotment option is exercised
in full), and will increase the number of shares held by new investors to
4,000,000 or approximately 38.1% of the total number of shares of Common
Stock outstanding after the offering (or 41.5% if the Underwriters' over-
allotment option is exercised in full). See "Principal and Selling
Stockholders."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus. The consolidated statement
of operations data for the years ended December 31, 1992 and 1993 and the
consolidated balance sheet data at December 31, 1992, 1993 and 1994 are derived
from audited consolidated financial statements not included herein. The
consolidated statement of operations data for the years ended December 31,
1994, 1995 and 1996 and the consolidated balance sheet data at December 31,
1995 and 1996 are derived from, and are qualified by reference to, the
Consolidated Financial Statements included elsewhere in this Prospectus and
have been audited by and reported on by Arthur Andersen LLP, independent public
accountants, and should be read in conjunction with those Consolidated
Financial Statements and Notes thereto. The consolidated statement of
operations data for the six months ended June 30, 1996 and 1997 and the
consolidated balance sheet data at June 30, 1997 are derived from the unaudited
financial statements included elsewhere in this Prospectus but have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information set
forth therein. The results of operations for the six months ended June 30, 1997
are not necessarily indicative of results to be expected for the full year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues:
Product sales......... $ 401 $ 1,578 $ 5,027 $17,406 $23,324 $ 11,292 $ 16,709
License fees and
royalties............ 1,543 4,185 2,099 1,009 619 205 406
------- ------- ------- ------- ------- -------- --------
Total net revenues.. 1,944 5,763 7,126 18,415 23,943 11,497 17,115
------- ------- ------- ------- ------- -------- --------
Cost of revenues........ 2,058 3,764 4,324 12,371 15,546 7,584 10,110
Gross profit (loss)..... (114) 1,999 2,802 6,044 8,397 3,913 7,005
------- ------- ------- ------- ------- -------- --------
Operating expenses:
Research and
development.......... 1,858 2,050 2,366 2,044 3,519 1,591 2,292
Sales and marketing... 2,660 2,158 2,098 2,744 3,905 1,731 2,569
General and
administrative....... 774 958 1,061 1,619 1,558 753 840
------- ------- ------- ------- ------- -------- --------
Total operating
expenses........... 5,292 5,166 5,525 6,407 8,982 4,075 5,701
------- ------- ------- ------- ------- -------- --------
Income (loss) from
operations............. (5,406) (3,167) (2,723) (363) (585) (162) 1,304
Interest and other
expense, net........... 27 (42) (23) (406) (726) (327) (353)
------- ------- ------- ------- ------- -------- --------
Income (loss) before
provision for income
taxes.................. (5,379) (3,209) (2,746) (769) (1,311) (489) 951
------- ------- ------- ------- ------- -------- --------
Provision for income
taxes.................. 30 323 6 34 30 10 67
------- ------- ------- ------- ------- -------- --------
Net income (loss)....... $(5,409) $(3,532) $(2,752) $ (803) $(1,341) $ (499) $ 884
======= ======= ======= ======= ======= ======== ========
Pro forma net income
(loss) per share....... $ (0.14) $ (0.05) $ 0.09
======= ======== ========
Pro forma weighted
average common and
common equivalent
shares (1)............. 9,580 9,513 10,400
<CAPTION>
DECEMBER 31,
------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ------------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $ 923 $ 898 $ 1,551 $ 3,800 $ 7,692 $ 8,343
Working capital......... 255 683 2,580 7,435 9,757 9,367
Total assets............ 1,799 2,798 5,371 15,729 19,535 22,435
Long term debt and
capitalized lease
obligations, net of
current portion........ 105 202 508 2,219 5,499 4,092
Stockholders' equity.... 702 1,102 3,306 9,512 9,086 9,478
</TABLE>
- -------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute per
share amounts.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
The following discussion contains forward-looking statements that involve
risks and uncertainties, including without limitation, statements of the
Company's plans, objectives, expectations and intentions. The Company's actual
results could differ materially from those projected in the forward-looking
statements discussed here. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors," as well as those
discussed elsewhere herein. The Company assumes no obligation to update the
forward-looking statements.
OVERVIEW
The Company designs, develops, manufactures and markets proprietary, high-
voltage, analog ICs for use in AC to DC power conversion primarily for the
cellular telephone, personal computer, cable and direct broadcast satellite
and various consumer electronics markets. From its inception in March 1988
through 1993, the Company developed numerous standard and custom products
incorporating high levels of features and functionality, each intended to
address the needs of various markets. Although the Company was successful in
developing the core of its patented technology during this period, market
penetration of its products was low because these products were not as cost
effective as alternative discrete products. The limited product revenue,
combined with the high costs of developing and marketing numerous solutions to
numerous target markets, prevented the Company from achieving profitability.
In 1993, the Company changed its strategy to focus on bringing cost-
effective, integrated products to the high-voltage AC to DC power supply
markets. As a result, in 1994, the Company completed development of the first
of its TOPSwitch family of products. The TOPSwitch family of products, with a
proprietary integrated architecture, is designed to address with relatively
few products broad applications in a number of high-volume, high- voltage AC
to DC power supply markets. The initial target markets addressed by TOPSwitch
are particularly sensitive to size, portability, energy efficiency and time-
to-market. The TOPSwitch products and the solutions enabled by them are
significantly lower in costs than the Company's previous products and the
solutions enabled by those products. Commercial shipments of TOPSwitch began
in May 1994. Primarily as a result of the increasing sales of TOPSwitch
products, the Company's net revenues from product sales more than tripled
between 1994 and 1995, increasing from $5.0 million to $17.4 million. Net
revenues from product sales increased 34% between 1995 and 1996 and 48% in the
first six months of 1997 compared to the first six months of 1996.
By focusing on the TOPSwitch family of products, the Company was able to
more effectively utilize its resources and limit the growth of operating
expenses in 1994 and 1995. Because of this and the growth in net revenues,
operating expenses were reduced from 77.5% of net revenues in 1994 to 34.8% of
net revenues in 1995. In response to increasing market acceptance of its
TOPSwitch products and faster revenue growth, in 1996 the Company accelerated
its investment in research and development and sales and marketing, including
technical customer support, and, as a result, operating expenses increased
from $6.4 million in 1995 to $9.0 million in 1996 and from $4.1 million in the
first half of 1996 to $5.7 million in the first half of 1997. The Company
expects that operating expenses will continue to increase in absolute dollars,
but will fluctuate as a percentage of net revenues, as it continues to add
resources to research and development, sales and marketing and general and
administrative activities.
The Company has experienced increased net revenues in each of the last four
quarters, achieved a positive income from operations in each of the last three
quarters, and achieved a positive net income in the quarter ended June 30,
1997. However, the prediction of future operating results is difficult. The
Company's future operating results will depend on many factors, including the
volume and timing of orders received by the Company from its customers;
competitive pressures on selling prices; the volume and timing of orders
18
<PAGE>
placed by the Company with its foundries; the availability of raw materials;
fluctuations in manufacturing yields, whether resulting from the transition to
new foundries or from other factors; changes in product mix; the Company's
ability to introduce new products and technologies on a timely basis; the
introduction of products and technologies by the Company's competitors; market
acceptance of the Company's and its customers' products; the timing of
investments in research and development and sales and marketing; cyclical
semiconductor industry conditions; fluctuations in exchange rates,
particularly the exchange rates between the U.S. dollar and the Japanese yen;
changes in the international business climate and economic conditions
generally. There can be no assurance that the Company will be able to sustain
profitability on a quarterly or annual basis. See "Risk Factors--Unpredictable
and Fluctuating Operating Results."
The Company licenses certain technologies and grants limited product
manufacturing and marketing rights to strategic partners in return for foundry
relationships, license fees and product royalty arrangements. Prior to the
introduction of TOPSwitch in 1994, the Company's analog ICs generated limited
product sales while license fees and prepaid royalties accounted for a
significant percentage of the Company's total revenues. In future periods, the
Company expects license fees and royalties to consist primarily of royalties
on products shipped by licensees incorporating licensed technology, and
anticipates that license fees and royalties will account for a small
percentage of net revenues. The Company does not expect significant prepaid
license fees from future license agreements.
A significant portion of the Company's cost of revenues consists of the cost
of wafers. The Company's contracts for its foundries' services are denominated
in Japanese yen. Changes in the exchange rate between the U.S. dollar and the
Japanese yen subject the Company's gross profit and operating results to the
potential for material fluctuations. From time to time, as the Company's
strategic partners close old production lines and move to new fabrication
facilities, the Company must absorb a portion of the costs of physically
moving the manufacturing of the Company's products to new production lines,
including the costs of installation of new process technologies. See "Risk
Factors--Dependence on Outside Manufacturing and Assembly," "Business--Sales,
Distribution and Marketing" and "Business--Manufacturing."
Approximately half of the Company's sales are made to distributors under
terms allowing certain rights of return and price protections for the
Company's products held in the distributors' inventories. Therefore, the
Company defers recognition of revenue and the proportionate cost of revenues
derived from sales to distributors until such distributors resell the
Company's products to their customers. The gross profit deferred as a result
of this policy is reflected as "deferred income on sales to distributors" on
the Company's consolidated balance sheet. See Note 2 of Notes to Consolidated
Financial Statements.
In connection with the issuance of stock options and common stock to
employees and consultants, the Company has recorded deferred compensation in
the aggregate amount of approximately $566,000, representing the difference
between the deemed fair market value of the Company's common stock and the
exercise price of stock options at the date of grant. The Company is
amortizing the deferred compensation expense over the applicable vesting
period, which is typically four years. For the six month period ended June 30,
1997, the first period effected by this deferred compensation charge, the
amortization expense was approximately $35,000, allocated to the appropriate
operating expense items. No compensation expense related to any other periods
presented has been recorded. See Note 9 of Notes to Consolidated Financial
Statements.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share." The
requirements of SFAS No. 128 will become effective for the Company's year
ending December 31, 1997. If SFAS No. 128 had been applied by the Company, pro
forma basic income (loss) per share would have been $(0.14), $(0.05) and $0.09
for the year end December 31, 1996, and for the six month periods ended June
30, 1996 and 1997, respectively, and pro forma diluted income (loss) per share
would have been $(0.14), $(0.05) and $0.09 for the same periods.
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total net revenues for the periods indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET REVENUES
-----------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Product sales.............. 70.5% 94.5% 97.4% 98.2% 97.6%
License fees and
royalties................. 29.5 5.5 2.6 1.8 2.4
------- ------- ------- ------- -------
Total net revenues....... 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- -------
Cost of revenues............. 60.7 67.2 64.9 66.0 59.1
------- ------- ------- ------- -------
Gross profit................. 39.3 32.8 35.1 34.0 40.9
------- ------- ------- ------- -------
Operating expenses:
Research and development... 33.2 11.1 14.7 13.8 13.4
Sales and marketing........ 29.4 14.9 16.3 15.1 15.0
General and
administrative............ 14.9 8.8 6.5 6.5 4.9
------- ------- ------- ------- -------
Total operating
expenses................ 77.5 34.8 37.5 35.4 33.3
------- ------- ------- ------- -------
Income (loss) from
operations.................. (38.2) (2.0) (2.4) (1.4) 7.6
Interest and other expense,
net......................... (.3) (2.2) (3.1) (2.9) (2.0)
------- ------- ------- ------- -------
Income (loss) before
provision for income taxes.. (38.5) (4.2) (5.5) (4.3) 5.6
------- ------- ------- ------- -------
Provision for income taxes... .1 .2 .1 -- .4
------- ------- ------- ------- -------
Net income (loss)............ (38.6)% (4.4)% (5.6)% (4.3)% 5.2%
======= ======= ======= ======= =======
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 AND 1997
Net revenues. Net revenues consist of revenues from product sales, which are
calculated net of returns and adjustments, plus license fees and royalties
paid by licensees of the Company's technology. Net revenues increased 48.9%
from $11.5 million for the six months ended June 30, 1996 to $17.1 million for
the six months ended June 30, 1997. Net revenues from product sales
represented $11.3 million and $16.7 million of net revenues for the first six
months of 1996 and 1997, respectively. The increase in net revenues from
product sales was due primarily to increased sales of the Company's TOPSwitch
family of products and, to a lesser extent, initial sales of the TOPSwitch-II
family of products, which began commercial shipment in April 1997. Net
revenues also grew because of an increase in royalty revenues, from $205,000
to $406,000 in the two periods, respectively.
International sales increased by $5.1 million in the first six months of
1997 compared to the first six months of 1996, growing from approximately 72%
of net revenues to approximately 79% respectively. Although the power supplies
using the Company's products are designed and distributed worldwide, most of
such power supplies are manufactured in Asia. As a result, the largest portion
of the Company's revenues is derived from sales to this region. The Company
expects international revenue to continue to account for a large portion of
the Company's net revenues. See "Risk Factors--Risks of International Sales."
For the six months ended June 30, 1996, net revenues from two customers
accounted for approximately 14% and 15% of net revenues. For the six months
ended June 30, 1997, net revenues from two different customers accounted for
approximately 13% and 19% of net revenues. For both periods, no other customer
accounted for more than 10% of net revenues. See "Risk Factors--Customer
Concentration" and Note 2 of Notes to Consolidated Financial Statements.
20
<PAGE>
Gross profit. Gross profit is equal to net revenues less cost of revenues.
The Company's cost of revenues consists primarily of costs associated with the
purchase of wafers from MEC and OKI, the assembly and packaging of its
products, and internal labor and overhead associated with the testing of both
wafers and packaged components. These costs include expenses incurred in
connection with the physical move of the manufacturing of the Company's
products between wafer production lines at both of its foundry suppliers and
with the installation of new process technologies at these foundries, which
may recur from time to time and adversely effect the Company's cost of
revenues.
Gross profit increased from $3.9 million, or 34.0% of net revenues, to $7.0
million, or 40.9% of net revenues, in the first six months of 1996 and 1997,
respectively, due to the combined effects of the absorption of certain fixed
costs over the increased sales volume, lower prices for wafers, partially as a
result of favorable foreign exchange rates, and improved packaging costs.
During this period the Company has experienced an improved foreign exchange
rate between the U.S. dollar and the Japanese yen, contributing approximately
$350,000, or approximately 2 percentage points, of the gross profit. Gross
profit in future periods may be influenced by fluctuations in the exchange
rate between the U.S. dollar and the Japanese yen.
Research and development expenses. Research and development expenses consist
primarily of employee-related expenses, expensed material and facility costs
associated with the development of new processes and new products. The Company
also expenses prototype wafers and mask sets related to new products as
research and development costs until new products are released to production.
Research and development expenses increased by 44.1%, from $1.6 million in the
first six months of 1996 to $2.3 million in the first six months of 1997. The
increase was primarily the result of increased salaries and other costs
related to the hiring of additional engineering personnel, outside consulting
fees and expensed prototype materials resulting from the transition of foundry
manufacturing processes with MEC and OKI. These expenses fell slightly as a
percentage of net revenues from 13.8% in the first six months of 1996 to 13.4%
in the comparable period of 1997 due to increased sales. The Company expects
that research and development expenses will continue to increase in absolute
dollars but will fluctuate as a percentage of net revenues.
Sales and marketing expenses. Sales and marketing expenses consist primarily
of employee-related expenses, commissions to sales representatives and
facilities expenses, including expenses associated with the Company's regional
sales and support offices. Sales and marketing expenses increased 48.4%, from
$1.7 million in the first six months of 1996 to $2.6 million in the first six
months of 1997, both representing 15% of net revenues. This increase
represents the addition of personnel to support international sales and field
application engineers. The Company expects that sales and marketing expenses
will continue to increase in absolute dollars but will fluctuate as a
percentage of net revenues.
General and administrative expenses. General and administrative expenses
consist primarily of employee-related expenses for administration, finance,
human resources and general management, and legal and auditing expenses. In
the first half of 1996 and 1997, general and administrative expenses were
$753,000 and $840,000, which represented 6.5% and 4.9% of net revenues,
respectively. This increase in absolute dollars is attributable to additional
headcount to support the growth in the volume of sales. The Company expects
that general and administrative expenses will continue to increase in absolute
dollars but will fluctuate as a percentage of net revenues.
Interest and other expense, net. Interest and other expense of $327,000 and
$353,000 in the first half of 1996 and 1997, respectively, reflects interest
incurred by the Company on its capital equipment lease obligations and on the
$3.0 million of subordinated debt originated in the second quarter of 1996,
partially offset by interest income earned on its cash and short-term
investments. The Company expects to pay off the subordinated debt with the
proceeds of this offering but to continue to utilize term debt to finance its
capital equipment needs. The Company further expects to realize additional
interest income in future periods from higher cash balances resulting from the
proceeds of this offering. See "Use of Proceeds" and "Underwriting."
21
<PAGE>
Provision for income taxes. Provision for taxes for the six months ended
June 30, 1996 and 1997 represent Federal and state minimum taxes and foreign
taxes. As of December 31, 1996, the Company had net operating loss
carryforwards for Federal and state income tax reporting purposes of
approximately $23.0 million and $6.5 million, respectively, which expire at
various dates through 2011. See Note 8 of Notes to Consolidated Financial
Statements. The Company's ability to utilize such operating losses will be
dependent on several key factors including the Company's future level of
revenue and profitability, its market capitalization and change in ownership.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Net Revenues. Net revenues were $7.1 million, $18.4 million and $23.9
million in 1994, 1995 and 1996, respectively. Net revenues from product sales
were $5.0 million, $17.4 million and $23.3 million in the same three fiscal
years, respectively, reflecting the growth in the Company's TOPSwitch family
of products, which comprised 18%, 68% and 79% of net revenues from product
sales in 1994, 1995 and 1996, respectively. For 1994, three customers
accounted for approximately 11%, 12% and 24% of net revenues. For 1995, three
customers accounted for approximately 12%, 20% and 21% of net revenues. For
1996, no individual customer accounted for more than 10% of net revenues. See
Note 2 of Notes to Consolidated Financial Statements. License fees consisted
of payments from foundry and technology licensing agreements with MEC and OKI
and a prior foundry. License fees have declined as fees payable pursuant to
license agreements executed in June 1990 and June 1993 sequentially declined
in accordance with the terms of those agreements. In future periods, the
Company expects license fees and royalties to consist primarily of royalties
paid on shipments by MEC and OKI of products that incorporate the Company's
licensed technologies.
Gross profit. Gross profit was $2.8 million, $6.0 million and $8.4 million,
representing 39.3%, 32.8% and 35.1% of net revenues, in 1994, 1995 and 1996,
respectively. The decline in gross profit as a percent of net revenues in 1995
as compared to 1994 was due to the lower license fees in 1995. Gross profit
from product sales during 1994 and 1995 rose from 14.0% to 28.9% of net
revenues from product sales, respectively, reflecting the effects of
absorption of fixed costs over increased sales volume and lower unit costs for
wafers, despite the impact of unfavorable foreign exchange rates. The increase
in gross profit in absolute dollars and as a percent of net revenues in 1996
over 1995 continued to reflect the absorption of fixed costs over a larger
sales volume and reductions in prices for wafers, partially as a result of
favorable exchange rates, and packaged assemblies.
Research and development expenses. Research and development expenses were
$2.4 million, $2.0 million and $3.5 million, which represented 33.2%, 11.1%
and 14.7% of net revenues, in 1994, 1995 and 1996, respectively. The decline
in research and development expenses in 1995 as compared to 1994 was primarily
due to a general reduction in staffing in 1994 to lower operating losses and
conserve cash. Research and development expenses increased 72.2% in 1996
compared to 1995 due to decisions to invest more heavily in the development of
the Company's technology to expand the cost effective power range of the
Company's TOPSwitch products. However, there can be no assurance that the
Company's increased research and development activities will be successful or
will lead to increased sales of the Company's current or future products.
Sales and marketing expenses. Sales and marketing expenses were $2.1
million, $2.7 million and $3.9 million, which represented 29.4%, 14.9% and
16.3% of net revenues, in 1994, 1995 and 1996, respectively. This increase in
absolute dollars reflected the addition of staff in both sales and application
engineering to improve the Company's ability to facilitate customers' use of
the Company's products in the design of new power supplies for specific
applications. The increased spending also reflects higher commissions
resulting from the increase in sales volume. The fluctuation in sales and
marketing expense as a percentage of net revenues reflects primarily the
increase in sales.
General and administrative expenses. General and administrative expenses
were $1.1 million, $1.6 million and $1.6 million, which represented 14.9%,
8.8% and 6.5% of net revenues, in 1994, 1995 and
22
<PAGE>
1996, respectively. As a percentage of net revenues, general and
administrative expenses decreased, reflecting primarily the increase in sales.
Interest and other expense, net. Interest and other expense, net, was
$23,000, $406,000 and $726,000, representing .3%, 2.2% and 3.1% of net
revenues, in 1994, 1995 and 1996, respectively. The increases reflect
increases in borrowings under the Company's capital lease lines, primarily to
finance the addition of test equipment to expand capacity to meet the
increased volume of sales and, in 1996, the addition of $3.0 million in
subordinated debt to provide additional cash to support operations.
Provision for income taxes. Provision for income taxes during 1994, 1995 and
1996 represented Federal and state minimum taxes and foreign taxes. As of
December 31, 1996, the Company had net operating loss carryforwards for
Federal and state income tax reporting purposes of approximately $23.0 million
and $6.5 million, respectively, which expire at various dates through 2011.
See Note 8 of Notes to Consolidated Financial Statements. The Company's
ability to utilize such operating losses will be dependent on several key
factors including the Company's future level of revenue and profitability, its
market capitalization and change in ownership.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain consolidated statement of operations
data for each of the six quarters in the period ended June 30, 1997, as well
as the percentage of the Company's net revenues represented by each item. This
information has been derived from the Company's unaudited consolidated
financial statements. The unaudited consolidated financial statements have
been prepared on the same basis as the audited consolidated financial
statements contained herein and include all adjustments, consisting only of
normal recurring adjustments, that the Company considers necessary for a fair
presentation of such information when read in conjunction with the Company's
annual audited Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. The results of operations for any quarter are
not necessarily indicative of the results for any subsequent period or for the
entire fiscal year.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
--------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Product sales......... $6,045 $5,247 $5,354 $6,678 $6,831 $ 9,878
License fees and
royalties............ 78 127 204 210 235 171
------ ------ ------ ------ ------ -------
Total net revenues.. 6,123 5,374 5,558 6,888 7,066 10,049
------ ------ ------ ------ ------ -------
Cost of revenues........ 4,040 3,544 3,740 4,222 4,321 5,789
------ ------ ------ ------ ------ -------
Gross profit............ 2,083 1,830 1,818 2,666 2,745 4,260
------ ------ ------ ------ ------ -------
Operating expenses:
Research and
development.......... 705 886 968 960 1,077 1,215
Sales and marketing... 805 926 1,015 1,159 1,105 1,464
General and
administrative....... 398 355 439 366 410 430
------ ------ ------ ------ ------ -------
Total operating
expenses........... 1,908 2,167 2,422 2,485 2,592 3,109
------ ------ ------ ------ ------ -------
Income (loss) from
operations............. 175 (337) (604) 181 153 1,151
Interest and other
expense, net........... (138) (189) (178) (221) (214) (139)
------ ------ ------ ------ ------ -------
Income (loss) before
provision for income
taxes.................. 37 (526) (782) (40) (61) 1,012
Provision for income
taxes.................. 2 8 6 14 10 57
------ ------ ------ ------ ------ -------
Net income (loss)....... $ 35 $ (534) $ (788) $ (54) $ (71) $ 955
====== ====== ====== ====== ====== =======
Pro forma net income
(loss) per share....... $ -- $(0.06) $(0.08) $(0.01) $(0.01) $ 0.09
====== ====== ====== ====== ====== =======
Pro forma weighted
average common and
common equivalent
shares................. 10,347 9,549 9,643 9,649 9,653 10,400
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET REVENUES
----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Product sales......... 98.7% 97.6% 96.3% 97.0% 96.7% 98.3%
License fees and
royalties............ 1.3 2.4 3.7 3.0 3.3 1.7
----- ----- ----- ----- ----- -----
Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- -----
Cost of revenues........ 66.0 65.9 67.3 61.3 61.2 57.6
Gross profit............ 34.0 34.1 32.7 38.7 38.8 42.4
----- ----- ----- ----- ----- -----
Operating expenses:
Research and
development.......... 11.5 16.5 17.4 13.9 15.2 12.1
Sales and marketing... 13.1 17.2 18.3 16.8 15.6 14.6
General and
administrative....... 6.5 6.7 7.9 5.4 5.9 4.2
----- ----- ----- ----- ----- -----
Total operating
expenses........... 31.1 40.4 43.6 36.1 36.7 30.9
----- ----- ----- ----- ----- -----
Income (loss) from
operations............. 2.9 (6.3) (10.9) 2.6 2.1 11.5
Interest and other
expense, net........... (2.3) (3.5) (3.2) (3.2) (3.0) (1.4)
----- ----- ----- ----- ----- -----
Income (loss) before
provision for income
taxes.................. 0.6 (9.8) (14.1) (0.6) (0.9) 10.1
Provision for income
taxes.................. -- 0.1 0.1 0.2 0.1 0.6
----- ----- ----- ----- ----- -----
Net income (loss)....... 0.6% (9.9)% (14.2)% (0.8)% (1.0)% 9.5%
===== ===== ===== ===== ===== =====
</TABLE>
Net revenues in the second and third quarters of 1996 decreased from net
revenues in the first quarter of 1996 due primarily to the termination of a
significant PC desktop program by one of the Company's end-users. The
Company's net revenues increased in each of the four consecutive quarters
through the quarter ended June 30, 1997, primarily due to increased shipments
of the Company's TOPSwitch family of products. These increased shipments were
due to growth in the volume of sales from existing customers, the addition of
new customers and, in the second quarter of 1997, the introduction of the
TOPSwitch II product family. In the second quarter of 1997 the Company
experienced a significant increase in net revenues from product sales
resulting in a net revenue increase of 42.2% over the first quarter of 1997.
Several factors contributed to this increase including a significant increase
in orders from one customer which represented approximately 20% of net product
revenue in the second quarter, an expansion in order volume from other
customers, primarily in the cellular telephone and desktop PC stand-by power
supply markets and an increase in the number of customers ordering production
level quantities of product. Similar growth rates are not expected in future
periods. See "Risk Factors--Unpredictable and Fluctuating Operating Results."
The Company's gross profit generally increased as a percentage of net
revenues during the six quarters ended June 30, 1997. Gross profit in the
third quarter of 1996 declined due to the lower absorption of manufacturing
costs resulting from a reduced level of production as the Company worked off
excess inventories.
Research and development expenses generally increased in absolute terms
during the six quarters presented, primarily due to increased staffing in the
areas of new product design and technology development. As a percentage of net
revenues, research and development expenses increased in the second and third
quarters of fiscal 1996 over the first quarter due to an increase in expenses
resulting from additional staffing and a lower net revenue base. During the
three quarters ended June 30, 1997, research and development expenses
fluctuated as a percentage of net revenues. The decline in the quarter ended
June 30, 1997 was due to an increase in net revenues.
Sales and marketing expenses generally increased in absolute dollars over
the six quarters presented, primarily due to the additional staffing in sales
and application engineering and the higher level of sales commissions in the
three quarters ended June 30, 1997 due to the higher level of net revenues
from product sales.
24
<PAGE>
General and administrative expenses increased only slightly during the six
quarters and declined overall as a percentage of net revenues as net revenues
increased. The increase in spending in the third quarter of 1996 was due to
additional provisions for professional fees and severance pay while the
increases in the first and second quarters of 1997 were due to general, non-
staffing, expenses associated with the increase in business activity,
including legal, audit and supplies and employee activity expenses.
Interest and other expense, net, increased in the third and fourth quarters
of 1996 due to the increase in interest expense resulting from increased
borrowings under the Company's capital lease lines, and interest expense
resulting from the $3.0 million subordinated debt incurred in May of 1996. The
decline of interest and other expenses, net, in each of the first and second
quarters of 1997, is due to increased interest income from higher cash
balances created by a net positive cash flow in the fourth quarter of 1996 as
the Company worked off excess inventory.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded operations primarily through
revenues from product sales and the sale of approximately $35.3 million in
convertible preferred stock, to a lesser extent, the Company has also funded
operations through the sales of technology licenses and engineering design
services totaling approximately $13.4 million, and various capital equipment
lease lines with terms extending from thirty-six to forty-eight months, a
$3.0 million subordinated note with Hambrecht & Quist Transition Capital, LLC,
an affiliate of Hambrecht & Quist LLC, one of the Representatives of the
Underwriters, and an $8.0 million revolving line of credit with Imperial Bank.
A portion of the credit line is used to back up letters of credit which the
Company provides to MEC and OKI prior to the shipment of wafers by the
foundries to the Company. The balance of this line is unused and available.
The line of credit is secured by substantially all of the Company's assets.
The line of credit agreement contains financial covenants and requires that
the Company maintain profitability on a quarterly basis and not pay or declare
dividends without the bank's consent. The Company was in compliance with its
covenants at June 30, 1997. In the past, the lender modified the line of
credit agreement to ensure that the Company remained in compliance. To date
there has been no impact on the Company's business or results of operations
due to non-compliance with such covenants. Currently the Company has a capital
equipment lease line with Finova Capital Corporation with a commitment of $3.0
million, of which approximately $2.0 million was outstanding at June 30, 1997.
See Note 9 of Notes to Consolidated Financial Statements.
As of June 30, 1997, the Company had working capital of $9.4 million,
including a short-term component of deferred income on sales to distributors
of $1.2 million. Without the deferred income reserve, working capital would
have been $10.6 million.
At June 30, 1997, the Company had cash, cash equivalents and short-term
investments of $8.3 million and no borrowings outstanding on its bank line of
credit. The Company's operating activities used cash of $3.5 million, $2.9
million and $1.6 million in fiscal 1994 and 1995 and for the six months ended
June 30, 1996 and generated cash of $1.1 million and $2.1 million in fiscal
1996 and for the six months ended June 30, 1997, respectively. Cash used in
operations for fiscal 1994 was principally the result of the net loss and the
increases in accounts receivable and inventories. Cash used in operations for
fiscal 1995 was principally the result of the net loss and the increases in
accounts receivable and inventories, partially offset by an increase in
accounts payable. Cash generated in 1996 reflects an increase in depreciation
and amortization and a decrease in accounts receivable and inventories. Cash
generated in the six months ended June 30, 1997 was principally the result of
the net income, depreciation and amortization, an increase in accounts
payable, partially offset by an increase in accounts payable.
The Company's investing activities used cash of $1.0 million, $1.7 million,
$4.2 million and $908,000 in 1994, 1995, 1996 and the six months ended June
30, 1997, respectively. In 1994, 1995 and the six months ended June 30, 1997,
such investing activities were principally for equipment and leasehold
improvements. In 1996, $3.6 million was used for purchases of short-term
investments and the balance was for equipment and leasehold improvements.
25
<PAGE>
At December 31, 1996, the Company had net operating loss carryforwards for
Federal and state tax reporting purposes of approximately $23.0 million and
$6.5 million, respectively, expiring at various dates through 2011. The
Company anticipates that the sale of Common Stock by the Company and the
Selling Stockholders in this offering will cause an annual limitation on the
use of its net operating loss carryforwards pursuant to the "change in
ownership" provisions of Section 382 of the Internal Revenue Code of 1986, as
amended. The Company currently estimates that this limitation will not
materially impact its utilization of its net operating loss carryforwards in
the near term.
The Company believes that cash generated from operations, together with its
existing sources of liquidity and the net proceeds to the Company from this
offering will satisfy the Company's projected working capital and other cash
requirements for at least the next 12 months.
26
<PAGE>
BUSINESS
OVERVIEW
Power Integrations, Inc. (the "Company") designs, develops and markets
proprietary, high-voltage, analog integrated circuits ("ICs") for use in AC to
DC power conversion. The Company has targeted high-volume power supply
markets, including the cellular telephone, personal computer, cable and direct
broadcast satellite and various consumer electronics markets. The Company's
ICs cost effectively bring the benefits of high levels of integration to AC to
DC switching supplies. The Company believes that the products in its TOPSwitch
family of high-voltage ICs, introduced in 1994, are the first highly
integrated power conversion ICs to achieve widespread market acceptance. An
enhanced family, TOPSwitch-II, was introduced in April 1997.
INDUSTRY BACKGROUND
Virtually every electronic device that plugs into a wall socket requires
some type of power supply. These power supplies convert incoming high-voltage,
alternating current ("AC") provided by electric utilities into low-voltage
direct current ("DC") that can be used by electronic devices. Additionally,
rechargeable, portable products, such as cellular phones and laptop computers,
also need an AC to DC power supply to recharge their batteries.
Historically, AC to DC power supplies have used large, inefficient
transformers which operate at low frequencies to transform high-voltage
current to low-voltage current. In the 1970s, the invention of high-voltage
discrete semiconductors enabled the development of a new generation of AC to
DC power supplies. These new AC to DC "switching" power supplies ("switchers")
used a high-voltage discrete semiconductor along with other components to
generate high frequency pulses of power enabling the use of smaller, more
efficient transformers to lower the voltage. Although these discrete switchers
offered advantages over older technologies, over the years they have not kept
pace with the rapid integration in the electronic devices they power.
Recent market trends in electronics have created new requirements for power
supplies. The proliferation of portable electronic devices, particularly in
wireless communications and mobile computing, has created a global market
where consumers demand that new generations of electronic devices become
smaller and lighter. This expectation of increasingly compact systems has
driven end user demand for smaller, lighter power supplies. Another major
trend affecting power supplies is the growing awareness of the financial and
environmental costs of excess energy consumption. Growing environmental
concerns have resulted in government guidelines, such as the voluntary "Energy
Star" rating in the United States, as well as in many foreign countries, which
encourage the use of more energy efficient electronic devices from home
appliances to personal computers. In addition, manufacturers are aggressively
seeking to reduce manufacturing costs and time-to-market by decreasing
component count and simplifying system design.
As the pressures from these market forces have increased, the limitations of
discrete switchers have become more pronounced. Discrete switchers require
numerous components which limit the power supply designers' ability to reduce
the size, increase the functionality and improve the efficiency of switchers
while at the same time meeting stringent market cost requirements. In
addition, discrete switchers involve a high level of system complexity which
limits the scalability of designs and increases time-to-market and development
risks for new products.
Despite these shortcomings, discrete switchers remain in widespread use in
the large market for high-voltage switchers within the 0.5 to 150 watt power
range. This market includes switchers for cellular phone chargers, personal
computers, cable and direct broadcast satellites and numerous other consumer
and industrial electronic devices. To address the shortcomings of discrete
switchers, attempts have been made to replace discrete switchers with
integrated switchers through the use of high-voltage analog ICs. Prior
attempts did not achieve widespread acceptance in the marketplace because they
were not as cost-effective as discrete alternatives. Consequently, the Company
believes that a substantial market opportunity exists for high-voltage ICs
that achieve a system cost that is better than or at parity with existing
solutions.
27
<PAGE>
THE COMPANY'S HIGHLY INTEGRATED SOLUTION
The Company has developed a family of high-voltage ICs which the Company
believes are the first highly integrated power conversion ICs to achieve
widespread market acceptance. Since introducing its TOPSwitch products in
1994, the Company has shipped approximately 50 million TOPSwitch ICs. These
patented ICs achieve a high level of system integration by combining a
controller, MOSFET and a number of other electronic components into a single
analog IC. The Company's TOPSwitch products enable many power supplies in the
0.5 to 150 watt range to have a total cost equal to or lower than discrete
switchers. The Company's TOPSwitch products offer the following key benefits
to power supplies:
FEWER COMPONENTS, REDUCED SIZE AND ENHANCED FUNCTIONALITY
The Company's highly integrated TOPSwitch ICs enable the design and
production of cost-effective switchers that use up to 50% fewer components and
have enhanced functionality compared to discrete-based solutions. For example,
the Company's integrated circuits provide thermal and short circuit protection
without increasing system cost while discrete switchers must add additional
components and cost to provide these functions.
IMPROVED EFFICIENCY
The Company's integrated circuit also improves electrical efficiency which
reduces power consumption and excess heat generation. The Company's patented
low-loss, high-voltage device, combined with its control circuitry, improves
overall electrical efficiency during both full operation and stand-by mode.
REDUCED TIME-TO-MARKET
The Company's integrated circuit enables a less complex system architecture
that greatly simplifies system design for power supply designers. This allows
manufacturers to leverage their existing TOPSwitch designs for new products,
which results in shorter time to market and reduced product development risk.
WIDE POWER RANGE AND SCALABILITY
Products in the Company's current TOPSwitch families of products share a
common proprietary architecture but vary in power capability to address a
power range of 0.5 to 150 watts. The Company's scalable architecture allows
switcher designers to leverage their existing TOPSwitch-based designs to
easily develop a wide range of products to address many different power supply
markets.
STRATEGY
The Company's objective is to be the leading provider of high-voltage power
conversion ICs. The Company intends to pursue the following strategies to
accelerate adoption of its products:
Target High-Volume Markets. The Company's strategy is to use its technology
and products to deliver cost-effective integrated solutions to high-volume AC
to DC switching power supply markets. The Company's proprietary TOPSwitch
architecture was designed to be used cost effectively over a wide power range
in multiple applications. The scalable TOPSwitch architecture allows the
Company to leverage a small number of products across a broad range of high-
volume markets, thereby gaining economies of scale and enhancing the Company's
competitiveness.
Focus on Markets that Can Derive Significant Benefits from Integration. The
Company is initially focusing its efforts on those markets that are
particularly sensitive to size, portability, energy efficiency and time to
market issues. The Company achieved early success penetrating the cellular
phone fast charger market as the cellular phone industry has moved from stand-
alone desktop chargers to more portable travel chargers. The Company has also
achieved rapid growth in the desktop PC market due to the market's recent
demand for stand-by power capability. As other markets emerge as significant
opportunities for the Company's TOPSwitch products, the Company intends to
focus its resources on the development and penetration of these markets. See
"Risk Factors--Concentration of Applications."
28
<PAGE>
Deliver Systems Solution and Provide Applications Expertise. To accelerate
market adoption of the TOPSwitch products, the Company offers its customers
comprehensive application design support. This system level support includes
extensive application notes and production-ready reference design boards. The
Company provides application engineering support out of the Company's
headquarters and through field application engineering labs located in
England, India, Japan, Korea, Singapore and Taiwan. The Company has committed
substantial resources to system support by dedicating approximately 15% of its
workforce to applications engineering. The Company believes its power supply
systems expertise and investment in field applications engineering provide it
with significant competitive advantages.
Extend Technological Leadership in High-voltage Analog ICs. The Company's
technology leadership is based on high-voltage analog device structures and
wafer fabrication processes coupled with analog circuit designs that have
resulted in 23 U.S. patents and 33 foreign patents. These patents, in
combination with the Company's other intellectual property, form the basis of
the Company's TOPSwitch product families. The Company recently introduced an
enhanced TOPSwitch product family that provides improved power capability and
system cost advantages while preserving the design simplicity of the Company's
original TOPSwitch products. The Company continues to improve its high-voltage
analog device structures, wafer fabrication processes and analog circuit
designs and seeks to obtain additional patents to protect its intellectual
property.
Leverage Patented Technology in Strategic Partnerships. The Company has
established strategic partnerships with MEC and OKI in order to obtain high
volume manufacturing resources, broader market penetration and royalty
revenues. The wafer manufacturing relationships with MEC and OKI enable the
Company to focus on product design and marketing while minimizing fixed costs
and capital expenditures. MEC and OKI also have licensed the right to
manufacture products for sale in certain geographic regions and for internal
consumption. See "Risk Factors--Dependence on Outside Manufacturing and
Assembly."
PRODUCTS
The Company has developed a series of product families that utilize its
high-voltage analog technology, analog IC design capabilities and power
conversion system expertise.
THE TOPSWITCH PRODUCT FAMILIES
The Company's TOPSwitch high-voltage analog IC products are able to meet the
power conversion needs of a wide range of applications within high volume
markets. Sales of TOPSwitch products accounted for 74% and 89% of the
Company's net revenues in 1996 and the first six months of 1997, respectively.
TOPSwitch. The TOPSwitch family consists of 13 products, the first of which
was introduced in 1994. The key benefits of the TOPSwitch family compared to
discrete switchers are fewer components, reduced size, enhanced functionality
and lower cost in many applications. The Company's TOPSwitch products achieve
a high level of system integration by combining a PWM controller, a high-
voltage MOSFET and a number of other electronic components into a single 3-pin
package. The TOPSwitch products are produced in two high-voltage versions--a
350 volt version which is required for the 115VAC switcher markets (e.g.
United States and Japan) and a 700 volt version which is required for the
230VAC switcher markets (e.g. Europe and International).
TOPSwitch II. The TOPSwitch II family currently consists of 11 products, the
first of which was introduced in April 1997. The TOPSwitch II products further
lower the switcher costs by improving the performance of TOPSwitch and
broadening the availability of a low cost package for low power applications.
The TOPSwitch II family utilizes the same proprietary architecture used in the
original TOPSwitch family, thereby enabling switcher designers experienced
with TOPSwitch to take advantage of the TOPSwitch II benefits without
implementing a new architecture.
29
<PAGE>
OTHER PRODUCTS
The Company's products also include the SMP family, the INT family and a
limited number of custom products. Sales of these products accounted for 26%
and 11% of the Company's net revenues in 1996 and the first six months of
1997, respectively. The Company expects revenue from these products to
continue to decline as a percentage of net revenues.
SMP. The SMP family is the original line of power conversion products
developed by the Company for the AC to DC power supply market. These products
are used in applications where switcher designers are willing to pay a premium
price for additional features such as variable frequency.
INT. The INT products are interface drivers for motor control applications
which utilize the Company's high-voltage process technology.
Custom Products. The Company also manufactures a limited number of custom
products, including a hook switch for telephones.
MARKETS & CUSTOMERS
The Company's strategy is to target high-volume power supply markets and to
initially focus on those markets that can derive significant benefits from its
TOPSwitch products. The following chart shows representative customers, which
in some cases are also end users, of the Company's TOPSwitch products in power
supplies in several major market segments.
<TABLE>
<CAPTION>
MARKET SEGMENT CUSTOMERS
<S> <C>
Cellular Phones
Battery Chargers........... Motorola, Nokia, Phihong Enterprises, Samsung
Electronics
-----------------------------------------------------------------------------
Desktop Computers
Stand-by Power............. API (Sun Moon Star), Astec, Delta
Electronics, Intertek, Liteon
-----------------------------------------------------------------------------
Cable and Direct Broadcast
Satellite Amstrad, API, Grundig Hughes, Nokia, Pace
Set-top Decoders........... Micro Technology, Scientific Atlanta
Cable Telephone............ ADC Telecom, Alltemated, Phillips, Tellabs
-----------------------------------------------------------------------------
PC Peripherals
Multi-media Monitor
(Audio).................... Acer, Sony
Universal Serial Bus....... Nokia, Philips, Samsung, Sony
Removable Mass Storage..... Anam Instruments (End User: Iomega)
-----------------------------------------------------------------------------
Consumer
TV......................... Daewoo, Samsung, Sony
VCR........................ Daewoo
DVD........................ Malata, Samsung
-----------------------------------------------------------------------------
Industrial
Utility Meters............. General Electronics Corporation, Schlumberger
Uninterrupted Power Exide Electronics
Supply....................
</TABLE>
30
<PAGE>
CURRENT PRIMARY MARKETS
Cellular Phones. In 1996, approximately 60 million cellular phones were sold
worldwide. This market is estimated to grow to approximately 98 million
cellular phones worldwide by 2001. Demand in this market is driven by low
cost, ease of use, portability and miniaturization. The Company believes that
these factors have created a substantial market opportunity for small,
efficient power supplies for battery chargers. The Company intends to continue
its penetration of this market with its integrated solution which enables a
low cost, compact and efficient power supply.
Desktop Computers. Desktop computers consume energy while idle and turned on
to wait for communication functions such as receiving a fax. As the level of
communication functions performed by the computer increases, the computer's
power consumption during idle is becoming a significant cost for both users
and the economy. Therefore, computer manufacturers and governmental
authorities are promoting the use of stand-by power features in new PCs to
reduce the PCs' power consumption when idle. The Company's highly efficient
TOPSwitch products are currently being used in computers to provide this
stand-by power solution and meet the market demand for more energy-efficient
computers.
Cable and Direct Broadcast Satellite. Set-top decoders are rapidly changing
as broadcasters are providing more advanced capabilities and a greater number
of channels to consumers. This has created an opportunity for a scalable power
supply system solution which can be quickly redesigned to keep up with the
market's rapidly changing requirements. The scalable architecture of the
Company's TOPSwitch products addresses this need for a high-volume, versatile
solution.
OTHER MARKETS
Although the Company is currently focusing on the above key markets, the
Company also sells its products into a wide variety of other markets which
include PC peripherals, televisions, VCRs, industrial meters and kitchen
appliances. As these and other markets emerge as significant opportunities for
the Company's TOPSwitch products, the Company intends to focus its resources
on the development and penetration of these markets.
SALES, DISTRIBUTION AND MARKETING
The Company sells its products to OEMs and merchant power supply
manufacturers through a direct sales staff and through a worldwide network of
independent sales representatives and distributors. The Company currently
utilizes sales representatives throughout Asia and Europe. The Company's
international sales representatives also act as distributors. In the United
States, the Company currently utilizes one national distributor and a number
of regional sales representatives. The Company has sales offices in Atlanta,
Georgia and Newport Beach, California, as well as in England, India, Korea and
Taiwan. In the first six months of 1997, direct sales and sales through
distributors were approximately equal as a percentage of net revenues. All
distributors are entitled to certain return privileges based on sales revenue
and are protected from price reductions affecting their inventories. The
Company's distributors are not subject to minimum purchase requirements and
the sales representatives and distributors can discontinue marketing any of
the Company's products at any time.
The Company's products are generally incorporated into a customer's power
supply at the design stage. The Company's sales and marketing efforts are
focused on facilitating the customer's use of the Company's products in the
design of new power supplies for specific applications. An important
competitive factor in achieving a design win is the Company's commitment to
provide comprehensive application design support. The Company publishes a
comprehensive Databook and Design Guide and provides to its current and
prospective customers extensive application notes and production-ready
reference design boards. In addition, the Company provides application
engineering support out of the Company's headquarters, and its field
application engineering labs located in England, India, Japan, Korea,
Singapore and Taiwan provide local
31
<PAGE>
resources to support customers in key geographies. The Company focuses
particular efforts on building relationships with and providing support to
industry-leading OEMs and merchant power supply manufacturers. The Company has
committed substantial resources to system support by dedicating approximately
15% of its workforce to applications engineering.
The Company's end user base is highly concentrated and a relatively small
number of OEMs, directly or indirectly through merchant power supply
manufacturers, accounted for a significant portion of the Company's revenue in
1996 and the six months ended June 30, 1997. Motorola is presently the
Company's largest end user. Although the exact dollar amounts and percentages
of sales to Motorola are difficult to ascertain because most of such sales
occur through distributors or indirectly through sales to merchant power
supply manufacturers which, in turn, sell power supplies to Motorola, the
Company estimates that direct and indirect sales to Motorola accounted for in
excess of 25% of the Company's net revenues for the six months ended June 30,
1997. The Company estimates that its top ten customers, including distributors
which resell to Motorola and others large OEMs and merchant power supply
manufacturers, accounted for 67% and 70% of the Company's net revenues for
1996 and the six months ended June 30, 1997, respectively. For the six months
ended June 30, 1997, Maxisum Ltd. and Phihong Enterprise accounted for 19.1%
and 13.4% of the Company's net revenues, respectively. For fiscal 1994, three
customers accounted for approximately 11%, 12% and 24% of net revenues. For
fiscal 1995, three customers accounted for approximately 12%, 20% and 21% of
net revenues. For fiscal 1996, no individual customer accounted for more than
10% of net revenues. In fiscal 1994, 1995, 1996 and the first six months of
1997, international sales comprised 57%, 65%, 72% and 79%, respectively, of
the Company's net revenues. See "Risk Factors--Customer Concentration."
Sales of the Company's products are generally made pursuant to standard
purchase orders, which are frequently revised to reflect changes in the
customer's requirements. Product deliveries are scheduled upon the Company's
receipt of purchase orders. Generally, these orders allow customers to
reschedule delivery dates and cancel purchase orders without significant
penalties. For these reasons, the Company believes that purchase orders
received, while useful for scheduling production are not necessarily reliable
indicators of future revenues. See "Risk Factors--Unpredictable and
Fluctuating Operating Results."
In the Japanese market, the Company has a license agreement with MEC under
which MEC sells its versions of the Company's products. While the Company
continues to sell its products to its existing Japanese customers, in April
1997, the Company agreed not to pursue new business in Japan until after June
2000. The Company believes that this new arrangement will better meet the
Company's market penetration and financial objectives in Japan. The Company
supports MEC's sales efforts and the Company's existing Japanese customers
through its office in Japan. OKI also has the rights to sell its versions of
the Company's products in Japan but is currently not exercising these rights.
See "Risk Factors--Dependence on Outside Manufacturing and Assembly" and
"Intellectual Property and Other Proprietary Rights."
TECHNOLOGY
HIGH-VOLTAGE TRANSISTOR STRUCTURE AND PROCESS TECHNOLOGY
The Company has developed a proprietary high-voltage, power IC technology
which utilizes the Company's MOS transistor structure and proprietary process
and has resulted in 10 U.S. patents. The technology enables the Company to
integrate cost effectively on the same monolithic IC, high-voltage n-channel
transistors with industry standard CMOS and bipolar components. The IC device
structure and the wafer fabrication process both contribute to the cost
effectiveness of the Company's high-voltage technology. The device structure
results in a transistor conduction capability that is significantly higher
than that of competing technologies. The IC device structure can be
implemented on low cost silicon wafers using a standard 3 micron CMOS process
when combined with the Company's proprietary implant process step. The Company
has focused its efforts on optimizing a single wafer fabrication process for
its TOPSwitch products. The same process can be used for power conversion
products that range from 20 to 800 volts.
32
<PAGE>
IC DESIGN AND SYSTEM TECHNOLOGY
The Company's proprietary IC designs combine complex control circuits and
high-voltage transistors on the same monolithic IC and have resulted in 13
U.S. patents. The Company's IC design technology takes advantage of the
Company's high voltage process to minimize the die size of both the high-
voltage device and the control circuits and improve the performance of the
Company's ICs versus alternative integration technologies. The combination of
the Company's IC design technology and the Company's system level expertise in
switchers has enabled the Company to develop the highly integrated TOPSwitch
ICs and scalable architecture for integrated switchers.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on improving the
Company's high-voltage device structures, wafer fabrication processes, analog
circuit designs and system level architecture. By these efforts, the Company
seeks to further reduce the costs of its products, and improve the cost
effectiveness and enhance the functionality of its customers' power supplies.
The Company has assembled a multidisciplined team of highly skilled engineers
to meet its research and development goals. These engineers bring to the
Company expertise in high-voltage structure and process technology, analog
design and power supply systems architecture.
In 1994, 1995, 1996 and the first six months of 1997, the Company spent $2.4
million, $2.0 million, $3.5 million and $2.3 million, respectively, on its
research and development efforts. The Company expects that it will continue to
invest substantial funds in research and development activities. The
development of high-voltage analog ICs is highly complex. There can be no
assurance that the Company will develop and introduce new products in a timely
and cost effective manner or that its development efforts will successfully
permit the Company's products to meet changing market demands. See "Risk
Factors--New Products and Technological Change."
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company utilizes a combination of patents, trademarks, copyrights, trade
secrets and confidentiality procedures to protect its intellectual property
rights. The Company holds 23 U.S. patents and has generally filed for or
received foreign patent protection on these patents resulting in 33 foreign
patents and 15 foreign patent applications. The U.S. patents have expiration
dates ranging from 2006 to 2016. Eight of the U.S. patents are related to the
device structure of the high-voltage transistor, 10 are circuit patents that
have been utilized in the Company's products and 3 are circuit patents that
provide the foundation for the Company's TOPSwitch products. Two of the U.S.
patents cover specific system applications using TOPSwitch. The Company is
currently pursuing additional U.S. patent applications relating to
improvements and extensions of the Company's products. There can be no
assurance that the Company's pending United States or foreign patent
applications or any future United States or foreign patent applications will
be approved, that any issued patents will protect the Company's intellectual
property or will not be challenged by third parties, or that the patents of
others will not have an adverse effect on the Company's ability to do
business. Furthermore, there can be no assurance that others will not
independently develop similar or competing technology or design around any
patents that may be issued to the Company. The Company also holds nine
trademarks, five in the U.S., two in California and two in Japan.
33
<PAGE>
Certain equipment, processes, information and knowledge developed by the
Company and used in the design and manufacture of its products are regarded as
proprietary by the Company. The Company's trade secrets include a proprietary
high volume production process that produces the Company's patented high-
voltage ICs. The Company attempts to protect its trade secrets and other
proprietary information through non-disclosure agreements, proprietary
information agreements with employees and consultants and other security
measures. Despite these efforts, there can be no assurance that others will
not gain access to the Company's trade secrets, or that the Company can
meaningfully protect its intellectual property. In addition, effective trade
secret protection may be unavailable or limited in certain foreign countries.
Although the Company intends to protect its rights vigorously, there can be no
assurance that such measures will be successful.
The Company has granted perpetual non-transferable licenses to MEC and OKI
to use the Company's semiconductor patents and other intellectual property for
the Company's current high-voltage technology, including the Company's
TOPSwitch technology, and improvements on the existing technology to
manufacture and design products for internal use and for sale or other
distribution to Japanese companies and to subsidiaries of Japanese companies
in Asia. In the case of OKI, to the extent such products are not based on
TOPSwitch technology, sales or other distribution may be on a worldwide basis
to any third parties. In the case of MEC, to the extent products are not based
on the TOPSwitch technology, sales or other distribution may also be made to
Asian companies in Asia. MEC and OKI have granted the Company perpetual cross
licenses to the technology developed by MEC or OKI under their license rights.
Until after June 2000, the Company has agreed not to license the technology
licensed to MEC to other Japanese companies (other than OKI) or their
subsidiaries. The Company has also agreed not to sell its products in Japan to
new customers. In exchange for their license rights, MEC and OKI have paid
and, in the case of MEC, will continue to pay to the Company licensing fees
for a fixed period and pay or will pay royalties on products using the
licensed technology during fixed periods. In April 1997, the license agreement
with MEC was amended to explicitly include high-voltage device technology
being developed by the Company in return for an improved royalty structure
from MEC. To date, only MEC has sold products to third parties under its
license rights.
The Company also has granted a perpetual, non-transferable license to AT&T
Microelectronics to use certain of the Company's IC processes and device
technologies in the products AT&T sells. In addition, pursuant to an agreement
with MagneTek, Inc., the Company has granted MagneTek an exclusive, perpetual
royalty-free license to manufacture lighting products that incorporate certain
of the Company's technology.
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. Any such litigation, whether or
not determined in the Company's favor or settled by the Company, would be
costly and would divert the efforts and attention of the Company's management
and technical personnel from normal business operations, which would have
material adverse effect on the Company's business, financial condition and
results of operations. Adverse determinations in litigation could result in
the loss of the Company's proprietary rights, subject the Company to
significant liabilities, require the Company to seek licenses from third
parties or prevent the Company from licensing its technology, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, the laws of certain foreign
countries in which the Company's technology is or may in the future be
licensed may not protect the Company's intellectual property rights to the
same extent as the laws of the United States, thus increasing the possibility
of infringement of the Company's intellectual property. See "Risk Factors--
Dependence on Proprietary Technology."
MANUFACTURING
The Company contracts with MEC and OKI to manufacture its wafers in Japan.
The Company's semiconductor products are assembled and packaged by independent
subcontractors in China, Malaysia and the Philippines. The Company performs
testing, finishing and shipping at its facility in Sunnyvale, California.
34
<PAGE>
This fabless manufacturing model enables the Company to focus on its
engineering and design strengths, minimize fixed costs on capital
expenditures, and still have access to high-volume manufacturing capacity. The
Company's products do not require leading edge process geometries for them to
be cost-effective and thus, the Company can use MEC's and OKI's older, low-
cost fabs for wafer manufacturing. The Company uses a proprietary and
sensitive implant process and must interact closely with MEC and OKI to
achieve satisfactory yields. Although the Company generally utilizes standard
IC packages for assembly, there are some materials and aspects that are
specific to the Company. The Company specifies a sole source high-voltage
molding compound that is difficult to process. This compound, and its required
processes, together with the other non-standard materials and processes needed
to assemble the Company's products require a more exacting level of process
control than normally required for standard packages. As a result the Company
must be involved with its contractors on an active engineering basis to
maintain and improve the process. The Company has developed process monitoring
equipment to support this effort and must provide adequate engineering
resources to provide similar support in the future.
The Company's wafer supply agreements with MEC and OKI expire in June 2000
and June 1998, respectively. Under the terms of the MEC agreement, minimum
annual and monthly purchase and sale commitments are established annually by
the mutual agreement of MEC and the Company. Pricing is also established by
the good faith agreement of MEC and the Company, subject to the Company's
right to most favored pricing. Under the terms of the OKI agreement, OKI has
agreed to reserve a specified amount of production capacity and to sell wafers
to the Company at fixed prices depending upon volume. The Company's agreements
with both MEC and OKI provide for the pricing of wafers in Japanese yen.
There can be no assurance that the Company will be able to reach an
agreement with either MEC or OKI to extend the term of their respective wafer
supply agreements. The Company's failure to reach, in a timely fashion, an
extension of either agreement or to enter into a wafer supply arrangement with
another manufacturer, could result in material disruptions in supply. Certain
contractual provisions limit the conditions under which the Company can enter
into such arrangements with other Japanese manufacturers or their subsidiaries
during the term of the agreement with MEC. In the event of a supply disruption
with OKI or MEC, if the Company were unable to qualify alternative
manufacturing sources for existing or new products in a timely manner or if
such sources were unable to produce devices with acceptable manufacturing
yields, the Company's business, financial condition and operating results
would be materially and adversely affected.
The Company typically receives shipments from MEC or OKI in approximately 12
to 14 weeks after placing orders, and lead times for new products can be
substantially longer. To provide sufficient time for assembly, testing and
finishing, the Company typically needs to receive wafers from MEC and OKI 4 to
6 weeks before the desired ship date to the Company's customers. As a result
of these factors and the fact that customers' orders can be made with little
advance notice, the Company has only a limited ability to react to
fluctuations in demand for its products, which could cause the Company to have
at any given time an excess or a shortage of inventory of a particular
product. From time to time in the past, the Company has been unable to fully
satisfy customer requests as a result of these factors. Any significant
disruptions in deliveries would materially and adversely affect the Company's
business and operating results.
The Company depends on MEC and OKI to produce wafers at acceptable yields
and to deliver them to the Company in a timely manner. As the Company
continues to increase its product output, there can be no assurance that the
Company's foundries and assemblers will not experience a decrease in yields.
Moreover, there can be no assurance that acceptable yields will be
maintainable in the future. See "Risk Factors--Dependence on Outside
Manufacturing and Assembly."
COMPETITION
The high-voltage power supply industry is intensely competitive and
characterized by extreme price sensitivity. Accordingly, the most significant
competitive factor in the target markets for the Company's products is cost
effectiveness. The Company's products face competition from alternative
technologies,
35
<PAGE>
primarily discrete switchers. The Company believes that at current pricing,
the TOPSwitch families of products offer favorable cost performance benefits
compared to discrete switchers in many high-volume applications over the power
range of approximately 0.5 watts to 150 watts. However, any significant
erosion in the price of discrete components, such as high-voltage Bipolar and
MOSFET transistors and PWM controller ICs, could adversely affect the cost
effectiveness of the TOPSwitch products. Also older alternative technologies
to switchers are more cost-effective than switchers that use the Company's
TOPSwitch products in certain power ranges for certain applications. If power
requirements for certain applications in which the Company's products are
currently utilized, such as battery chargers for cellular telephones, drop
below certain power levels, these older alternative technologies can be used
more cost effectively than TOPSwitch-based switchers. The Company is
continuing its efforts to use its extensive system level expertise to enhance
the cost effectiveness of TOPSwitch-based switchers in the lower power ranges.
There can be no assurance that the Company will be successful in these
efforts.
Recently, the Company's TOPSwitch product families have begun to meet
additional competition from hybrid and single high-voltage ICs similar to
TOPSwitch. These competing products are being developed or have been developed
and are being produced by companies such as Motorola, SGS, Samsung and Sanken.
The Company expects competition to increase as Motorola, SGS, Samsung, Sanken
and possibly other companies develop and introduce new products. To the extent
these competitors' products are lower in cost than the Company's products, the
Company's business, financial condition and results of operations could be
materially and adversely affected. Many of the Company's emerging competitors,
including Motorola, SGS, Samsung and Sanken, have significantly greater
financial, technical, manufacturing and marketing resources than the Company.
In the context of a market where a high-voltage IC is designed into a
customer's product and the provider of such ICs is therefore the sole source
of the IC for that product, greater resources and, in particular, greater
manufacturing resources, may be a significant factor in the customer's choice
of the IC because of the customer's perception of greater certainty in its
source of supply. See "Risk Factors--Customer Concentration."
The Company's ability to compete in its target markets also depends on such
factors as the timing and success of new product introductions by the Company
and its competitors, the pace at which the Company's customers incorporate the
Company's products into their end user products, availability of wafer
fabrication and finished good manufacturing capability, the availability of
adequate sources of raw materials, protection of Company products by effective
utilization of intellectual property laws and general economic conditions.
There can be no assurance that the Company's products will continue to compete
favorably or that the Company will be successful in the face of increasing
competition from new products and enhancements introduced by existing
competitors or new companies entering this market. Failure of the Company to
compete successfully in the high-voltage power supply business would
materially and adversely affect the Company's business, financial condition
and results of operations. See "Risk Factors--Competition."
EMPLOYEES
As of June 30, 1997, the Company employed 112 full time personnel,
consisting of 45 in manufacturing, 27 in research and development, 29 in sales
and marketing and 11 in finance and administration.
FACILITIES
The Company's main executive, administrative, manufacturing and technical
offices are located in a 30,000 square foot facility in Sunnyvale, California
under a lease which expires in October 1998 with a conditional five year
option at fair market value to the year 2003. The Company's manufacturing
operations at this facility consist of testing wafers and ICs. The Company
believes that its existing facilities are adequate for its current needs.
36
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages, as of
August 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Howard F. Earhart........ 57 President, Chief Executive Officer and Director
Balu Balakrishnan........ 43 Vice President, Marketing and Engineering
Clements Edward Pausa.... 66 Vice President, Operations
Vladimir Rumennik........ 51 Vice President, Technology Development
Daniel M. Selleck........ 51 Vice President, Worldwide Sales
Robert G. Staples........ 49 Chief Financial Officer, Vice President, Finance
and Administration and Secretary
Clifford J. Walker....... 46 Vice President, Corporate Development
Dr. Edward C. Ross 55
(1)(2).................. Chairman of the Board of Directors
Dr. William Davidow (1).. 62 Director
E. Floyd Kvamme (1)(2)... 59 Director
Steven J. Sharp.......... 55 Director
</TABLE>
- ------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Howard F. Earhart has served as President, Chief Executive Officer and a
Director of the Company since January 1995. From April 1990 to January 1995,
Mr. Earhart served as Chief Executive Officer or advisor to the Chief
Executive Officer of various companies including, but not limited to Co-Active
Computing, Inc., a personal computer peer to peer network adapter company,
Digital-F/X, a hardware and software company, and Raster Graphics, an
electrostatic plotter company. Mr. Earhart has also served as president of the
Consumer Products Group of Memorex Corporation.
Balu Balakrishnan has served as Vice President, Marketing and Engineering of
the Company since September 1994. From April 1992 to September 1994, Mr.
Balakrishnan served as Vice President, Engineering and Business Development of
the Company. From October 1990 to April 1992, Mr. Balakrishan served as Vice
President, Design Engineering and from April 1989 to October 1990, he served
as Director of Design Engineering of the Company.
Clements Edward Pausa has served as Vice President, Operations of the
Company since June 1997. From October 1994 to June 1997, Mr. Pausa served as a
Vice President of Alphatec Group, a semiconductor manufacturing services
company. From October 1990 to June 1997, Mr. Pausa served as a director of
consulting at Coopers & Lybrand LLP. From August 1969 to October 1990, Mr.
Pausa served as a Vice President of National Semiconductor. Mr. Pausa has
served as a director of Coopers & Lybrand LLP, since October 1990.
Vladimir Rumennik has served as Vice President, Technology Development of
the Company since April 1991. From February 1990 to March 1991, Mr. Rumennik
was Director of Technology Development of the Company. Prior to January 1990,
Mr. Rumennik was a manager at Signetics, a semiconductor company and a
subsidiary of Philips Semiconductor ("Signetics"). Mr. Rumennik has also held
positions at Philips Laboratories and Xerox Microelectronics Center.
Daniel M. Selleck has served as Vice President, Worldwide Sales of the
Company since May 1993. From February 1984 to May 1993, Mr. Selleck held
various sales management positions with Philips Semiconductor including
European Regional Sales Manager and Western Area Sales Manager in the United
States.
37
<PAGE>
Robert G. Staples has served as Chief Financial Officer, Vice President,
Finance and Administration and Secretary of the Company since June 1995. From
October 1994 to June 1995, Mr. Staples served as Chief Financial Officer of
MIS, a software development company. From October 1993 to October 1994, Mr.
Staples served as Chief Financial Officer of Simtec Corporation, a
semiconductor company. From April 1988 to October 1993, Mr. Staples served as
Chief Financial Officer and Vice President, Finance and Administration of
Codar Technology, a defense contracting company.
Clifford J. Walker has served as Vice President, Corporate Development of
the Company since June 1995. From September 1994 to June 1995, Mr. Walker
served as Vice President of Reach Software, a software company. From December
1993 to September 1994, Mr. Walker served as President of Morgan Walker, a
consulting company. From July 1992 to December 1993, Mr. Walker served as Vice
President of Extended Length Flex, a PCB company. From October 1986 to July
1992, Mr. Walker served as Vice President of Springer Technologies, a thin
film disk head company.
Dr. Edward C. Ross has served as a Director of the Company since January
1989 and has served as the Chairman of the Board of Directors since January
1995. From January 1989 to January 1995, Dr. Ross served as President and
Chief Executive Officer of the Company. Dr. Ross has served as President,
Technology and Manufacturing Group of Cirrus Logic, Inc., a semiconductor
company, since September 1995.
Dr. William Davidow has served as a Director of the Company since its
inception. Dr. Davidow has been a general partner of Mohr, Davidow Ventures, a
venture capital company since 1985. Dr. Davidow also serves as a director of
two public companies, Rambus, Inc. and The Vantive Corporation.
E. Floyd Kvamme has served as a Director of the Company since September
1989. Mr. Kvamme has been a general partner of Kleiner Perkins Caufield &
Byers, a venture capital company, since 1984. Mr. Kvamme also serves as a
director of four public companies, TriQuint Semiconductor ("TriQuint"),
Harmonic Lightwaves, Photon Dynamics and Prism Solutions.
Steven J. Sharp is a founder of the Company and has served as a Director of
the Company since its inception. Mr. Sharp has served as President, Chief
Executive Officer and Chairman of the Board of TriQuint since September 1991.
The Company's Bylaws currently authorize five directors, which number may be
changed from time-to-time by the Board of Directors. All directors hold office
until the next annual meeting of stockholders or until their successors are
duly elected and qualified. The Bylaws provide that, beginning with the first
annual meeting of stockholders, the Board of Directors will be divided into
three classes, with each class serving staggered three-year terms. There are
no family relationships among the directors or officers of the Company.
In September 1997, the Board of Directors established an Audit Committee and
a Compensation Committee. The Audit Committee oversees actions taken by the
Company's independent auditors, recommends the engagement of auditors and
reviews the Company's internal audits. The Compensation Committee makes
decisions concerning salaries and incentive compensation for employees and
consultants of the Company. The Compensation Committee also makes
recommendations regarding the Company's employee stock plans. See "--Stock
Plans."
38
<PAGE>
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the compensation paid by
the Company during the fiscal year ended December 31, 1996 to the Company's
Chief Executive Officer and each of the Company's four other executive
officers whose salary and bonus for services in all capacities to the Company
exceeded $100,000 during such year (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 1996
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-----------------
ANNUAL COMPENSATION AWARDS
---------------------------------- -----------------
NO. OF SECURITIES
NAME AND ALL OTHER UNDERLYING
PRINCIPAL POSITION SALARY(1) BONUS(1) COMPENSATION(2) OPTIONS
------------------ --------- -------- --------------- -----------------
<S> <C> <C> <C> <C>
Howard F. Earhart......... $180,000 $120,000 $536 --
President and Chief
Executive Officer
Balu Balakrishnan......... 155,000 72,000 536 --
Vice President, Marketing
and Engineering
Vladimir Rumennik......... 145,000 60,000 536 7,352
Vice President,
Technology Development
Daniel M. Selleck......... 140,000 72,000 536 22,058
Vice President, Worldwide
Sales
Robert G. Staples......... 120,000 48,000 536 18,382
Chief Financial Officer,
Vice President, Finance
and Administration and
Secretary
Clifford J. Walker........ 120,000 48,000 536 18,382
Vice President, Corporate
Development
</TABLE>
- --------
(1) Amounts shown are on a full year basis and include cash and noncash
compensation earned and received by executive officers.
(2) Represents premiums paid by the Company for life insurance coverage.
39
<PAGE>
The following table provides information concerning grants of stock options
to purchase the Company's Common Stock made during the fiscal year ended
December 31, 1996 to each of the Named Executive Officers:
OPTION GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(4)
OPTIONS IN FISCAL PRICE PER EXPIRATION --------------------
NAME GRANTED(1) 1996(2) SHARE(3) DATE 5% 10%
---- ---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Howard F. Earhart....... -- -- -- -- -- --
Balu Balakrishnan....... -- -- -- -- -- --
Vladimir Rumennik....... 7,352 2.3% $1.36 9/18/06 $6,288.14 $15,935.38
Daniel M. Selleck....... 22,058 6.8 1.36 9/18/06 18,866.13 47,810.49
Robert G. Staples....... 18,382 5.7 1.36 9/18/06 15,722.06 39,842.80
Clifford J. Walker...... 18,382 5.7 1.36 9/18/06 15,722.06 39,842.80
</TABLE>
- --------
(1) Options granted in fiscal 1996 are immediately available and generally
vest over fifty months, with 1/8th of the option shares becoming fully
vested six months from the grant date and 1/50th of the remainder vesting
each successive month, with full vesting occurring on the fiftieth month
from the date of grant. The Company has a repurchase right for shares not
vested. Under the terms of the Company's 1988 Stock Option Plan (the "1988
Plan"), the administrator retains discretion, subject to the 1988 Plan
limits, to modify the terms of outstanding options and to reprice
outstanding options. The options have a term of 10 years, subject to
earlier termination in certain situations related to termination of
employment. In addition, in June 1997, options to purchase 73,529 shares
of Common Stock were granted to Mr. Earhart, options to purchase 22,058
shares of Common Stock were granted to each of Messrs. Balakrishnan,
Rumennik and Selleck, options to purchase 14,705 shares of Common Stock
were granted to Mr. Staples and options to purchase 25,735 shares of
Common Stock were granted to Mr. Walker each at an exercise price of $1.70
per share. These options, granted under the Company's 1997 Stock Option
Plan (the "1997 Plan"), are immediately available and generally vest over
four years, with 1/8th of the option shares becoming fully vested six
months from the grant date and 1/48th of the remainder vesting each
successive month, with full vesting occurring four years from the date of
grant. The Company has a repurchase right for shares not vested. Under the
terms of the 1997 Plan, the administrator retains discretion, subject to
the 1997 Plan limits, to modify the terms of outstanding options and to
reprice outstanding options. The options have a term of 10 years subject
to earlier termination in certain situations related to termination of
employment. See "Stock Plans" for a description of the material payment
terms of the options.
(2) Based on a total of 323,970 options granted to all employees and
consultants during fiscal 1996.
(3) All options were granted at an exercise price equal to the fair market
value of the Common Stock as determined by the Board of Directors on the
date of grant. The Common Stock was not publicly traded at the time of the
option grants to the officers.
(4) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could
be achieved for the respective options if exercised at the end of the
option term. The assumed 5% and 10% rates of stock price appreciation are
provided in accordance with rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
the future Common Stock price. Actual gains, if any, on stock option
exercises are dependent on the future performance of the Common Stock,
overall market conditions and the option holders' continued employment
through the vesting period. This table does not take into account any
appreciation in the price of the Common Stock from the date of grant to
date.
40
<PAGE>
AGGREGATE OPTION EXERCISES AND FISCAL 1996 YEAR-END VALUES
There were no exercises of stock options by Named Executive Officers during
the year ended December 31, 1996. The following table provides the specified
information concerning unexercised options held as of December 31, 1996 by
each of the Named Executive Officers:
AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
AT 12/31/96(1) OPTIONS AT 12/31/96(2)
---------------------- -------------------------
NAME VESTED UNVESTED VESTED UNVESTED
---- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Howard F. Earhart............. 74,117 190,589 -- --
Balu Balakrishnan............. 16,470 71,764 -- --
Vladimir Rumennik............. 93,524 53,528 -- --
Daniel M. Selleck............. 56,763 53,528 -- --
Robert G. Staples............. 23,824 60,734 -- --
Clifford J. Walker............ 15,882 46,617 -- --
</TABLE>
- --------
(1) These options are immediately exercisable in full at the date of grant,
but shares purchased on exercise of unvested options are subject to
repurchase right in favor of the Company which lapses ratably over 50
months and entitles the Company to repurchase unvested shares at their
original issuance price.
(2) Calculated on the basis of the fair market value of the underlying
securities as of December 31, 1996 of $1.36 per share, as determined by
the Board of Directors, minus the aggregate exercise price.
No options to purchase Common Stock were exercised during the fiscal year
ended December 31, 1996 by the Named Executive Officers. No compensation
intended to serve as incentive for performance to occur over a period longer
than one fiscal year was paid pursuant to a long-term incentive plan during
the last fiscal year to any Named Executive Officer. The Company does not have
any defined benefit or actuarial plan under which benefits are determined
primarily by final compensation or average final compensation and years of
service with any of the Named Executive Officers.
STOCK PLANS
1988 Stock Option Plan. The 1988 Plan provides for the grant of stock
options to employees (including officers), directors and consultants of the
Company and its subsidiaries. The 1988 Plan provides for the grant of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") or nonstatutory stock options,
although incentive stock options may be granted only to employees. As of June
30, 1997, options to purchase an aggregate 1,420,012 shares of Common Stock
were outstanding under the 1988 Plan. Options granted under the 1988 Plan will
remain outstanding in accordance with their terms, but the Board of Directors
has determined that as of June 1997, no further options will be granted under
the 1988 Plan.
1997 Stock Option Plan. The 1997 Plan was approved by the Board of Directors
in June 1997 and by the stockholders in July 1997. The 1997 Plan provides for
the grant of incentive stock options within the meaning of section 422 of the
Code, to employees, and for grants of nonstatutory stock options to employees,
non-employee directors and consultants. As of June 30, 1997, options to
purchase an aggregate of 260,363 shares of Common Stock were outstanding under
the 1997 Plan.
The 1997 Plan is administered by the Board of Directors or a committee
thereof. Subject to the provisions of the 1997 Plan, the Board or committee
has the authority to select the persons to whom options are granted and
determine the terms of each option, including (i) the number of shares of
Common Stock
41
<PAGE>
covered by the option, (ii) when the option becomes exercisable, (iii) the
option exercise price, which, in the case of incentive stock options, must be
at least 100% of the fair market value of a share of Common Stock as of the
date of grant, and, in the case of nonstatutory stock options, must be at
least 85% of the fair market value of a share of Common Stock as of the date
of grant, and (iv) the duration of the option (which, for an incentive stock
option, may not exceed ten years). Generally, options granted under the 1997
Plan are immediately exercisable but remain subject to repurchase by the
Company until vested under a schedule established by the Board of Directors or
committee thereof. All options are non-transferable other than by will or the
laws of descent and distribution.
The 1997 Plan's maximum share reserve is 2,132,227 shares, which is
comprised of the sum of (i) 660,745 shares (new shares allocated to the 1997
Plan) and (ii) 1,471,482 (the number of shares subject to outstanding options
on June 3, 1997 granted pursuant to the 1988 Plan (the "1988 Plan Options")
which amount will automatically be increased on the first day of each fiscal
year of the Company beginning on or after January 1, 1999 by a number of
shares equal to 5% of the number of shares of the Company's Common Stock
issued and outstanding on the last day of the preceding fiscal year. The
number of shares available for issuance under the 1997 Plan, at any time, is
reduced by the number of shares remaining subject to the 1988 Plan Options. In
addition, without further stockholder approval, no more than 2,132,227 shares
may be available cumulatively for issuance upon exercise of incentive stock
options, including incentive stock options that have been granted previously.
Of the shares of Common Stock currently reserved for issuance under the 1997
Plan as of June 30, 1997, no shares have been issued upon the exercise of
options, options for the purchase of a total of 260,363 shares at a weighted
average exercise price of $1.70 per share were outstanding and a maximum of
400,382 shares were available for future option grants.
1997 Outside Directors Stock Option Plan. A total of 200,000 shares of
Common Stock have been reserved for issuance under the Company's 1997 Outside
Directors Stock Option Plan (the "Directors Plan"). The Directors Plan
provides for the grant of nonstatutory stock options to nonemployee directors
of the Company. The Directors Plan is designed to work automatically without
administration; however, to the extent administration is necessary, it will be
performed by the Board of Directors. The Directors Plan provides that each
current and future nonemployee director of the Company will be granted an
option to purchase 15,000 shares of Common Stock on the effective date of this
offering or the date on which the optionee first becomes a nonemployee
director of the Company, as the case may be (the "Initial Grant"). Thereafter,
each nonemployee director will be granted an additional option to purchase
5,000 shares of Common Stock (an "Annual Grant") on each anniversary of (a)
the effective date of this offering (for persons serving on the Board of
Directors on the effective date of this offering) or (b) the date of initial
election or appointment to the Board of Directors (for persons first elected
or appointed to the Board of Directors after the effective date of this
offering). Subject to an optionee's continuous service with the Company,
approximately 1/3rd of an Initial Grant will become exercisable one year after
the date of grant and 1/36th of the Initial Grant will become exercisable
monthly thereafter. Each Annual Grant will become exercisable in twelve
monthly installments beginning in the 25th month after the date of grant,
subject to the optionee's continuous service. The exercise price per share of
all options granted under the Directors Plan will equal the fair market value
of a share of Common Stock on the date of grant. Options granted under the
Directors Plan have a term of ten years and are non-transferable. In the event
of certain changes in control of the Company, options outstanding under the
Directors Plan will become immediately exercisable and vested in full.
1997 Employee Stock Purchase Plan. A total of 250,000 shares of Common Stock
have been reserved for issuance under the Company's 1997 Employee Stock
Purchase Plan (the "Purchase Plan"), none of which have been issued as of the
effective date of this offering. The Purchase Plan, which is intended to
qualify under Section 423 of the Code, is administered by the Board of
Directors or by a committee thereof. Employees (including officers and
employee directors of the Company) of the Company or any subsidiary designated
by the Board of Directors for participation in the Purchase Plan are eligible
to participate in the Purchase Plan if they are customarily employed for more
than 20 hours per week and more than five months
42
<PAGE>
per year. The Purchase Plan will be implemented by overlapping 24-month
offerings, the first of which will commence on the effective date of this
offering and the initial offering period will terminate on January 31, 2000.
Each offering will generally be comprised of four six-month purchase periods,
with shares purchased on the last day of each purchase period (a "Purchase
Date"). Thereafter, offering periods will begin on February 1 and August 1 of
each year. The Board may change the dates or duration of one or more
offerings, but no offering may exceed 27 months. The Purchase Plan permits
eligible employees to purchase Common Stock through payroll deductions at a
price no less than 85% of the lower of the fair market value of the Common
Stock on the first day or the last day of each six-month purchase period.
Participants generally may not purchase more than 5,000 shares in a 24 month
offering or stock having a value (measured at the beginning of the offering)
greater than $25,000 in any calendar year. In the event of certain changes in
control of the Company, the Board may accelerate the purchase of shares under
the Purchase Plan unless the acquiring corporation assumes or replaces the
purchase rights outstanding under the Purchase Plan.
401(k) Plan. The Company maintains a tax-qualified employee savings and
retirement plan (the "401(k) Plan") which covers the Company's full-time
employees. Pursuant to the 401(k) Plan, employees may elect to reduce their
current annual compensation for at least 1% up to the lesser of 20% or the
statutorily prescribed limit ($9,500 in calendar years 1996 and 1997), and
have the amount of such reduction contributed to the 401(k) Plan. The 401(k)
Plan does not provide for any matching contributions by the Company. The
401(k) Plan is intended to qualify under Section 401 of the Internal Revenue
Code of 1986, as amended, so that contributions by employees to the 401(k)
Plan, and income earned on plan contributions, are not taxable to employees
until withdrawn from the 401(k) Plan, and so that contributions to the 401(k)
Plan, including employees' 401(k) contributions will be deductible by the
Company. Each participant may direct the investment of the assets in his or
her 401(k) account among a number of investment options offered by the 401(k)
Plan.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash for services provided as a
director. Directors are reimbursed for all travel and related expenses
incurred in connection with attending board and committee meetings. Upon
adoption of the Directors Plan, directors who are not employees of the Company
will receive yearly grants of options to purchase Common Stock. The Directors
Plan will become effective upon consummation of this offering. See "--Stock
Plans--1997 Outside Directors Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Compensation Committee is composed of William Davidow, E. Floyd Kvamme
and Edward Ross. No interlocking relationship exists between any member of the
Company's Compensation Committee and any member of any other company's board
of directors or compensation committee. The Compensation Committee makes
recommendations regarding the Company's employee stock plans and makes
decisions concerning salaries and incentive compensation for employees and
consultants of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law, the
Company's Amended Certificate of Incorporation, which will become effective
upon consummation of this offering, will provide that directors of the Company
shall not be personally liable for monetary damages to the Company or its
stockholders for a breach of fiduciary duty as a director, except for
liability as a result of (i) a breach of the director's duty of loyalty to the
Company or its stockholders, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) an act
related to the unlawful stock repurchase or payment of a dividend under
Section 174 of Delaware General Corporation Law, and (iv) transactions from
which the director derived an improper personal benefit. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission.
43
<PAGE>
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. The Company
intends to enter into separate indemnification agreements with its directors
and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers, (other
than liabilities arising from willful misconduct of a culpable nature), to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers and may indemnify its employees to the fullest extent permitted
by law. The Company believes that indemnification under its Bylaws covers at
least negligence and gross negligence on the part of the indemnified party.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has 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.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding which may result in a claim for such indemnification.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AGREEMENTS AND CHANGE OF
CONTROL ARRANGEMENTS
Pursuant to an employment offer letter from the Company to Mr. Pausa dated
May 30, 1997, Mr. Pausa shall receive severance payment in the amount of
$120,000 in the event he is involuntarily terminated, other than "for cause,"
within the first eighteen months of his employment.
44
<PAGE>
CERTAIN TRANSACTIONS
Since January 1994, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which the Company was or is
to be a party in which the amount involved exceeds $60,000, and in which any
director, executive officer or holder of more than 5% any class of voting
securities of the Company and members of such person's immediate family had or
will have a direct or indirect material interest other than the transactions
described below.
On March 11, 1994, the Company sold 7,013,396 shares of Series E Preferred
Stock and warrants to purchase 132,120 shares of Series E Preferred Stock for
an aggregate cash consideration of $5,260,047. The following executive
officers, directors, beneficial holders of more than 5% of a class of the
Company's capital stock and immediate family members of such persons purchased
Series E Preferred Stock:
<TABLE>
<CAPTION>
SHARES OF
PURCHASER (1) STOCK (2)
------------- ---------
<S> <C>
The Hillman family and related entities(3)(4).................... 34,793
InterWest Partners V, L.P.(3)(5)................................. 48,097
Kleiner Perkins Caufield & Byers IV(3)........................... 83,675
MagneTek, Inc.(3)................................................ 48,113
Mohr, Davidow Ventures II(3)..................................... 83,675
</TABLE>
- --------
(1) See notes to table of beneficial ownership in "Principle and Selling
Stockholders" for information relating to the beneficial ownership of such
shares.
(2) Reflects the number of shares of Common Stock into which the Series E
Preferred Stock is convertible upon the consummation of this offering.
(3) A beneficial holder of more than 5% of the Company's capital stock.
(4) Represents an aggregate of 4,948 shares held by C. G. Grefenstette and
Thomas G. Bigley, trustees U/A/T dated 8/28/68 for Audrey Hilliard
Hillman, Henry Lea Hillman, Jr., Juliet Lea Hillman and William Talbott
Hillman. Also includes 4,157 shares held by Venhill Limited Partnership,
20,887 shares held by HCC Investments, Inc., and 4,801 shares held by
Henry L. Hillman, Elsie Hilliard Hillman and C. G. Grefenstette, trustees
of the Henry L. Hillman Trust U/A dated 11/18/85.
(5) Represents 47,862 shares held by InterWest Partners V, L.P. and 235 shares
held by InterWest Investors V.
As a result of adjustments in the conversion price of Series E Preferred
Stock, as set forth in the Company's Certificate of Incorporation, upon the
consummation of this offering, all outstanding shares of Series E Preferred
Stock will be converted into Common Stock on a 1 for 1.066856 basis.
Between April 27, 1995 and May 12, 1995, the Company sold an aggregate of
9,091,000 shares of Series F Preferred Stock for an aggregate cash
consideration of $5,000,050. The following executive officers, directors,
beneficial holders of more than 5% of a class of the Company's capital stock
and immediate family members of such persons purchased Series F Preferred
Stock:
<TABLE>
<CAPTION>
SHARES OF
PURCHASER (1) STOCK (2)
------------- ----------
<S> <C>
The Hillman family and related entities(3)(4)................... 273,689
InterWest Partners V, L.P.(3)(5)................................ 280,455
Kleiner Perkins Caufield & Byers IV(3).......................... 272,331
Mohr, Davidow Ventures II(3).................................... 272,331
Dr. Edward C. Ross(6)........................................... 2,995
</TABLE>
- --------
(1) See notes to table of beneficial ownership in "Principle and Selling
Stockholders" for information relating to the beneficial ownership of such
shares.
(2) Reflects the number of shares of Common Stock into which the Series F
Preferred Stock is convertible upon the consummation of this offering.
(3) A beneficial holder of more than 5% of the Company's capital stock.
45
<PAGE>
(4) Represents an aggregate of 38,124 shares held by C. G. Grefenstette and
Thomas G. Bigley, trustees U/A/T dated 8/28/68 for Audrey Hilliard
Hillman, Henry Lea Hillman, Jr., Juliet Lea Hillman and William Talbott
Hillman. Also includes 34,041 shares held by Venhill Limited Partnership,
163,398 shares held by HCC Investments, Inc., and 38,126 shares held by
Henry L. Hillman, Elsie Hilliard Hillman and C. G. Grefenstette, trustees
of the Henry L. Hillman Trust U/A dated 11/18/85.
(5) Represents 278,703 shares held by InterWest Partners V, L.P. and 1,752
shares held by InterWest Partners V.
(6) Director of the Company.
As a result of adjustments in the conversion price of Series F Preferred
Stock, as set forth in the Company's Certificate of Incorporation, upon the
consummation of this offering, all outstanding shares of Series F Preferred
Stock will be converted into Common Stock on a 1 for 1.018519 basis.
On July 25, 1997, in connection with the purchase of Common Stock upon
exercise of stock options granted to Howard Earhart, the Company loaned to Mr.
Earhart $125,000, at an interest rate of 6.65% pursuant to a Promissory Note
and Pledge Agreement due on July 25, 2002, or at the Company's option upon (i)
termination of Mr. Earhart's employment with the Company, (ii) a default in
the payment of any installment or principle and/or interest when due, (iii) a
sale of the Pledged Stock (as defined below) or (iv) acceleration being
reasonably necessary for the Company to comply with any regulations
promulgated by the Board of Governors of the Federal Reserve System affecting
the extension of credit in connection with the Company's securities. The loan
is secured by 73,529 shares of Common Stock (the "Pledged Stock").
On July 28, 1997, in connection with the purchase of Common Stock upon
exercise of stock options granted to Clements Edward Pausa, the Company loaned
to Mr. Pausa $131,250, at an interest rate of 6.65% pursuant to a Promissory
Note and Pledge Agreement due on July 28, 2002, or at the Company's option
upon (i) termination of Mr. Pausa's employment with the Company, (ii) a
default in the payment of any installment or principle and/or interest when
due, (iii) a sale of the Pledged Stock (as defined below) or (iv) acceleration
being reasonably necessary for the Company to comply with any regulations
promulgated by the Board of Governors of the Federal Reserve System affecting
the extension of credit in connection with the Company's securities. The loan
is secured by 77,205 shares of Common Stock (the "Pledged Stock").
The Company believes that all transactions with affiliates described above
were made on terms no less favorable to the Company than could have been
obtained unaffiliated third parties.
46
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1997, and as adjusted
to reflect the sale of the shares offered hereby, assuming no exercise of the
Underwriters' over-allotment option, (i) by each person who is known by the
Company to own beneficially more than 5% of the Company's Common Stock, (ii)
by each of the Named Executive Officers and by each of the Company's
directors, (iii) by all current executive officers and directors as a group,
and (iv) by each Selling Stockholder. Except pursuant to applicable community
property laws or as indicated in the footnotes to this table, each stockholder
identified in the table possesses sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE OWNED AFTER THE
OFFERING (1) SHARES OFFERING (1)
----------------------- BEING ----------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------- ------------ ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS
Howard F. Earhart(2).... 382,352 4.4% %
Balu Balakrishnan(3).... 257,352 3.0
Clements Edward
Pausa(4)............... 77,205 *
Vladimir Rumennik(5).... 169,117 2.0
Daniel M. Selleck(6).... 132,352 1.6
Robert G. Staples(7).... 99,264 1.2
Clifford J. Walker(8)... 88,234 1.0
Dr. Edward C. Ross(9)... 219,465 2.6
Dr. William
Davidow(10)............ 1,019,777 12.2
E. Floyd Kvamme(11)..... 878,468 10.5
Steven J. Sharp(12)..... 48,529 *
All executive officers
and directors as a
group
(11 persons)(13)....... 3,372,115 39.9
5% STOCKHOLDERS
Mohr, Davidow Ventures 1,109,777 12.1
II.....................
3000 Sand Hill Road
Bldg. 1, Suite 240
Menlo Park, CA 94025
Funds affiliated with
Kleiner Perkins 893,443 10.6
Caufield & Byers(14)..
2750 Sand Hill Road
Menlo Park, CA 94025
Funds affiliated with
InterWest 736,347 8.8
Partners(15)..........
3000 Sand Hill Road
Bldg. 3, Suite 255
Menlo Park, CA 94025
Entities affiliated with
The Hillman 727,267 8.7
Family(16)............
2000 Grant Building
Pittsburgh, PA 15219
MagneTek, Inc........... 699,536 8.3
26 Century Blvd.,
P. O. Box 290159
Nashville, TN 37229-
0159
</TABLE>
47
<PAGE>
OTHER SELLING STOCKHOLDERS
- --------
* Represents less than 1%.
(1) The amounts reported in this table include shares of Common Stock
issuable upon the automatic conversion of all Preferred Stock, which
conversion will occur upon consummation of this offering. Based on
8,387,270 shares of Common Stock outstanding prior to the offering. A
person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of options.
Calculations of percentages of beneficial ownership assume the exercise
by only the respective named stockholders of all options for the purchase
of Common Stock held by such stockholder which are exercisable within 60
days of June 30, 1997. Unless otherwise indicated, the address of each of
the named individuals is: c/o Power Integrations, Inc., 477 N. Mathilda
Avenue, Sunnyvale, CA 94086.
(2) Includes 221,765 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 279,411 shares issuable
upon exercise of options.
(3) Includes 92,647 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 110,294 shares issuable
upon exercise of options.
(4) Includes 77,205 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 77,205 shares issuable upon
exercise of options.
(5) Includes 62,941 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 169,117 shares issuable
upon exercise of options.
(6) Includes 60,147 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 132,352 shares issuable
upon exercise of options.
(7) Includes 63,456 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 99,264 shares issuable upon
exercise of options.
(8) Includes 63,014 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 88,235 shares issuable upon
exercise of options.
(9) None of Dr. Ross' shares are subject to a right of repurchase in favor of
the Company which lapses over time. Includes 98,823 shares issuable upon
exercise of options.
(10) Represents all shares held by entities affiliated with Mohr, Davidow
Ventures, II. Mr. Davidow, as a general partner of Mohr, Davidow
Ventures, may be deemed to beneficially own shares, but Mr. Davidow
disclaims beneficial ownership of all such shares except to the extent of
his proportional interest therein.
(11) Represents all shares held by entities affiliated with Kleiner Perkins
Caufield & Byers ("KPCB"). Mr. Kvamme, as a general partner of KPCB, may
be deemed to beneficially own shares, but Mr. Kvamme disclaims beneficial
ownership of all such shares except to the extent of his proportional
interest therein.
(12) Includes 2,117 shares held by Sutro & Co. Keough Custodian FBO Steven
Sharp.
(13) See footnotes (2) through (9), and footnote (11). Includes 641,175 shares
subject to a right of repurchase in favor of the Company which lapses
over time, and 955,878 shares issuable upon exercise of options.
(14) Includes 878,468 shares held by Kleiner Perkins Caufield & Byers IV, and
14,975 shares held by KPCB Zaibatsu Fund I.
(15) Includes 731,814 shares held by InterWest Partners V, L.P. and 4,533
shares held by InterWest Investors V.
(16) Includes 25,425 shares held by C.G. Greffenstette and Thomas Bigley,
Trustees U/A/T dated August 28, 1968 for Audrey Hillard Hillman, 25,425
shares held by C.G. Greffenstette and Thomas Bigley, Trustees U/A/T dated
August 28, 1968 for Henry Lea Hillman, Jr., 25,425 shares held by C.G.
Greffenstette and Thomas Bigley, Trustees U/A/T dated August 28, 1968 for
Juliet Lea Hillman, 25,425 shares held by C.G. Greffenstette and Thomas
Bigley, Trustees U/A/T dated August 28, 1968 for William Talbot Hillman,
435,559 shares held by HCC Investments, Inc., 101,556 shares held by
Henry L. Hillman, Elsie Hilliard and C.G. Greffenstette, and 88,452
shares held by Venhill Limited Partnership.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, par value $0.001
per share and 3,000,000 shares of Preferred Stock, par value $0.001 per share
after giving effect to the amendment of the Company's Certificate of
Incorporation to split each 6.8 outstanding shares of Common Stock into one
share of Common Stock and the automatic conversion of all outstanding
Preferred Stock into Common Stock upon the closing of this offering. The
following summary of certain provisions of the Common Stock and the Preferred
Stock of the Company does not purport to be complete and is subject to, and
qualified in its entirety by, the Certificate of Incorporation and Bylaws of
the Company that are included as exhibits to the Registration Statement of
which this Prospectus forms a part and by the provisions of applicable law.
COMMON STOCK
As of June 30 1997, there were approximately 8,387,270 shares of Common
Stock outstanding held of record by 182 stockholders, as adjusted to reflect
the conversion of the outstanding shares of Preferred Stock upon the closing
of the offering. The holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the holders of
Common Stock. Subject to preferences applicable to any outstanding preferred
stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preference
of any preferred stock. Holders of Common Stock have no preemptive or
subscription rights, and there are no redemption or conversion rights with
respect to such shares. All outstanding shares of Common Stock are fully paid
and non-assessable, and the shares of Common Stock to be issued upon
completion of the offering will be fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the dividend rate, voting rights and other rights, preferences
and restrictions of each series any or all of which may be greater than the
rights of the Common Stock. It is not possible to state the actual effect of
the issuance of any shares of preferred stock upon the rights of holders of
the Common Stock until the Board of Directors determines the specific rights
of the holders of such preferred stock. However, the effects might include,
among other things, restricting dividends on the Common Stock, diluting the
voting power of the Common Stock, impairing the liquidation rights of the
Common Stock and delaying or preventing a change in control of the Company
without further action by the stockholders. The Company has no present plans
to issue any shares of preferred stock.
REGISTRATION RIGHTS
Following the sale of the shares of Common Stock offered hereby, the holders
of approximately 6,258,212 shares of Common Stock (including 474,198 shares
issuable upon exercise of outstanding warrants),will have certain rights to
register those shares under the Securities Act of 1933, as amended. The
holders of approximately 5,883,504 shares of Common Stock (including 297,727
shares issuable upon exercise of outstanding warrants) are subject to rights
under the Fifth Amended and Restated Rights Agreement, as amended (the "Rights
Agreement"). Subject to certain limitations in the Rights Agreement, the
holders of at least 35% of such shares may require, on two occasions, that the
Company use its best efforts to register such shares for public resale,
subject to certain limitations. If the Company registers any of its Common
Stock either for its own account or for the account of other security holders,
the holders of such shares are entitled to include their shares of Common
Stock in the registration, subject to the ability of the underwriters to limit
the number of shares included in the offering. The holders of at least 35% of
such shares may also require the Company to register all or a portion of their
registrable securities on Form S-3 when use of such form becomes available to
the Company, provided, among other limitations, that the proposed aggregate
price to
the public is at least $1,000,000. All fees, costs and expenses of such
registrations (other than underwriting discounts and commissions) will be
borne by the Company.
49
<PAGE>
A holder of approximately 176,471 shares of Common Stock issuable upon
exercise of an outstanding warrant is subject to rights under the terms of an
Investor's Rights Agreement between the Company and such holder. Subject to
certain limitations in the Investor's Rights Agreement, if the Company
registers any of its Common Stock, either for its own account or for the
account of other securityholders, the holder of such shares is entitled to
include its shares of Common Stock in the registration, subject to the ability
of the underwriters to limit the number of shares included in the offering.
All fees, costs and expenses of such registrations (other than underwriting
discounts and commissions) will be borne by the Company.
Holders of approximately 198,237 shares of Common Stock are subject to
rights under the terms of Stock Purchase Agreements between the Company and
such holders. Subject to certain limitations in the Stock Purchase Agreements,
if the Company registers any of its Common Stock, either for its own account
or for the account of other securityholders, the holders of such shares are
entitled to include their shares of Common Stock in the registration, subject
to the ability of the underwriters to limit the number of shares included in
the offering. All fees, costs and expenses of such registrations (other than
underwriting discounts and commissions) will be borne by the Company.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three (3) years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that
resulted in the stockholder 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 (x) by persons
who are directors and also officers and (y) 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 (iii) on or subsequent to such date, the business
combination is approved by the board of directors and 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 that is
not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
The Company's Amended Certificate of Incorporation, which will become
effective upon consummation of this offering, will require that any action
required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of the stockholders and
may not be effected by a consent in writing. In addition, special meetings of
the stockholders of the Company may be called only by the Board of Directors
or certain officers of the Company. The Amended Certificate of Incorporation
will also provide that, beginning with the first annual meeting of
stockholders following this offering, the Board of Directors will be divided
into three classes, with each class serving staggered three-year terms, that a
director may be removed from the Board of Directors only for cause and only
upon the vote of at least 66 2/3% of the voting power of all outstanding
stock, and that certain amendments of the Company's Certificate of
Incorporation, and all amendments by the stockholders of the Company's Bylaws,
require the approval of holders of at least 66 2/3% of the voting power of all
outstanding stock. These provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Company's
Common Stock. Future sales of substantial amounts of Common Stock in the
public market could adversely affect the market price of the Common Stock.
Upon completion of this offering, the Company will have outstanding an
aggregate of 11,438,712 shares of Common Stock, assuming (i) the issuance of
2,100,000 shares of Common Stock offered hereby, (ii) no exercise of the
Underwriters' over-allotment option and (iii) no exercise of options to
purchase Common Stock after August 31, 1997. Of these shares, the 4,000,000
shares sold in the offering will be freely tradable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except for any shares purchased by "Affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act (whose
sales would be subject to certain limitations and restrictions described
below).
The remaining 7,438,712 shares of Common Stock held by existing stockholders
were issued and sold by the Company in reliance on exemptions from the
registration requirements of the Securities Act. All officers, directors and
certain other holders of Common Stock have entered into contractual "lock-up"
agreements providing that they will not, without Hambrecht & Quist's prior
written consent, offer, sell, contract to sell or grant any option to purchase
or otherwise dispose of shares of Common Stock owned by them or that could be
purchased by them through the exercise of options to purchase Common Stock of
the Company until 180 days after the effective date of this offering (the
"Effective Date"). As a result of these contractual restrictions, additional
shares will be available for sale in the public market as follows: (i) 59,403
shares will be eligible for immediate sale on the date of this Prospectus, and
(ii) 7,379,309 shares will be eligible for sale upon expiration of the lock-up
agreements 180 days after the Effective Date, subject in some cases to the
limitations of Rule 144. In addition, outstanding options to purchase
approximately 328,126 shares will be vested and exercisable, and the shares
issuable upon exercise thereof eligible for sale, approximately 180 days
following the Effective Date, upon expiration of certain lock-up agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
one year (including the holding period of any prior owner except an affiliate)
is entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 114,387
shares immediately after this offering) or (ii) generally, the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
the required filing of a Form 144 with respect to such sale. Sales under Rule
144 are generally subject to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been
an affiliate of the Company at any time during the 90 days preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell such shares without having to comply with the
manner of sale, public information, volume limitation or notice filing
provisions of Rule 144. Under Rule 701 under the Securities Act, persons who
purchase shares upon exercise of options granted prior to the effective date
of this offering are entitled to sell such shares 90 days after the effective
date of this offering in reliance on Rule 144, without having to comply with
the holding period and notice filing requirements of Rule 144 and, in the case
of non-affiliates, without having to comply with the public information,
volume limitation or notice filing provisions of Rule 144.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisors prior to the date the
issuer becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written
compensatory benefit plans or written contracts relating the compensation of
such persons. In addition, the Commission had indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject
to the reporting requirements of the Exchange Act, along with the shares
acquired upon exercise of such options (including exercises after the date of
this Prospectus). Securities issued in
51
<PAGE>
reliance on Rule 701 are restricted securities and, subject to the contractual
restrictions described above, beginning 90 days after the date of this
Prospectus, may be sold by persons other than Affiliates (as defined in Rule
144 under the Securities Act) subject only to the manner of sale provisions of
Rule 144 and by Affiliates under Rule 144 without compliance with its one-year
minimum holding period requirements.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering the 2,582,227 shares subject to outstanding options or
reserved for issuance under the Company's 1988 Plan, the 1997 Plan, the 1997
Purchase Plan or Directors Plan. Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to Affiliates, be available for sale in the open market, except to the extent
that such shares are subject to vesting restrictions with the Company or the
contractual restrictions described above. All of the shares issuable upon
exercise of outstanding options are subject to 180 day lock-up agreements with
the Company and/or representatives of the Underwriters. An aggregate of shares
will be issuable upon the exercise of the currently outstanding options vested
and exercisable 180 days following the date of this Prospectus. Such shares
will be freely tradable in the public market upon exercise, pursuant to such
registration statement on Form S-8. See "Management--Stock Plans."
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representatives, Hambrecht & Quist
LLC, Montgomery Securities and Robertson, Stephens & Company LLC
(collectively, the "Representatives"), have severally agreed to purchase from
the Company and the Selling Stockholders the following respective numbers of
shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC............................................
Montgomery Securities............................................
Robertson, Stephens & Company LLC................................
---------
Total.......................................................... 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representatives. The Representatives have
informed the Company that the Underwriters do not intend to confirm sales of
Common Stock offered hereby to any account over which they have discretionary
authority.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 600,000
additional shares of Common Stock at the initial public offering price, less
the underwriting discount, set forth on the cover page of this Prospectus. To
the extent that the Underwriters exercise this option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased
by it shown in the above table bears to the total number of shares of Common
Stock offered hereby. The Company will be obligated, pursuant to the option,
to sell shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Selling Stockholders and all other stockholders of the Company,
including the executive officers and directors, who will own in the aggregate
shares of Common Stock after this offering, have agreed that they will
not, without the prior written consent of Hambrecht & Quist LLC, offer, sell
or otherwise dispose of
53
<PAGE>
any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exercisable for or convertible into shares of Common Stock
owned by them during the 180-day period following the effective date of the
Registration Statement for this offering. The Company has agreed that it will
not, without the prior written consent of Hambrecht & Quist LLC, offer, sell
or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock during the 180-day period following the effective
date of the Registration Statement for this offering, except that the Company
may grant additional options under its stock plans and issue securities under,
or pursuant to the exercise of options granted under, its stock plans provided
that, without the prior written consent of Hambrecht & Quist LLC, such
additional options shall not be exercised during such period. See "Shares
Eligible for Future Sale."
The Representatives currently anticipate that up to shares of Common
Stock may be sold at the initial public offering price to directors (or their
affiliated entities) and employees of the Company who have expressed an
interest in purchasing such shares of Common Stock in the offering. The number
of shares available for sale to the general public will be reduced to the
extent such persons purchase such shares. Any such shares not so purchased
will be offered by the Representatives to the general public on the same basis
as other shares offered hereby.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of the Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the offering. A penalty bid means an arrangement that
permits the Underwriters to reclaim a selling concession from a syndicate
member in connection with the offering when shares of Common Stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq Stock Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
On May 22, 1996, the Company entered into a series of transactions with
Hambrecht & Quist Transition Capital, LLC ("H&Q Capital"). Pursuant to these
transactions, H&Q Capital: (i) loaned $3.0 million to the Company pursuant to
a 12% subordinated secured loan agreement (the "Loan"); (ii) purchased 805,280
shares of Series C Preferred Stock of the Company for $1.00 per share; and
(iii) purchased from the Company for $12,000, a warrant to purchase 1,200,000
shares of Common Stock at $0.20 per share (the fair value of the Common Stock
as of that date as determined by the Board of Directors of the Company),
exercisable until May 22, 2002. The Company paid a $30,000 fee to H&Q Capital
in consideration for entering into the above-referenced transactions. The
Company anticipates that $3.0 million of the net proceeds of this offering
will be used to repay the outstanding balance of the Loan. The majority equity
holder of both H&Q Capital and Hambrecht & Quist LLC is Hambrecht & Quist
Group, a Delaware corporation.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be
determined by negotiation among the Company, the representatives of the
Selling Stockholders and the Representatives. Among the factors to be
considered in determining the initial public offering price are prevailing
market and economic conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The estimated initial public offering price range set
forth on the cover of this preliminary prospectus is subject to change as a
result of market conditions and other factors.
54
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby and general corporate legal
matters will be passed upon for the Company by Gray Cary Ware & Freidenrich, A
Professional Corporation ("GCWF"), Palo Alto, California. As of August 31,
1997, an investment partnership of GCWF beneficially owned an aggregate of
8,441 shares of the Company's Common Stock. Wilson Sonsini Goodrich & Rosati,
Professional Corporation, is acting as counsel for the Underwriters in
connection with certain legal matters relating to the sale of the Common Stock
offered hereby.
EXPERTS
The financial statements included in this Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, to the extent and for the
periods indicated in their report and are included herein in reliance upon the
authority of said firm as experts in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act, with respect to the Common Stock offered hereby.
This Prospectus which constitutes a part of the Registration Statement does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. For further information with respect to
the Company and such Common Stock, reference is made to the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or any other document referred
to are not necessarily complete. In each instance, reference is made to the
copy of such contract or document filed as an exhibit to the Registration
Statement, and each such statement is qualified in all respects by such
reference. Copies of the Registration Statement, including exhibits and
schedule thereto, may be inspected without charge at the Commission's
principal office in Washington, D.C., or obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 7
World Trade Center, Suite 1300, New York, New York 10048 and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information filed electronically with the
Commission. The address of the site is http://www.sec.gov.
55
<PAGE>
POWER INTEGRATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Shareholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Power Integrations, Inc.:
We have audited the accompanying consolidated balance sheets of Power
Integrations, Inc. (a California corporation) and subsidiaries as of December
31, 1995 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Power Integrations, Inc.
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Jose, California
January 28, 1997, except for
Note 9 for which the date is
September 10, 1997
F-2
<PAGE>
POWER INTEGRATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, 1997
DECEMBER 31, PRO FORMA
------------------ JUNE 30, SHAREHOLDERS'
1995 1996 1997 EQUITY
-------- -------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...... $ 3,003 $ 3,282 $ 3,858
Short-term investments......... 797 4,410 4,485
Accounts receivable, net of
allowances of $150, $285 and
$330, respectively............ 3,086 2,777 5,266
Inventories.................... 4,381 3,938 3,863
Prepaid expenses and other
current assets................ 166 300 334
-------- -------- -------- -------
Total current assets......... 11,433 14,707 17,806
-------- -------- -------- -------
PROPERTY AND EQUIPMENT, AT COST:
Machinery and equipment........ 6,638 8,920 9,753
Leasehold improvements......... 609 636 636
-------- -------- -------- -------
7,247 9,556 10,389
Less: Accumulated depreciation
and amortization.............. (2,951) (4,728) (5,760)
-------- -------- -------- -------
4,296 4,828 4,629
-------- -------- -------- -------
$ 15,729 $ 19,535 $ 22,435
======== ======== ======== =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Current portion of capitalized
lease obligations............. $ 803 $ 1,566 $ 1,607
Current portion of note payable
to a shareholder.............. -- 251 942
Accounts payable............... 1,980 1,476 3,758
Accrued payroll and related
expenses...................... 588 829 796
Other accrued liabilities...... 35 94 136
Deferred income on sales to
distributors.................. 592 734 1,200
-------- -------- --------
Total current liabilities.... 3,998 4,950 8,439
-------- -------- --------
DEFERRED COMPENSATION, NET OF
CURRENT PORTION................. -- -- 426
-------- -------- -------- -------
CAPITALIZED LEASE OBLIGATIONS,
NET OF CURRENT PORTION.......... 2,219 2,750 2,034
-------- -------- --------
NOTE PAYABLE TO A SHAREHOLDER,
NET OF CURRENT PORTION.......... -- 2,749 2,058
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
(NOTE 5)
SHAREHOLDERS' EQUITY:
Convertible Preferred Stock, no
par value, aggregate
liquidation preference of
$36,869
Authorized--54,000,000 shares
Outstanding (Series A, B, C,
D, E, and F)--45,058,516
shares in 1995, 45,863,796
shares in 1996 and at June
30, 1997; no shares
outstanding pro forma (Note
6)........................... 34,478 35,271 35,271 --
Common Stock, no par value
Authorized--100,000,000 shares
Outstanding--830,547 shares in
1995, 873,644 shares in 1996
and 940,347 at June 30, 1997;
8,387,270 shares outstanding
pro forma.................... 438 565 602 35,873
Deferred compensation.......... -- -- (531) (531)
Cumulative translation
adjustment.................... (8) (13) (11) (11)
Accumulated deficit............ (25,396) (26,737) (25,853) (25,853)
-------- -------- -------- -------
Total shareholders' equity... 9,512 9,086 9,478 $ 9,478
-------- -------- -------- -------
$ 15,729 $ 19,535 $ 22,435
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- -----------------------
1994 1995 1996 1996 1997
------- ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES:
Product sales........... $ 5,027 $17,406 $23,324 $11,292 $16,709
License fees and
royalties.............. 2,099 1,009 619 205 406
------- ------- -------- ------- -------
Total net revenues.... 7,126 18,415 23,943 11,497 17,115
------- ------- -------- ------- -------
COST OF REVENUES.......... 4,324 12,371 15,546 7,584 10,110
------- ------- -------- ------- -------
GROSS PROFIT.............. 2,802 6,044 8,397 3,913 7,005
------- ------- -------- ------- -------
OPERATING EXPENSES:
Research and develop-
ment................... 2,366 2,044 3,519 1,591 2,292
Sales and marketing..... 2,098 2,744 3,905 1,731 2,569
General and administra-
tive................... 1,061 1,619 1,558 753 840
------- ------- -------- ------- -------
Total operating ex-
penses............... 5,525 6,407 8,982 4,075 5,701
------- ------- -------- ------- -------
INCOME (LOSS) FROM
OPERATIONS............... (2,723) (363) (585) (162) 1,304
------- ------- -------- ------- -------
OTHER INCOME (EXPENSE):
Interest income......... 80 93 204 74 143
Interest expense........ (72) (183) (780) (335) (403)
Other expense, net...... (31) (316) (150) (66) (93)
------- ------- -------- ------- -------
Total other income
(expense)............ (23) (406) (726) (327) (353)
------- ------- -------- ------- -------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAXES.................... (2,746) (769) (1,311) (489) 951
PROVISION FOR INCOME TAX-
ES....................... 6 34 30 10 67
------- ------- -------- ------- -------
NET INCOME (LOSS)......... $(2,752) $ (803) $ (1,341) $ (499) $ 884
======= ======= ======== ======= =======
PRO FORMA NET INCOME
(LOSS) PER SHARE......... $ (0.14) $ (0.05) $ .09
======== ======= =======
PRO FORMA WEIGHTED AVERAGE
COMMON AND COMMON
EQUIVALENT SHARES........ 9,580 9,513 10,400
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------- -------------
CUMULATIVE TOTAL
DEFERRED TRANSLATION ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT WARRANTS COMPENSATION ADJUSTMENT DEFICIT EQUITY
------- -------- ------ ------ -------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1993................... 27,201 $ 22,839 340 $ 70 $ 38 $ -- $ (3) $(21,841) $1,103
Issuance of Series E
Preferred Stock....... 7,013 4,934 -- -- -- -- -- -- 4,934
Issuance of Common
Stock under employee
stock option plan..... -- -- 42 27 -- -- -- -- 27
Translation
adjustment............ -- -- -- -- -- -- (6) -- (6)
Net loss............... -- -- -- -- -- -- -- (2,752) (2,752)
------- -------- --- ---- ---- ----- ---- -------- ------
BALANCE AT DECEMBER 31,
1994................... 34,214 27,773 382 97 38 -- (9) (24,593) 3,306
Issuance of Series F
Preferred Stock....... 9,091 4,947 -- -- -- -- -- -- 4,947
Issuance of Common
Stock under employee
stock option plan..... -- -- 427 233 -- -- -- -- 233
Issuance of Common
Stock upon exercise of
warrant............... -- -- 22 108 (33) -- -- -- 75
Issuance of Series C
Preferred Stock upon
exercise of warrants.. 1,754 1,756 -- -- (3) -- -- -- 1,753
Expiration of
unexercised warrants
to purchase Series A,
C and D Preferred
Stock................. -- 2 -- -- (2) -- -- -- --
Translation
adjustment............ -- -- -- -- -- -- 1 -- 1
Net loss............... -- -- -- -- -- -- -- (803) (803)
------- -------- --- ---- ---- ----- ---- -------- ------
BALANCE AT DECEMBER 31,
1995................... 45,059 34,478 831 438 -- -- (8) (25,396) 9,512
Issuance of Series C
Preferred Stock upon
exercise of warrants.. 805 793 -- -- -- -- -- -- 793
Issuance of Common
Stock under employee
stock option plan, net
of repurchases........ -- -- 28 27 -- -- -- -- 27
Issuance of Common
Stock upon exercise of
warrants.............. -- -- 15 100 -- -- -- -- 100
Translation
adjustment............ -- -- -- -- -- -- (5) -- (5)
Net loss............... -- -- -- -- -- -- (1,341) (1,341)
------- -------- --- ---- ---- ----- ---- -------- ------
BALANCE AT DECEMBER 31,
1996................... 45,864 35,271 874 565 -- -- (13) (26,737) 9,086
Issuance of Common
Stock under employee
stock option plan..... -- -- 66 37 -- -- -- -- 37
Deferred compensation.. -- -- -- -- -- (566) -- -- (566)
Amortization of
deferred
compensation.......... -- -- -- -- -- 35 -- -- 35
Translation
adjustment............ -- -- -- -- -- -- 2 -- 2
Net income............. -- -- -- -- -- -- 884 884
------- -------- --- ---- ---- ----- ---- -------- ------
BALANCE AT JUNE 30, 1997
(Unaudited)............ 45,864 $ 35,271 940 $602 $-- $(531) $(11) $(25,853) $9,478
======= ======== === ==== ==== ===== ==== ======== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- -----------------------
1994 1995 1996 1996 1997
-------- ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)......... $ (2,752) $ (803) $ (1,341) $ (499) $ 884
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation and amorti-
zation.................. 485 1,036 1,887 798 1,032
Deferred compensation ex-
pense................... -- -- -- -- 35
Provision for allowances
for accounts receiv-
able.................... 48 95 143 70 45
Change in operating as-
sets and liabilities:
Accounts receivable...... (992) (1,883) 166 103 (2,534)
Inventories.............. (769) (3,239) 443 (1,966) 75
Prepaid expenses and
other current assets.... 483 (80) (134) (22) (34)
Accounts payable......... (75) 1,321 (504) (329) 2,282
Accrued liabilities...... 48 23 297 59 (129)
Deferred income on sales
to distributors......... -- 592 142 142 466
-------- ------- -------- ------- -------
Net cash provided by
(used in) operating
activities............ (3,524) (2,938) 1,099 (1,644) 2,122
-------- ------- -------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment............... (570) (1,316) (537) (50) (833)
Purchases of short-term
investments............. (390) (406) (3,613) -- (75)
-------- ------- -------- ------- -------
Net cash used in in-
vesting activities.... (960) (1,722) (4,150) (50) (908)
-------- ------- -------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from issu-
ance of Preferred
Stock................... 4,934 6,700 793 793 --
Net proceeds from issu-
ance of Common Stock.... 27 308 127 14 37
Principal payments under
capitalized lease obli-
gations................. (215) (505) (590) -- (675)
Proceeds from issuance of
note payable to a share-
holder.................. -- -- 3,000 3,000 --
-------- ------- -------- ------- -------
Net cash provided by
(used in) financing
activities............ 4,746 6,503 3,330 3,807 (638)
-------- ------- -------- ------- -------
NET INCREASE IN CASH AND
CASH EQUIVALENTS......... 262 1,843 279 2,113 576
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD... 898 1,160 3,003 3,003 3,282
-------- ------- -------- ------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD......... $ 1,160 $ 3,003 $ 3,282 $ 5,116 $ 3,858
======== ======= ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Capitalized lease obliga-
tions incurred for prop-
erty and equipment...... $ 607 $ 2,838 $ 1,883 $ 1,687 $ --
======== ======= ======== ======= =======
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest... $ 72 $ 183 $ 575 $ 261 $ 260
======== ======= ======== ======= =======
Cash paid for income tax-
es...................... $ -- $ 6 $ 45 $ 31 $ 3
======== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(ALL INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND 1997 IS UNAUDITED)
1. THE COMPANY:
Power Integrations, Inc. (the "Company"), which was incorporated on March
25, 1988 (See Note 9), designs, develops, manufactures and markets a range of
proprietary, high voltage, analog integrated circuits for use in AC to DC
power conversion primarily for the cellular telephone, personal computer,
cable and direct broadcast satellite and various consumer electronics markets.
The Company is subject to a number of risks including, among others, the
volume and timing of orders received by the Company from its customers;
competitive pressures on selling prices; the volume and timing of orders
placed by the Company with its foundries; the availability of raw materials;
fluctuations in manufacturing yields, whether resulting from the transition to
new foundries or from other factors; changes in product mix; the Company's
ability to introduce new products and technologies on a timely basis; the
introduction of products and technologies by the Company's competitors; market
acceptance of the Company's and its customers' products; the timing of
investments in research and development and sales and marketing; cyclical
semiconductor conditions; fluctuations in exchange rates, particularly
exchange rates between the U.S. dollar and the Japanese yen; changes in the
international business climate and economic conditions; reliance on a limited
number of key customers; dependence on key individuals; the ability to secure
adequate financing to support future growth, if and when required; and the
successful development and marketing of its products in an emerging and
rapidly changing market.
All of the wafers are manufactured by two offshore independent foundries.
Although there are a number of other suppliers that could provide similar
services, a change in suppliers could cause a delay in manufacturing and
possible loss of sales, which could affect operating results adversely.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation and Foreign Currency Translation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of intercompany
transactions and balances. The functional currencies of the Company's
subsidiaries are the local currencies. Accordingly, all assets and liabilities
are translated into U.S. dollars at the current exchange rates as of the
applicable balance sheet date. Revenues and expenses are translated at the
average exchange rate prevailing during the period. Cumulative gains and
losses from the translation of the foreign subsidiaries financial statements
have been included in shareholders' equity.
Unaudited Interim Financial Data
The unaudited financial statements as of June 30, 1997 and for the six
months ended June 30, 1996 and 1997 have been prepared on the same basis as
the audited consolidated financial statements and, in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial information set forth
therein, in accordance with generally accepted accounting principles.
Cash and Cash Equivalents and Short-Term Investments
The Company considers cash invested in highly liquid financial instruments
with an original maturity of three months or less to be cash equivalents. Cash
investments in highly liquid financial instruments with original maturities
greater than three months but less than one year are classified as short-term
investments. As of December 31, 1995 and 1996, the Company's short-term
investments consist of U.S. Government backed securities, which are classified
as held to maturity and are valued using the amortized cost method which
approximates market.
F-7
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories
Inventories (which consist of costs associated with the purchases of wafers
from offshore foundries and of packaged components from several offshore
assembly manufacturers, as well as internal labor and overhead associated with
the testing of both wafers and packaged components) are stated at the lower of
cost (first-in, first-out) or market. Provisions, when required, are made to
reduce excess and obsolete inventories to their estimated net realizable
values. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.................................... $ 706 $ 264 $ 350
Work-in-process.................................. 1,450 2,451 3,032
Finished goods................................... 2,225 1,223 481
------ ------ ------
$4,381 $3,938 $3,863
====== ====== ======
</TABLE>
Property and Equipment
Depreciation and amortization of property and equipment are provided using
the straight-line method over the shorter of the estimated useful lives of the
assets over a period of one to four years or over the applicable lease term.
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $4.3 million and $6.2
million as of December 31, 1995 and 1996, respectively. Related accumulated
amortization on these leased assets was approximately $772,000 and $2.1
million as of December 31, 1995 and 1996, respectively.
Pro Forma Net Income (Loss) Per Share (Unaudited)
Pro forma net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares consist of Preferred Stock (using the "if converted"
method) and stock options and warrants (using the treasury stock method).
Common equivalent shares are excluded from the computation if their effect is
anti-dilutive except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins and staff policy, such computations include all
common and common equivalent shares issued within the 12 months preceding the
initial filing date as if they were outstanding for all periods presented
(using the treasury stock method and an assumed initial public offering price
of $11.00 per share). In addition, Preferred Stock is included in the
computation (using the "if converted" method) even when the effect of their
inclusion is anti-dilutive. Pro forma net loss per share data prior to fiscal
1996 as well as historical earnings per share data (all periods) has not been
presented since such amounts are not deemed meaningful due to the significant
change in the Company's capital structure that will occur in connection with
the proposed offering.
New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share." The
requirements of SFAS No. 128 will become effective for the Company's year
ending December 31, 1997. If SFAS No. 128 had been applied by the Company, pro
forma basic income (loss) per share would have been $(0.14), $(0.05) and
$(0.09) for the year ended December 31, 1996, and for the six month periods
ended June 30, 1996 and 1997, respectively, and pro forma diluted income
(loss) per share of $(0.14), (0.05) and $(0.09), respectively.
F-8
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Revenues from product sales are generally recognized upon shipment. During
1994, 1995 and 1996, and for the six months ended June 30, 1996 and 1997 sales
to distributors of the Company's products accounted for approximately 51%,
54%, 52%, 57% and 51% of net revenues, respectively. A portion of the
Company's sales are made to distributors under terms allowing certain rights
of return and protection against subsequent price declines on the Company's
products held by the distributors. Pursuant to the Company's distributor
agreements, the Company protects its distributors' exposures related to the
impact of price reductions as well as products at distributors that are slow
moving or have been discontinued. These agreements, which may be canceled by
either party on a specified notice, generally contain a provision for the
return of the Company's product in the event the agreement with the
distributor is terminated. Accordingly, the Company defers recognition of
revenue and the proportionate costs of revenues derived from sales to
distributors until such distributors resell the Company's products to their
customers. The margin deferred as a result of this policy is reflected as
"deferred income on sales to distributors" on the consolidated Company's
balance sheet.
The Company has entered into separate wafer supply and technology license
agreements with three separate unaffiliated companies (the "Foundries"). As of
December 31, 1996, all wafers are supplied by two foundries. The wafer supply
agreements, which are renewable and expire at various dates through June 2000,
require certain purchase commitments to be made over the term of the
agreements which are significant. In connection with the technology license
agreements, the Company is entitled to receive a royalty on sales of products
by the Foundries which incorporate the Company's technology into their own
products. Initial license fees received under the agreements are non-
refundable. During 1994, 1995 and 1996, revenue recognized under these
agreements was approximately $2.1 million, $1.0 million and $619,000,
respectively.
The Company's end user base is highly concentrated and a relatively small
number of OEMs, directly or indirectly through merchant power supply
manufacturers, accounted for a significant portion of the Company's revenue.
For fiscal years 1994, 1995, 1996, and for the six months ended June 30, 1996
and 1997, ten customers accounted for approximately 75%, 77%, 64%, 73% and 70%
of net revenues, respectively.
The following customers accounted for more than 10% of total net revenues:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
---------------- ------------
CUSTOMER 1994 1995 1996 1996 1997
- -------- ---- ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
A................................................... 11% 21% * * *
B................................................... 12% * * * *
C................................................... 24% * * * *
D................................................... * 20% * * *
E................................................... * 12% * 14% *
F................................................... * * * * 13%
G................................................... * * * * 19%
H................................................... * * * 15% *
</TABLE>
- --------
* less than 10% or no sales
Export Sales
The Company markets its products to OEMs and merchant power supply
manufacturers in North America and in foreign countries through its sales
personnel and a worldwide network of independent sales
F-9
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
representatives and distributors. Export sales, which consist of domestic
sales to customers in foreign countries are comprised of the following:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
---------------- -------------
1994 1995 1996 1996 1997
---- ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Japan........................................ 31% 28% 16% 21% 7%
Taiwan....................................... 5% 14% 13% 17% 25%
Hong Kong.................................... -- 4 12% 5% 24%
Western Europe............................... 12% 9% 19% 17% 13%
Other........................................ 9% 10% 12% 12% 10%
--- --- --- ----- -----
Total foreign................................ 57% 65% 72% 72% 79%
=== === === ===== =====
</TABLE>
Foreign Currency Risk
During 1995, the Company opened a Japanese yen bank account with a U.S. bank
for payments to suppliers and for cash receipts from Japanese suppliers and
customers denominated in yen. For the years ended December 31, 1995 and 1996,
the Company realized foreign exchange losses of approximately $164,000 and
$77,000, respectively, which are included in "other expense, net," in the
accompanying consolidated statements of operations.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash investments and trade receivables.
The Company has cash investment policies that limit cash investments to short-
term, low risk investments. With respect to trade receivables, the Company
performs ongoing credit evaluations of its customers' financial condition and
requires letters of credit whenever deemed necessary. Additionally, the
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends related
to past losses and other information. As of December 31, 1995 and 1996,
approximately 82% and 85% of accounts receivable, respectively, were
concentrated with ten customers.
3. BANK LINE OF CREDIT:
The Company has an $8.0 million revolving line of credit agreement (the
"Agreement") with a bank. Advances under the Agreement bear interest at the
bank's prime lending rate plus 1.5% (9.75% at December 31, 1996). All advances
under the Agreement are limited to 80% of eligible accounts receivable and the
lesser of 40% or $3.5 million of eligible domestic finished goods inventory.
Additionally, the Agreement contains certain limitations, including a $5.0
million limit on direct borrowings, a $4.0 million limit on advances for
F-10
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
commercial letters of credit and a $5.0 million limit on advances for foreign
currency forward contracts, if any, provided that at no time will the
aggregate sum of the limits exceed $8.0 million. As of December 31, 1996,
there were outstanding letters of credit totaling 35,741,930 Japanese yen
(approximately $306,000). The Agreement, which was renegotiated in July 1997
under similar terms and expires on August 4, 1998, restricts the Company from
entering into certain transactions and contains certain financial covenants,
including maintaining a minimum current ratio of 1.25 to 1.0, minimum tangible
net worth of $9.0 million, maximum debt to net worth of 1.5 to 1.0 and
quarterly after-tax profitability beginning with the fourth quarter of 1997.
As of December 31, 1996, there were no borrowings outstanding under the
Agreement.
4. NOTES PAYABLE TO A SHAREHOLDER:
In May 1996, the Company issued a $3.0 million note payable to a holder of
Series C Preferred Stock, which matures in October 1999. Interest, which is
payable monthly, is 12%. The note is subordinated in rights of payment to all
existing and future indebtedness of the Company. Principal payments become due
beginning November 1997 and are to be paid monthly through maturity. Annual
principal obligations relating to this note are approximately $251,000,
$1,424,000 and $1,325,000 for 1997, 1998 and 1999, respectively.
5. COMMITMENTS AND CONTINGENCIES:
The Company leases its facility under an operating lease which expires in
October 1998. Rent expense under all operating leases was approximately
$159,000, $159,000 and $223,000 in 1994, 1995 and 1996, respectively.
A significant portion of the Company's machinery and equipment is leased
under agreements accounted for as capital leases. The Company leased
approximately $2.8 million and $1.9 million of equipment during 1995 and 1996,
respectively, under various capital leasing arrangements. In 1996, the Company
entered into a new capital lease line of credit agreement (the "Capital
Leasing Agreement"), which allows for combined borrowings of up to $300,000,
to finance the acquisition of property and equipment. The Capital Leasing
Agreement, which expires October 1, 1999, bears interest at a fixed rate
established at the time of borrowing which was 11.0% as of December 31, 1996.
Approximately $122,000 was available under the Capital Leasing Agreement.
Future minimum lease payments under all lease agreements as of December 31,
1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR OPERATING CAPITAL
---- --------- -------
<S> <C> <C>
1997.................................................... $ 223 $ 1,959
1998.................................................... 186 1,689
1999.................................................... -- 1,195
2000.................................................... -- 167
----- -------
Total minimum lease payments.......................... $ 409 5,010
=====
Less: Amounts representing interest on capital leases
(10.5%-14.9%).......................................... (694)
-------
4,316
Less: Current portion................................... (1,566)
-------
Long-term portion....................................... $ 2,750
=======
</TABLE>
F-11
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
From time to time, the Company is involved in various disputes which have
arisen in the ordinary course of business. Management believes that the
ultimate resolution of these disputes will not have a material adverse impact
on the Company's financial position or its results of operations.
6. CONVERTIBLE PREFERRED STOCK:
Preferred Stock outstanding consists of the following (in thousands, except
share information):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Series A, 8,400,000 shares authorized, 7,900,000
shares outstanding in 1995, 1996 and 1997,
liquidation preference of $3,950............... $ 3,079 $ 3,079 $ 3,079
Series B, 8,000,000 shares authorized, 7,489,000
shares outstanding in 1995, 1996 and 1997,
liquidation preference of $7,489............... 7,435 7,435 7,435
Series C, 11,392,900 shares authorized,
10,365,120 shares outstanding in 1995 and
11,170,400 shares outstanding in 1996 and 1997,
liquidation preference of $11,170.............. 10,164 10,957 10,957
Series D, 3,280,000 shares authorized, 3,200,000
shares outstanding in 1995, 1996 and 1997,
liquidation preference of $4,000............... 3,919 3,919 3,919
Series E, 12,300,000 shares authorized,
7,013,396 shares outstanding in 1995, 1996 and
1997, liquidation preference of $5,260......... 4,934 4,934 4,934
Series F, 10,091,000 shares authorized,
9,091,000 shares outstanding in 1995, 1996 and
1997, liquidation preference of $5,000......... 4,947 4,947 4,947
------- ------- -------
$34,478 $35,271 $35,271
======= ======= =======
</TABLE>
The rights, privileges and preferences of Series A, B, C, D, E and F
Preferred Stock include:
Dividends
The holders of each outstanding share of Series A, B, C, D, E and F
Preferred Stock are entitled to receive annual, non-cumulative dividends of
$.04, $.08, $.08, $.08, $.06 and $.04 per share, respectively, when and as
declared by the Board of Directors, in preference to any distribution to the
holders of the Common Stock. To date, no dividends have been declared.
Liquidation Preference
In the event of a liquidation, dissolution or winding up of the affairs of
the Company, the holders of Series A, B, C, D, E and F Preferred Stock shall
be entitled to receive $.50, $1.00, $1.00, $1.25, $.75 and $.55 per share,
respectively, plus any declared and unpaid dividends in preference to any
distribution to the holders of the Common Stock.
F-12
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Conversion
Each share of Series A, B, C, D, E and F Preferred Stock is convertible, at
the option of the shareholder, into one share of Common Stock, subject to the
reverse stock split and adjustments for certain corporate changes such as the
reverse stock split (see Note 9) and dilutive events. Each share shall
automatically convert upon the earlier of (i) the closing of an underwritten
registered public offering of the Company's Common Stock with an aggregate
offering price to the public of at least $5 million and a price per share not
less than the greater of (a) $1.00 per share and (b) the then effective
conversion price of the Series D Preferred Stock (in both cases adjusted to
reflect stock splits, reverse stock splits, stock dividends and stock
recapitalizations) or (ii) the vote or written consent of over 50% of the
holders of the Series A, B, C, D, E and F Preferred Stock voting together as a
single class (except as otherwise required by law) approving the conversion of
the Series A, B, C, D, E and F Preferred Stock into Common Stock.
Voting Rights
The Series A, B, C, D, E and F Preferred Stock have full voting rights
equivalent to the number of Common Stock into which they are convertible.
Each share of Preferred Stock is entitled to the number of votes equal to
the number of shares of Common Stock into which shares of Preferred Stock
could be converted. Additionally, so long as 1,000,000 shares of Series D
Preferred Stock are outstanding, the holders of Series D Preferred Stock,
voting as a separate class, are entitled to elect one director to the Board of
Directors.
Registration Rights
The Series A, B, C, D, E and F preferred shareholders have certain
registration rights under the Securities Act of 1933.
Pro Forma Shareholders' Equity
In connection with the initial public offering of the Company's Common
Stock, all outstanding Preferred Stock will automatically convert into Common
Stock upon the closing of the offering. The pro forma effects on shareholders'
equity of the conversion of Series A, B, C, D, E, and F Preferred Stock and
the assumed issuance of 7,446,923 shares of Common Stock upon the exercise of
certain warrants prior to the closing of the offering have been reflected in
the accompanying unaudited pro forma consolidated balance sheet as of June 30,
1997.
7. COMMON STOCK:
1988 Stock Option Plan
In June 1988, the Board of Directors approved the 1988 Stock Option Plan
(the "1988 Plan"), whereby the Board of Directors may grant options to key
employees, directors and consultants to purchase the Company's Common Stock at
exercise prices of not less than 85% of the fair value of the shares at the
date of grant. Through December 31, 1996, the Board of Directors has
authorized a total of 2,117,941 shares of Common Stock for issuance under the
Plan. Options expire ten years after the date of grant (five years if the
option is granted to a ten percent owner optionee) and generally vest over 50
months. Options granted under the 1988 Plan will remain outstanding in
accordance with their terms, but, effective July 1997, the Board of Directors
has determined that no further options will be granted under the 1988 Plan
(see Note 9).
F-13
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes option activity under the 1988 and 1997 Plans
(see Note 9):
<TABLE>
<CAPTION>
OPTIONS OPTIONS EXERCISE WEIGHTED AVERAGE
AVAILABLE OUTSTANDING PRICES EXERCISE PRICE
--------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Outstanding at December
31, 1994............... 86,615 676,941 $ .34-$.85 $ .75
Authorized............ 882,353 -- -- --
Granted............... (951,346) 951,346 .51-1.36 .59
Exercised............. -- (426,506) .34-.85 .54
Canceled.............. 69,524 (69,524) .51-.85 .68
-------- --------- ----------- -----
Outstanding at December
31, 1995............... 87,146 1,132,257 .34-1.36 .70
Authorized............ 294,118 -- -- --
Granted............... (323,970) 323,970 1.36 1.36
Exercised............. -- (27,847) .51-1.36 .94
Cancelled............. 131,954 (131,954) .51-1.36 1.16
-------- --------- ----------- -----
Outstanding at December
31, 1996............... 189,248 1,296,426 .34-$1.36 .80
Authorized............ 660,745 -- -- --
Granted............... (455,625) 455,625 1.36-1.70 1.67
Exercised............. -- (65,662) .51-1.36 1.67
Cancelled............. 6,014 (6,014) 1.36 1.36
-------- --------- ----------- -----
Outstanding at June 30,
1997 (Unaudited)....... 400,382 1,680,375 .51-$1.36 1.02
======== ========= =========== =====
Exercisable at December
31, 1996............... 527,782 $ .34-$1.36 $ .75
========= =========== =====
Exercisable at June 30,
1997 (Unaudited)....... 590,402 $ .34-$1.36 $ .87
========= =========== =====
</TABLE>
The Company accounts for the Plan under APB Opinion No. 25, "Accounting for
Stock Issued to Employees," under which no compensation expense has been
recognized. Had compensation expense for the Plan been determined consistent
with SFAS No. 123, "Accounting for Stock Based Compensation," the Company's
net loss would have been increased to the following pro forma amounts (in
thousands, except per share information):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1996
------ --------
<S> <C> <C>
Net loss:
As Reported............................................. $ (803) $ (1,341)
Pro Forma............................................... $ (841) $ (1,401)
Net loss per share:
Pro Forma (see Note 2).................................. $ (0.14)
Adjusted Pro Forma...................................... $ (0.15)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
expense may not be representative of that to be expected in future years.
A total of 362,353 of the 1,295,426 options outstanding at December 31, 1996
have exercise prices between $.34 and $.85, with a weighted average exercise
price of $.75 and a weighted average remaining contractual life of 5 years. A
total of 313,574 of these options are exercisable. The remaining 933,073
options
F-14
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
have exercise prices between $.51 and $1.36 with a weighted average exercise
price of $.82 and a weighted average remaining contractual life of 9 years. A
total of 214,209 of these options are exercisable.
The weighted-average grant date fair value of options granted during 1995
and 1996 was $.14 and $.27, respectively. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1995 and
1996: risk-free interest rates of 6.3 and 6.2 percent, respectively; expected
dividend yields of zero percent; expected lives of 4 years; expected
volatility of zero percent.
Warrants
In connection with an equipment lease agreement entered into during 1988
with a financing company, the Company issued a warrant for the purchase of up
to 22,059 shares of the Company's Common Stock at an exercise price of $3.40
per share. This warrant was exercised in June 1995. The Company leased
additional equipment during 1989 from the same financing company and, as part
of this lease, a warrant for the purchase of up to an additional 14,705 shares
of the Company's Common Stock at an exercise price of $6.80 per share was
issued. This warrant was exercised in July 1996.
In connection with the issuance of Series C Preferred Stock during 1991, the
Company issued warrants for the purchase of up to 2,780,968 shares of the
Company's Series C Preferred Stock at an exercise price of $1.00 per share. In
1995, warrants to purchase 1,753,188 shares of Series C Preferred Stock were
exercised, 222,500 warrants expired during 1995, and the remaining 805,280
warrants were exercised during May 1996.
In connection with the issuance of Series E Preferred Stock in 1994, the
Company issued warrants for the purchase of up to 132,120 shares of the
Company's Series E Preferred Stock at an exercise price of $.90 per share. The
warrants are currently exercisable and expire four years from the date of
issuance or upon an initial public offering of the Company's Common Stock with
a price per share of $2.00 or more and with a total offering price of at least
$5 million.
In connection with an equipment lease agreement entered into during 1993
with a financing company, the Company issued a warrant for the purchase of
80,000 shares of Series D Preferred Stock at an exercise price of $.75 per
share. This warrant is currently exercisable and expires the latter of
December 29, 2003 or five years after the closing of an initial public
offering of the Company's Common Stock. The Company leased additional
equipment during 1994 from the same financing company and, as part of this
lease, warrants for the purchase of 160,000 shares of Series E Preferred Stock
at an exercise price of $.75 per share were issued. These warrants are
currently exercisable and expire the latter of December 27, 2004 or five years
after the closing of an initial public offering of the Company's Common Stock.
In 1995, the Company leased additional equipment from the same financing
company and issued a warrant to purchase 163,636 shares of the Company's
Series F Preferred Stock at $.55 per share. The warrant is currently
exercisable and expires the latter of December 27, 2005 or five years after
the closing of an initial public offering of the Company's Common Stock.
In connection with an equipment leasing agreement entered into during 1995
with a financial company, the Company issued a warrant to purchase 274,914
shares of the Company's Common Stock at $.95 per share. The warrant is
exercisable upon issuance and expires November 20, 2002.
In connection with obtaining the revolving line of credit agreement with a
bank in 1995 (see Note 3), the Company issued the bank warrants to purchase
980,000 shares of the Company's Series F Preferred Stock, respectively, at
$.55 per share. The warrants are exercisable upon issuance and expire between
February 26, 2002 and August 6, 2002. In connection with the renewal of the
line of credit agreement in 1996, the
F-15
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company issued the bank warrants to purchase 154,600 share of Common Stock at
$.95 per share. These warrants are exercisable upon issuance expire on April
14, 2003.
In connection with the issuance of a note payable to a shareholder in 1996
(see Note 4), the Company issued a warrant to purchase 1,200,000 shares of the
Company's Common Stock at $.20 per share. The warrant is exercisable upon
issuance and expires May 22, 2002.
Shares Reserved
As of December 31, 1996, the Company has shares of Common Stock reserved for
future issuance as follows:
<TABLE>
<S> <C>
Convertible Series A Preferred Stock.............................. 7,900,000
Convertible Series B Preferred Stock.............................. 7,489,000
Convertible Series C Preferred Stock.............................. 11,170,400
Convertible Series D Preferred Stock.............................. 3,200,000
Convertible Series E Preferred Stock.............................. 7,013,396
Convertible Series F Preferred Stock.............................. 9,091,000
Stock Option Plan................................................. 1,484,674
Warrants:
Convertible Series D Preferred Stock............................ 80,000
Convertible Series E Preferred Stock............................ 292,120
Convertible Series F Preferred Stock............................ 1,143,636
Common Stock.................................................... 239,635
----------
49,103,861
==========
</TABLE>
8. INCOME TAXES:
The Company accounts for income taxes under SFAS No. 109 "Accounting for
Income Taxes." SFAS No. 109 provides for a liability approach to accounting
for income taxes under which deferred income taxes are provided based upon
enacted tax laws and rates applicable to the periods in which taxes become
payable.
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------- ----------
1994 1995 1996 1997
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Current Payable:
Federal.......................................... $-- $14 $ 5 $35
State............................................ -- 13 3 22
Foreign.......................................... 6 7 22 10
---- --- --- ---
$ 6 $34 $30 $67
==== === === ===
</TABLE>
F-16
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes differs from the amount which would result by
applying the applicable Federal income tax rate to loss before provision for
income taxes as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- ----------
1994 1995 1996 1997
----- ----- ----- ----------
<S> <C> <C> <C> <C>
Provision (benefit) computed at Federal
statutory rate........................ (34.0)% (34.0)% (34.0)% 34.0%
State income taxes, net of Federal tax
benefit............................... (6.1) (6.1) (6.1) 6.1
Change in valuation allowance.......... 40.1 38.6 38.2 (41.5)
Alternative minimum tax................ -- 3.2 0.6 5.8
Nondeductible expenses and other....... -- 1.7 1.9 1.6
Foreign tax............................ -- 1.0 1.7 1.0
----- ----- ----- -----
-- 4.4% 2.3% 7.0%
===== ===== ===== =====
</TABLE>
The components of the net deferred income tax asset were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Net operating loss carryforwards......................... $ 8,295 $ 8,215
Tax credit carryforwards................................. 1,044 1,164
Inventory reserves....................................... 362 750
Accounts receivable reserves............................. 60 114
Accrued vacation......................................... 67 87
Other cumulative temporary differences................... 202 190
-------- --------
10,030 10,520
Valuation allowance...................................... (10,030) (10,520)
-------- --------
$ -- $ --
======== ========
</TABLE>
A valuation allowance has been recorded for the entire deferred tax asset as
a result of uncertainties regarding the realization of the asset balance, the
variability of operating results and taxable income.
As of December 31, 1996, the Company has net cumulative operating loss
carryforwards for Federal and state income tax reporting purposes of
approximately $23.0 million and $6.5 million, respectively. In addition, as of
December 31, 1996, the Company has research and development tax credit
carryforwards of approximately $1.2 million. These carryforwards expire in
various periods from 2004 to 2011. The United States Tax Reform Act of 1986
contains provisions that may limit the net operating loss carryforwards and
research and development credits available to be used in any given year upon
the occurrence of certain events, including a significant change in ownership.
9. SUBSEQUENT EVENTS:
Public Offering
In September 1997, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
the Company to sell shares of its Common Stock in connection with the proposed
Initial Public Offering (IPO). If the offering is consummated under the terms
presently anticipated, all of the currently outstanding convertible Preferred
Stock will automatically convert to 7,446,923 shares of Common Stock upon the
closing of the IPO. The effect of the above has been reflected in the
accompanying unaudited pro forma balance sheet as of June 30, 1997.
F-17
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reincorporation and Reverse Stock Split
In September 1997, the Board of Directors approved the reincorporation of
the Company in Delaware, at which time the Company will be authorized to issue
40,000,000 shares of $0.001 par value Common Stock, and 48,863,796 shares of
$0.001 par value Preferred Stock. Upon conversion of the outstanding Preferred
Stock, such Preferred Stock will be retired, and the authorized shares of
Preferred Stock will be 3,000,000.
In September 1997, the Company's Board of Directors approved a one-for-6.8
reverse split of its Common Stock. All common and preferred share and per
share amounts in the accompanying consolidated financial statements have been
adjusted retroactively to give effect to this reverse stock split.
1997 Employee Stock Purchase Plan
In September 1997, the Board adopted the 1997 Employee Stock Purchase Plan
(the "Purchase Plan"). The Company has reserved 250,000 shares of Common Stock
for issuance under the Purchases Plan. The Purchase Plan will enable eligible
employees to purchase Common Stock at 85% of the lower of the fair market
value of the Company's Common Stock on the first or the last day of each
offering period.
Deferred Compensation
In connection with the issuance of stock options to employees and
consultants, the Company has recorded deferred compensation in the aggregate
amount of approximately $566,000, representing the difference between the
deemed fair market value of the Company's Common Stock and the exercise price
of the stock options at the date of grant. The Company is amortizing the
deferred compensation expense over the applicable vesting period, which is
typically over 48 months. For the unaudited six month period ended June 30,
1997, amortization expense was approximately $35,000. No compensation expense
related to any other periods presented has been recorded.
1997 Stock Option Plan
In June 1997, the Board of Directors approved the 1997 Stock Option Plan
(the "1997 Plan"), whereby the Board of Directors may grant options to key
employees, directors and consultants to purchase the Company's Common Stock at
exercise prices of not less than 85% of the fair value (as determined by the
Board of Directors) of the shares at the date of grant. The 1997 Plan's
maximum share reserve is 2,132,227 shares, which is comprised of the sum of
(i) 660,745 shares (new shares allocated to the 1997 Plan) and (ii) 1,471,482
(the number of shares subject to outstanding options on June 30, 1997 granted
pursuant to the 1988 Plan (the "1988 Plan Options")). The number of shares
available for issuance under the 1997 Plan, at any time, is reduced by the
number of shares remaining subject to the 1988 Plan Options. Of the shares of
Common Stock currently reserved for issuance under the 1997 Plan as of June
30, 1997, no shares have been issued upon the exercise of options, options for
the purchase of a total of 260,363 shares at a weighted average exercise price
of $1.70 per share were outstanding and a maximum of 400,382 shares were
available for future option grants. Options expire ten years after the date of
grant (five years if the option is granted to a ten percent owner optionee)
and generally vest over 48 months.
1997 Outside Directors Stock Option Plan
In September 1997, the Board of Directors approved an Outside Directors
Stock Option Plan (the "Directors Plan"). A total of 200,000 shares of Common
Stock have been reserved for issuance under the Directors Plan. The Directors
Plan provides for the grant of nonstatutory stock options to nonemployee
directors of the Company. The Directors Plan is designed to work automatically
without administration; however, to the extent administration is necessary, it
will be performed by the Board of Directors. The Directors Plan provides that
each current and future nonemployee director of the Company will be granted
F-18
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
an option to purchase 15,000 shares of Common Stock on the effective date or
the date on which the optionee first becomes a nonemployee director of the
Company after the effective date as the case may be (the "Initial Grant").
Thereafter, each nonemployee director who has served on the Board of Directors
continuously for 6 months will be granted an additional option to purchase
5,000 shares of Common Stock (an "Annual Grant"). Subject to an optionee's
continuous service with the Company, approximately 1/3rd of an Initial Grant
will become exercisable one year after the date of grant and 1/36th of the
Initial Grant will become exercisable monthly thereafter. Each Annual Grant
will become exercisable in twelve monthly installments beginning in the 25th
month after the date of grant, subject to the optionee's continuous service.
The exercise price per share of all options granted under the Directors Plan
will equal the fair market value of a share of Common Stock on the date of
grant. Options granted under the Directors Plan have a term of ten years and
are non-transferable. In the event of certain changes in control of the
Company, options outstanding under the Directors Plan will become immediately
exercisable and vested in full.
1997 Capital Leasing Agreement
In May 1997, the Company entered into a new capital lease line of credit
agreement (the "1997 Capital Leasing Agreement"), which allows for combined
borrowings up to $3 million to finance the acquisition of property and
equipment. The 1997 Capital Leasing Agreement, which expires March 31, 1998,
bears interest at a fixed rate established at the time of borrowing. There were
no borrowings outstanding as of June 30, 1997. In July 1997, the Company
purchased approximately $874,000 of capital equipment under this agreement at a
fixed rate of interest of 12.0%.
F-19
<PAGE>
(GRAPHIC OF INTEGRATED CIRCUIT APPEARS HERE)
(LOGO OF POWER INTEGRATIONS, INC. APPEARS HERE)
POWER INTEGRATIONS
TECHNOLOGY COMBINES HIGH-
VOLTAGE POWER TRANSISTORS
WITH ANALOG CIRCUITS ON
THE SAME SILICON CHIP.
THE COMPANY HAS BEEN
ISSUED 23 U.S. AND 33
FOREIGN PATENTS.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCK-
HOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL. NEITHER THE DELIVER OF THIS PROSPECTUS NOR ANY OFFER OR SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF
OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 27
Management............................................................... 37
Certain Transactions..................................................... 45
Principal and Selling Stockholders....................................... 47
Description of Capital Stock............................................. 49
Shares Eligible for Future Sale.......................................... 51
Underwriting............................................................. 53
Legal Matters............................................................ 55
Experts.................................................................. 55
Additional Information................................................... 55
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
(POWER INTEGRATIONS LOGO)
COMMON STOCK
------------
PROSPECTUS
------------
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the Common Stock being registered. Pursuant to the Fifth Amended and
Restated Rights Agreement dated April 27, 1995, as amended, the Company is
paying all of the expenses incurred on behalf of the Selling Stockholders
(other than underwriting discounts and commissions). All amounts shown are
estimates except for the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
----------
<S> <C>
Registration fee................................................. $ 16,728
NASD filing fee.................................................. 6,020
Nasdaq National Market application fee........................... 50,000
Blue sky qualification fees and expenses......................... 12,500
Printing and engraving expenses.................................. 200,000
Legal fees and expenses.......................................... 300,000
Accounting fees and expenses..................................... 225,000
Director and Officer liability insurance......................... 100,000
Transfer agent and registrar fees................................ 10,000
Fee for Custodian for Selling Stockholders....................... 10,000
Miscellaneous expenses........................................... 69,752
----------
Total.......................................................... $1,000,000
==========
</TABLE>
- --------
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors, and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's Certificate of
Incorporation and Bylaws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition,
the Registrant intends to enter into separate indemnification agreements with
its directors, officers and certain employees which would require the
Registrant, among other things, to indemnify them against certain liabilities
which may arise by reason of their status or service (other than liabilities
arising from willful misconduct of a culpable nature) and to maintain
directors' and officers' liability insurance, if available on reasonable
terms.
These indemnification provisions and the indemnification agreement to be
entered into between the Registrant and its officers and directors may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act.
The Underwriting Agreement, filed as Exhibit 1.1 to this Registration
Statement, provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act, or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since June 30, 1994, the Registrant has sold and issued the following
unregistered securities (as adjusted where appropriate for the proposed
reverse stock split whereby each 6.8 outstanding shares of Common Stock will
be converted into one share of Common Stock):
(1) On December 27, 1994, in connection with an equipment lease, the
Registrant issued a warrant to an equipment lessor to purchase 80,000
shares of Series E Preferred Stock at an exercise price of $0.75 per share.
(2) On February 27, 1995, in connection with the extension of a line of
credit, the Registrant issued a warrant to a bank to purchase 200,000
shares of Series F Preferred Stock at an exercise price of $0.55 per share.
(3) In April 1995, the Registrant issued and sold an aggregate of
7,218,575 shares of Series F Preferred Stock to a group of private
investors for aggregate cash consideration of $3,970,216.25.
(4) In May 1995, the Registrant issued and sold an aggregate of 1,872,425
shares of Series F Preferred Stock to a group of private investors for
aggregate cash consideration of $1,029,833.75.
(5) On June 16, 1995, the Registrant issued and sold 22,058 shares of
Common Stock to a single investor for aggregate cash consideration of
$75,000, upon exercise of a warrant granted in connection with an equipment
lease.
(6) On July 13, 1995, in connection with an equipment lease, the
Registrant issued a warrant to an equipment lessor to purchase 163,636
shares of Series F Preferred Stock at an exercise price of $0.55 per share.
(7) On August 7, 1995, in connection with the extension of a line of
credit, the Registrant issued a warrant to a bank to purchase 780,000
shares of Series F Preferred Stock at an exercise price of $0.75 per share.
(8) On August 22, 1995, the Registrant issued and sold 1,265,692 shares
of Series C Preferred Stock to a group of investors for aggregate
consideration of $1,265,692, upon exercise of warrants granted in
connection with the sale of the Registrant's Series C Preferred Stock.
(9) On November 11, 1995, the Registrant issued and sold Series C
Preferred Stock convertible into 559,698 shares of Common Stock to a group
of investors for aggregate consideration of $487,500, upon exercise of
warrants granted in connection with the sale of the Registrant's Series C
Preferred Stock.
(10) On November 17, 1995, in connection with an equipment lease, the
Registrant issued a warrant to an equipment lessor to purchase 40,428
shares of Common Stock at an exercise price of $6.46.
(11) On April 15, 1996, in connection with the extension of a line of
credit, the Registrant issued a warrant to a bank to purchase 22,735 shares
of Common Stock at an exercise price of $6.46 per share.
(12) On May 22, 1996, in connection with the extension of a line of
credit, the Registrant issued a warrant to an investment bank to purchase
176,470 shares of Common Stock at an exercise price of $1.36 per share.
(13) On May 22, 1996, the Registrant issued and sold 805,280 shares of
Series C Preferred Stock to an investment bank for aggregate consideration
of $805,280, upon exercise of warrants granted in connection with the sale
of the Registrant's Series C Preferred Stock.
(14) On July 10, 1996, the Registrant issued and sold 14,705 shares of
Common Stock to a single investor for aggregate cash consideration of
$100,000, upon exercise of a warrant granted in connection with an
equipment lease.
(15) From July 1, 1994 to June 30, 1997, the Registrant issued and sold
an aggregate of 544,855 shares of Common Stock to employees, directors and
consultants of the Registrant for aggregate
II-2
<PAGE>
consideration of $311,630, upon exercise of stock options granted pursuant
to the Registrant's 1988 Stock Option Plan.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of Prospectus included herein.
The issuances described in Items 15(1) through 15(14) were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving a public
offering. In addition, certain issuances described in Item 15(15) were deemed
exempt from registration under the Securities Act in reliance on Rule 701
promulgated thereunder as transactions pursuant to compensatory benefit plans
and contracts relating to compensation. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about the Registrant or had access,
through employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Form of Agreement and Plan of Merger between Power Integrations,
Inc., a California corporation and Power Integrations, Inc., a
Delaware corporation.
3.1A Certificate of Incorporation of Power Integrations, Inc., a Delaware
corporation.
3.1B** Form of Certificate of Amendment of Certificate of Incorporation of
Power Integrations, Inc., a Delaware corporation.
3.2 Bylaws of Power Integrations, Inc., a Delaware corporation.
4.1 Fifth Amended and Restated Rights Agreement dated April 27, 1995, as
amended, by and among the Company and the investors named therein.
4.2 Rights Agreement dated May 22, 1996 between the Company and Hambrecht
& Quist Transition Capital, LLC.
5.1* Opinion of Gray Cary Ware & Freidenrich, A Professional Corporation.
10.1 Form of Indemnification Agreement for directors and officers.
10.2 1988 Stock Option Plan and forms of agreements thereunder.
10.3 1997 Stock Option Plan and forms of agreements thereunder.
10.4 1997 Outside Directors Stock Option Plan and forms of agreements
thereunder.
10.5 1997 Employee Stock Purchase Plan and forms of agreements thereunder.
10.6*** Amended Technology License Agreement dated June 29, 1995, as amended
on April 1, 1997 between the Company and MEC.
10.7*** Amended Wafer Foundry Agreement dated June 29, 1997 between the
Company and MEC.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.8*** Licensing and Wafer Supply Agreement dated June 17, 1993, as amended
on September 21, 1995, between the Company and OKI.
10.9 Master Equipment Lease Agreement dated February 11, 1997 between the
Company and Finova Technology Finance, Inc.
10.10 Master Lease Agreement dated September 3, 1996 between the Company
and Leasing Technologies International, Inc.
10.11 Master Equipment Lease Agreement dated November 17, 1995 between the
Company and Lighthouse Capital Partners, L.P.
10.12 Master Equipment Lease Agreement dated December 29, 1993, as amended,
between the Company and MMC/GATX Partnership No. 1.
10.13 Sublease dated June 15, 1995 between the Company and Intermedics,
Inc.
10.14 Founder Stock Purchase Agreement between the Company and Steven J.
Sharp dated April 13, 1988.
10.15 Founder Stock Purchase Agreement between the Company and Klas H.
Eklund dated April 13, 1988.
10.16 Founder Stock Purchase Agreement between the Company and Arthur E.
Fury dated April 13, 1988.
11.1 Statements of Computation of Pro Forma Common Shares and Equivalents.
21.1 List of subsidiaries.
23.1 Consent of Independent Public Accountants.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-6).
27.1* Financial Data Schedule (available in EDGAR format only).
</TABLE>
- --------
* To be filed by amendment.
** As proposed to be filed with the Secretary of State of the State of
Delaware prior to the effectiveness of the offering.
*** This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
(b) Financial Statement Schedules.
All schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial statements
or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered hereunder, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
The undersigned registrant hereby undertakes 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 the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(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 the time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SUNNYVALE, COUNTY OF
SANTA CLARA, STATE OF CALIFORNIA, ON THE 10 DAY OF SEPTEMBER 1997.
Power Integrations, Inc.
/s/ Howard F. Earhart
By: _________________________________
HOWARD F. EARHART PRESIDENT, CHIEF
EXECUTIVE OFFICER AND DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Howard F. Earhart and Robert G. Staples,
and each of them acting individually, as his attorney-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Registration Statement, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they
may be signed by our said attorney to any and all amendments to said
Registration Statement.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED:
SIGNATURE TITLE DATE
/s/ Howard F. Earhart President, Chief September 10, 1997
- ------------------------------------- Executive Officer
HOWARD F. EARHART and Director
(Principal
Executive Officer)
/s/ Robert G. Staples Chief Financial September 10, 1997
- ------------------------------------- Officer and Vice
ROBERT G. STAPLES President--Finance
and Administration
(Principal
Financial &
Accounting Officer)
/s/ Edward C. Ross Director September 10, 1997
- -------------------------------------
DR. EDWARD C. ROSS
/s/ Wiliam Davidow Director September 10, 1997
- -------------------------------------
DR. WILLIAM DAVIDOW
/s/ E. Floyd Kvamme Director September 10, 1997
- -------------------------------------
E. FLOYD KVAMME
/s/ Steven J. Sharp Director September 10, 1997
- -------------------------------------
STEVEN J. SHARP
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Form of Agreement and Plan of Merger between Power Integrations,
Inc., a California corporation and Power Integrations, Inc., a
Delaware corporation.
3.1A Certificate of Incorporation of Power Integrations, Inc., a Delaware
corporation.
3.1B** Form of Certificate of Amendment of Certificate of Incorporation of
Power Integrations, Inc., a Delaware corporation.
3.2 Bylaws of Power Integrations, Inc., a Delaware corporation.
4.1 Fifth Amended and Restated Rights Agreement dated April 27, 1995, as
amended, by and among the Company and the investors named therein.
4.2 Rights Agreement dated May 22, 1996 between the Company and Hambrecht
& Quist Transition Capital, LLC.
5.1* Opinion of Gray Cary Ware & Freidenrich, A Professional Corporation.
10.1 Form of Indemnification Agreement for directors and officers.
10.2 1988 Stock Option Plan and forms of agreements thereunder.
10.3 1997 Stock Option Plan and forms of agreements thereunder.
10.4 1997 Outside Directors Stock Option Plan and forms of agreements
thereunder.
10.5 1997 Employee Stock Purchase Plan and forms of agreements thereunder.
10.6*** Amended Technology License Agreement dated June 29, 1995, as amended
on April 1, 1997 between the Company and MEC.
10.7*** Amended Wafer Foundry Agreement dated June 29, 1997 between the
Company and MEC.
10.8*** Licensing and Wafer Supply Agreement dated June 17, 1993, as amended
on September 21, 1995, between the Company and OKI.
10.9 Master Equipment Lease Agreement dated February 11, 1997 between the
Company and Finova Technology Finance, Inc.
10.10 Master Lease Agreement dated September 3, 1996 between the Company
and Leasing Technologies International, Inc.
10.11 Master Equipment Lease Agreement dated November 17, 1995 between the
Company and Lighthouse Capital Partners, L.P.
10.12 Master Equipment Lease Agreement dated December 29, 1993, as amended,
between the Company and MMC/GATX Partnership No. 1.
10.13 Sublease dated June 15, 1995 between the Company and Intermedics,
Inc.
10.14 Founder Stock Purchase Agreement between the Company and Steven J.
Sharp dated April 13, 1988.
10.15 Founder Stock Purchase Agreement between the Company and Klas H.
Eklund dated April 13, 1988.
10.16 Founder Stock Purchase Agreement between the Company and Arthur E.
Fury dated April 13, 1988.
11.1 Statements of Computation of Pro Forma Common Shares and Equivalents.
21.1 List of subsidiaries.
23.1 Consent of Independent Auditors.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-6).
27.1* Financial Data Schedule (available in EDGAR format only).
</TABLE>
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* To be filed by amendment.
** As proposed to be filed with the Secretary of State of the State of
Delaware prior to the effectiveness of the offering.
*** This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
<PAGE>
EXHIBIT 1.1
POWER INTEGRATIONS, INC.
________________ SHARES
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
, 1997
--------------
HAMBRECHT & QUIST LLC
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY LLC
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Power Integrations, Inc., a Delaware corporation (the "Company"), proposes
to issue and sell_________shares of its authorized but unissued Common Stock,
$_____par value per share ("Common Stock") of the Company, and the stockholders
of the Company named in Schedule II hereto (collectively, the "Selling
Securityholders") propose to sell an aggregate of__________shares of Common
Stock of the Company (together, the "Underwritten Stock"). The Company proposes
to grant to the Underwriters (as defined below) an option to purchase up to
______additional shares of Common Stock (the "Option Stock" and, together with
the Underwritten Stock, the "Stock"). The Common Stock is more fully described
in the Registration Statement and the Prospectus hereinafter mentioned.
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (collectively,
the "Underwriters," which term shall also include any underwriter purchasing
Stock pursuant to Section 3(b) hereof). You represent and warrant that you have
been authorized by each of the other Underwriters to enter into this Agreement
on its behalf and to act for it in the manner herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1 (No.
333-_____), including the related preliminary prospectus, for the registration
under the Securities Act of 1933, as amended (the "Securities Act") of the
Stock. Copies of such registration statement and of each amendment thereto, if
any, including the related preliminary prospectus (meeting the requirements of
Rule 430A of the rules and regulations of the Commission) heretofore filed by
the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
<PAGE>
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company hereby represents and warrants as follows:
(i) The Company and its each of subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own or lease its properties and conduct its business
as described in the Registration Statement and the Prospectus and as being
conducted, and is duly qualified as a foreign corporation and in good
standing in all jurisdictions in which the character of the property owned
or leased or the nature of the business transacted by it makes
qualification necessary (except where the failure to be so qualified would
not have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole).
(ii) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition
or results of operations of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business, other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of
business, neither the Company nor any of its subsidiaries has/the Company
has not entered into any material transaction not referred to in the
Registration Statement and the Prospectus.
(iii) The Registration Statement and the Prospectus comply, and on
the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the rules
and regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties in this
-----------------
subparagraph (iii) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.
(iv) The Stock is duly and validly authorized, is (or, in the case
of shares of the Stock to be sold by the Company, will be, when issued and
sold to the Underwriters as provided herein) duly and validly issued, fully
paid and nonassessable and conforms to the description thereof in the
Prospectus. No further approval or authority of the stockholders or the
Board of Directors of the Company will be required for the transfer and
sale of the Stock to be sold by the Selling Securityholders or the issuance
and sale of the Stock as contemplated herein.
-2-
<PAGE>
(v) The Stock to be sold by the Selling Securityholders is listed
and duly admitted to trading on the Nasdaq National Market, and prior to
the Closing Date the Stock to be issued and sold by the Company will be
authorized for listing by the Nasdaq National Market upon official notice
of issuance.
(b) Each of the Selling Securityholders hereby represents and warrants as
follows:
(i) Such Selling Securityholder has good and marketable title to all
the shares of Stock to be sold by such Selling Securityholder hereunder,
free and clear of all liens, encumbrances, equities, security interests and
claims whatsoever, with full right and authority to deliver the same
hereunder, subject, in the case of each Selling Securityholder, to the
rights of__________, as Custodian (herein called the Custodian), and that
upon the delivery of and payment for such shares of the Stock hereunder,
the several Underwriters will receive good and marketable title thereto,
free and clear of all liens, encumbrances, equities, security interests and
claims whatsoever.
(ii) Certificates in negotiable form for the shares of the Stock to
be sold by such Selling Securityholder have been placed in custody under a
Custody Agreement for delivery under this Agreement with the Custodian;
such Selling Securityholder specifically agrees that the shares of the
Stock represented by the certificates so held in custody for such Selling
Securityholder are subject to the interests of the several Underwriters and
the Company, that the arrangements made by such Selling Securityholder for
such custody, including the Power of Attorney provided for in such Custody
Agreement, are to that extent irrevocable, and that the obligations of such
Selling Securityholder shall not be terminated by any act of such Selling
Securityholder or by operation of law, whether by the death or incapacity
of such Selling Securityholder (or, in the case of a Selling Securityholder
that is not an individual, the dissolution or liquidation of such Selling
Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur
before the delivery of such shares of the Stock hereunder, certificates for
such shares of the Stock shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death,
incapacity, dissolution, liquidation or other event had not occurred,
regardless of whether the Custodian shall have received notice of such
death, incapacity, dissolution, liquidation or other event.
(iii) Such Selling Securityholder has reviewed the Registration
Statement and Prospectus and, although such Selling Securityholder has not
independently verified the accuracy or completeness of all the information
contained therein, nothing has come to the attention of such Selling
Securityholder that would lead such Selling Securityholder to believe that
on the Effective Date, the Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary in order to make the statements therein
not misleading; and, on the Effective Date the Prospectus contained and, on
the Closing Date, contains any untrue statement of a material fact or
omitted or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
______shares of the Underwritten Stock to the several Underwriters, each Selling
Securityholder agrees to sell to the several Underwriters the number of shares
of the Underwritten Stock set forth in Schedule II opposite the name of such
-----------
Selling Securityholder, and each of the Underwriters agrees to purchase from the
Company and the Selling Securityholders the respective aggregate number of
shares of Underwritten Stock set forth opposite its name in Schedule I. The
----------
price at which such shares of Underwritten Stock shall be sold by the Company
and the Selling Securityholders and purchased by the several Underwriters shall
be $______per share. The obligation of each Underwriter to the Company and each
of the Selling Securityholders shall be to purchase from the Company and the
Selling Securityholders that number of shares of the Underwritten Stock which
represents the same proportion of the total number of shares of the Underwritten
Stock to be sold by each of the Company and the Selling Securityholders pursuant
to this Agreement as the number of shares of the Underwritten Stock set forth
opposite the name of such Underwriter in Schedule I hereto represents of the
----------
total number of shares of the Underwritten Stock to be purchased by all
Underwriters pursuant to this Agreement, as adjusted by you in such manner as
you deem advisable to avoid fractional shares. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs (b) and (c) of this Section 3, the
-3-
<PAGE>
agreement of each Underwriter is to purchase only the respective number of
shares of the Underwritten Stock specified in Schedule I.
----------
(b) If for any reason one or more of the Underwriters shall fail or refuse
(otherwise than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for
the number of shares of the Stock agreed to be purchased by such Underwriter or
Underwriters, the Company or the Selling Securityholders shall immediately give
notice thereof to you, and the non-defaulting Underwriters shall have the right
within 24 hours after the receipt by you of such notice to purchase, or procure
one or more other Underwriters to purchase, in such proportions as may be agreed
upon between you and such purchasing Underwriter or Underwriters and upon the
terms herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
provided, however, that the non-defaulting Underwriters shall not be obligated
- -----------------
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Securityholders shall have the right, within 24 hours
next succeeding the 24-hour period above referred to, to make arrangements with
other underwriters or purchasers satisfactory to you for purchase of such shares
and portion on the terms herein set forth. In any such case, either you or the
Company and the Selling Securityholders shall have the right to postpone the
Closing Date determined as provided in Section 5 hereof for not more than seven
business days after the date originally fixed as the Closing Date pursuant to
said Section 5 in order that any necessary changes in the Registration
Statement, the Prospectus or any other documents or arrangements may be made.
If neither the non-defaulting Underwriters nor the Company and the Selling
Securityholders shall make arrangements within the 24-hour periods stated above
for the purchase of all the shares of the Stock which the defaulting Underwriter
or Underwriters agreed to purchase hereunder, this Agreement shall be terminated
without further act or deed and without any liability on the part of the Company
or the Selling Securityholders to any non-defaulting Underwriter and without any
liability on the part of any non-defaulting Underwriter to the Company or the
Selling Securityholders. Nothing in this paragraph (b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the Company
grants an option to the several Underwriters to purchase, severally and not
jointly, up to____________shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover page
and under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Stock filed by the Company
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriters to the
-4-
<PAGE>
Company for inclusion in the Registration Statement, any Preliminary Prospectus,
and the Prospectus, and you on behalf of the respective Underwriters represent
and warrant to the Company that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock and
the Option Stock (if the option granted by Section 3(c) hereof shall have been
exercised not later than 7:00 A.M., San Francisco time, on the date two business
days preceding the Closing Date), and payment therefor, shall be made at the
office of Gray Cary Ware & Friedenrich, 400 Hamilton Avenue, Palo Alto, CA
94301, at 7:00 a.m., San Francisco time, on the fourth business day after the
date of this Agreement, or at such time on such other day, not later than seven
full business days after such fourth business day, as shall be agreed upon in
writing by the Company, the Selling Securityholders and you. The date and hour
of such delivery and payment (which may be postponed as provided in Section 3(b)
hereof) are herein called the "Closing Date".
(b) If the option granted by Section 3(c) hereof shall be exercised after
7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Gray Cary Ware & Friedenrich,
400 Hamilton Avenue, Palo Alto, CA 94301, at 7:00 a.m., San Francisco time, on
the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to the
Company or its order, and payment for the Stock purchased from the Selling
Securityholders shall be made to the Custodian, for the account of the Selling
Securityholders, in each case by one or more certified or official bank check or
checks in same day funds. Such payment shall be made upon delivery of
certificates for the Stock to you for the respective accounts of the several
Underwriters against receipt therefor signed by you. Certificates for the Stock
to be delivered to you shall be registered in such name or names and shall be in
such denominations as you may request at least one business day before the
Closing Date, in the case of Underwritten Stock, and at least one business day
prior to the purchase thereof, in the case of the Option Stock. Such
certificates will be made available to the Underwriters for inspection, checking
and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New
York, New York 10004 on the business day prior to the Closing Date or, in the
case of the Option Stock, by 3:00 p.m., New York time, on the business day
preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any later
date on which Option Stock is purchased for the account of such Underwriter.
Any such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS.
Each of the Company and the Selling Securityholders respectively covenants and
agrees as follows:
(a) The Company will (i) prepare and timely file with the Commission under
Rule 424(b) a Prospectus containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A and (ii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of (i)
the request by the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company and
the Selling Securityholders will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time be issued,
to obtain the withdrawal thereof at the earliest possible moment.
-5-
<PAGE>
(c) The Company will (i) on or before the Closing Date, deliver to you a
signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each post-
effective amendment, if any, to the Registration Statement (together with, in
each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
-----------------
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time
to time, prepare and file such statements, reports, and other documents as are
or may be required to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission (including the Report on Form SR required by Rule 463 of the
Commission under the Securities Act).
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company and the Selling Securityholders jointly and severally agree
to pay all costs and expenses incident to the performance of their obligations
under this Agreement, including all costs and expenses incident to (i) the
preparation, printing and filing with the Commission and the National
Association of Securities Dealers, Inc. ("NASD") of
-6-
<PAGE>
the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii)
the furnishing to the Underwriters of copies of any Preliminary Prospectus and
of the several documents required by paragraph (c) of this Section 6 to be so
furnished, (iii) the printing of this Agreement and related documents delivered
to the Underwriters, (iv) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph (d) of
this Section 6, (v) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph (g) of this Section 6 and (vi) the
printing and issuance of stock certificates, including the transfer agent's
fees. The Selling Securityholders will pay any transfer taxes incident to the
transfer to the Underwriters of the shares the Stock being sold by the Selling
Securityholders.
(j) The Company and the Selling Securityholders jointly and severally agree
to reimburse you, for the account of the several Underwriters, for blue sky fees
and related disbursements (including counsel fees and disbursements and cost of
printing memoranda for the Underwriters) paid by or for the account of the
Underwriters or their counsel in qualifying the Stock under state securities or
blue sky laws and in the review of the offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this Section 6 are intended
to relieve the Underwriters from the payment of the expenses and costs which the
Company and the Selling Securityholders hereby agree to pay and shall not affect
any agreement which the Company and the Selling Securityholders may make, or may
have made, for the sharing of any such expenses and costs.
(l) The Company and each of the Selling Securityholders hereby agrees that,
without the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, the Company or such Selling Securityholder, as the case may be,
will not, for a period of 180 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (i) sell,
offer, contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this
Agreement, (B) the issuance of shares of Common Stock by the Company upon the
exercise of options granted under the stock option plans of the Company (the
"Option Plans") or upon the exercise of warrants outstanding as of the date
hereof, all as described in footnote (____) to the table under the caption
"Capitalization" in the Preliminary Prospectus, and (C) options to purchase
Common Stock granted under the Option Plans.
(m) The Company agrees to use its best efforts to cause all directors,
officers, and stockholders to agree that, without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will
not, for a period of 180 days following the commencement of the public offering
of the Stock by the Underwriters, directly or indirectly, (i) sell, offer,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock or (ii) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise.
(n) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
-7-
<PAGE>
7. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (f) of this Section 7, the
Company and the Selling Securityholders jointly and severally agree to indemnify
and hold harmless each Underwriter and each person (including each partner or
officer thereof) who controls any Underwriter within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Securities Exchange Act of
1934, as amended (herein called the Exchange Act), or the common law or
otherwise, and the Company and the Selling Securityholders jointly and severally
agree to reimburse each such Underwriter and controlling person for any legal or
other expenses (including, except as otherwise hereinafter provided, reasonable
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the 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 (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
-----------------
and the Selling Securityholders contained in this paragraph (a) shall not apply
to any such losses, claims, damages, liabilities or expenses if such statement
or omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the Company by
or on behalf of any Underwriter for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto, (2) the indemnity agreement contained in this paragraph (a)
with respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof, and (3) each Selling
Securityholder shall only be liable under this paragraph with respect to (A)
information pertaining to such Selling Securityholder furnished by or on behalf
of such Selling Securityholder expressly for use in any Preliminary Prospectus
or the Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto or (B) facts that would constitute a breach of any
representation or warranty of such Selling Securityholder set forth in Section
2(b) hereof. The indemnity agreements of the Company and the Selling
Securityholders contained in this paragraph (a) and the representations and
warranties of the Company and the Selling Securityholders contained in Section 2
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, and the Selling Securityholders from and against any
and all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the 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 (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus
-8-
<PAGE>
(as amended or as supplemented if the Company shall have filed with the
Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of such indemnifying
Underwriter for use in the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto. The indemnity agreement of each
Underwriter contained in this paragraph (b) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and (b) of
this Section 7 agrees that, upon the service of a summons or other initial legal
process upon it in any action or suit instituted against it or upon its receipt
of written notification of the commencement of any investigation or inquiry of,
or proceeding against, it in respect of which indemnity may be sought on account
of any indemnity agreement contained in such paragraphs, it will promptly give
written notice (herein called the Notice) of such service or notification to the
party or parties from whom indemnification may be sought hereunder. No
indemnification provided for in such paragraphs shall be available to any party
who shall fail so to give the Notice if the party to whom such Notice was not
given was unaware of the action, suit, investigation, inquiry or proceeding to
which the Notice would have related and was prejudiced by the failure to give
the Notice, but the omission so to notify such indemnifying party or parties of
any such service or notification shall not relieve such indemnifying party or
parties from any liability which it or they may have to the indemnified party
for contribution or otherwise than on account of such indemnity agreement. Any
indemnifying party shall be entitled at its own expense to participate in the
defense of any action, suit or proceeding against, or investigation or inquiry
of, an indemnified party. Any indemnifying party shall be entitled, if it so
elects within a reasonable time after receipt of the Notice by giving written
notice (herein called the Notice of Defense) to the indemnified party, to assume
(alone or in conjunction with any other indemnifying party or parties) the
entire defense of such action, suit, investigation, inquiry or proceeding, in
which event such defense shall be conducted, at the expense of the indemnifying
party or parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; provided, however,
-----------------
that (i) if the indemnified party or parties reasonably determine that there may
be a conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be entitled to have counsel chosen by such
indemnified party or parties participate in, but not conduct, the defense. If,
within a reasonable time after receipt of the Notice, an indemnifying party
gives a Notice of Defense and the counsel chosen by the indemnifying party or
parties is reasonably satisfactory to the indemnified party or parties, the
indemnifying party or parties will not be liable under paragraphs (a) through
(c) of this Section 7 for any legal or other expenses subsequently incurred by
the indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding, except that (A) the indemnifying
party or parties shall bear the legal and other expenses incurred in connection
with the conduct of the defense as referred to in clause (i) of the proviso to
the preceding sentence and (B) the indemnifying party or parties shall bear such
other expenses as it or they have authorized to be incurred by the indemnified
party or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is unavailable or
insufficient to hold harmless an indemnified party under paragraph (a) or (b) of
this Section 7, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as
is appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each indemnifying party in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Securityholders on the one hand and the Underwriters on the other shall
be deemed to be in the same respective proportions as the total net proceeds
from
-9-
<PAGE>
the offering of the Stock received by the Company and the Selling
Securityholders and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Stock. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) Neither the Company nor the Selling Securityholders will, without the
prior written consent of each Underwriter, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(f) The liability of each Selling Securityholder under such Selling
Securityholder's representations and warranties contained in paragraph (a) of
Section 2 hereof and under the indemnity and reimbursement agreements contained
in the provisions of this Section 7 and Section 11 hereof shall be limited to an
amount equal to the initial public offering price of the stock sold by such
Selling Securityholder to the Underwriters. The Company and the Selling
Securityholders may agree, as among themselves and without limiting the rights
of the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States would, in the
Underwriters' reasonable judgment, make the offering or delivery of the Stock
impracticable, (iii) suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange, or The Nasdaq Stock Market, or limitations on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such exchange or system, (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
-10-
<PAGE>
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; provided, however, that in the event of
any such termination the Company and the Selling Securityholders agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and to the following further conditions:
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder and the
validity and form of the certificates representing the Stock, all corporate
proceedings and other legal matters incident to the foregoing, and the form of
the Registration Statement and of the Prospectus (except as to the financial
statements contained therein), shall have been approved at or prior to the
Closing Date by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters.
(c) You shall have received from Gray Cary Ware & Friedenrich, counsel for
the Company and the Selling Securityholders, and from_________________________,
patent counsel for the Company, opinions, addressed to the Underwriters and
dated the Closing Date, covering the matters set forth in Annex A and Annex B
------- -------
hereto, respectively, and if Option Stock is purchased at any date after the
Closing Date, additional opinions from each such counsel, addressed to the
Underwriters and dated such later date, confirming that the statements expressed
as of the Closing Date in such opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
of the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus, (vi)
there are not any franchises, contracts, leases or other documents which are
required to be filed as exhibits to the Registration Statement which have not
been filed as required, (vii) the representations and warranties of the Company
herein are true and correct in all material respects as of the Closing Date or
any later date on which Option Stock is to be purchased, as the case may be, and
(viii) there has not been any material change in the market for securities in
general or in political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment
-11-
<PAGE>
to make a public offering of the Stock, or a material adverse change in market
levels for securities in general (or those of companies in particular) or
financial or economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date on
which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (vii) of paragraph (d) of this Section 9 are true and
correct.
(f) You shall have received from Arthur Andersen LLP, a letter or letters,
addressed to the Underwriters and dated the Closing Date and any later date on
which Option Stock is purchased, confirming that they are independent public
accountants with respect to the Company within the meaning of the Securities Act
and the applicable published rules and regulations thereunder and based upon the
procedures described in their letter delivered to you concurrently with the
execution of this Agreement (herein called the Original Letter), but carried out
to a date not more than three business days prior to the Closing Date or such
later date on which Option Stock is purchased (i) confirming, to the extent
true, that the statements and conclusions set forth in the Original Letter are
accurate as of the Closing Date or such later date, as the case may be, and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of the Original Letter or
to reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company or any of its subsidiaries which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Stock or
the purchase of the Option Stock as contemplated by the Prospectus.
(g) You shall have received from Arthur Andersen LLP a letter stating that
their review of the Company's system of internal accounting controls, to the
extent they deemed necessary in establishing the scope of their examination of
the Company's financial statements as at_____________, 19____, did not disclose
any weakness in internal controls that they considered to be material
weaknesses.
(h) You shall have been furnished evidence in usual written or telegraphic
form from the appropriate authorities of the several jurisdictions, or other
evidence satisfactory to you, of the qualification referred to in paragraph (f)
of Section 6 hereof.
(i) The Stock to be sold by the Selling Securityholders is listed and duly
admitted to trading on the Nasdaq National Market, and prior to the Closing
Date, the Stock to be issued and sold by the Company shall have been duly
authorized for listing on the Nasdaq National Market upon official notice of
issuance.
(j) On or prior to the Closing Date, you shall have received from all
directors, officers, and stockholders agreements, in form reasonably
satisfactory to Hambrecht & Quist LLC, stating that without the prior written
consent of Hambrecht & Quist LLC on behalf of the Underwriters, such person or
entity will not, for a period of 180 days following the commencement of the
public offering of the Stock by the Underwriters, directly or indirectly, (i)
sell, offer, contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel for the Underwriters, shall be satisfied that they comply
in form and scope.
-12-
<PAGE>
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that (i) in the event of such
-----------------
termination, the Company and the Selling Securityholders agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in paragraphs
(i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company or the
Selling Securityholders to perform any agreement herein, to fulfill any of the
conditions herein, or to comply with any provision hereof other than by reason
of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; provided, however, that in the event of any such termination
-----------------
the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement (and subject, in the case of a
Selling Securityholder, to the provisions of paragraph (f) of Section 7), the
Company and the Selling Securityholders hereby jointly and severally agree to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
-----------------
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, 477 North Mathilda Avenue,
Sunnyvale, CA 94086, Attention: Howard F. Earhart; and if to the Selling
Securityholders, shall be mailed, telegraphed or delivered to the Selling
Securityholders in care of Howard F. Earhart at 477 North Mathilda Avenue,
Sunnyvale, CA 94086. All notices given by telegraph shall be promptly confirmed
by letter.
-13-
<PAGE>
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or the Selling Securityholders or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
provided, however, that if this Agreement is terminated prior to the Closing
- -----------------
Date, the provisions of paragraphs (l), (m) and (n) of Section 6 hereof shall be
of no further force or effect.
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.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
-14-
<PAGE>
Please sign and return to the Company and to the Selling Securityholders in
care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.
Very truly yours,
POWER INTEGRATIONS, INC.:
By:
----------------------------------------
Howard F. Earhart
President and Chief Executive Officer
SELLING SECURITYHOLDERS:
[List Names]
By:
----------------------------------------
[Attorney-in-Fact]
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY LLC
By Hambrecht & Quist LLC
By:
---------------------------------------------
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
----------
-15-
<PAGE>
SCHEDULE I
UNDERWRITERS
NUMBER OF
SHARES
TO BE
UNDERWRITERS PURCHASED
------------ ---------
Hambrecht & Quist LLC
Montgomery Securities
Robertson, Stephens & Company LLC
-------
Total............................................
=======
<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
NUMBER OF
NAME AND ADDRESS SHARES TO
OF SELLING SECURITYHOLDERS BE SOLD
-------------------------- ---------
-------
Total...................................................
=======
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF GRAY CARY WARE & FRIEDENRICH
COUNSEL FOR THE COMPANY
AND THE SELLING SECURITYHOLDERS
(i) Each of the Company and its subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, is duly qualified as a foreign corporation
and in good standing in each state of the United States of America in which its
ownership or leasing of property requires such qualification (except where the
failure to be so qualified would not have a material adverse effect on the
business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole), and has full corporate power
and authority to own or lease its properties and conduct its business as
described in the Registration Statement; all the issued and outstanding capital
stock of each of the subsidiaries of the Company has been duly authorized and
validly issued and is fully paid and nonassessable, and is owned by the Company
free and clear of all liens, encumbrances and security interests, and to the
best of such counsel's knowledge, no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to convert
any obligations into shares of capital stock or ownership interests in such
subsidiaries are outstanding;
(ii) the authorized capital stock of the Company consists of [________
shares of______________Stock, of which there are outstanding___________shares,
and]___________shares of Common Stock, $_______par value, of which there are
outstanding__________shares (including the Underwritten Stock plus the number of
shares of Option Stock issued on the date hereof); proper corporate proceedings
have been taken validly to authorize such authorized capital stock; all of the
outstanding shares of such capital stock (including the Underwritten Stock and
the shares of Option Stock issued, if any) have been duly and validly issued and
are fully paid and nonassessable; any Option Stock purchased after the Closing
Date, when issued and delivered to and paid for by the Underwriters as provided
in the Underwriting Agreement, will have been duly and validly issued and be
fully paid and nonassessable; and no preemptive rights of, or rights of refusal
in favor of, stockholders exist with respect to the Stock, or the issue and sale
thereof, pursuant to the Certificate of Incorporation or Bylaws of the Company
and, to the knowledge of such counsel, there are no contractual preemptive
rights that have not been waived, rights of first refusal or rights of co-sale
which exist with respect to the Stock being sold by the Selling Securityholders
or the issue and sale of the Stock;
(ii) the Registration Statement has become effective under the Securities
Act and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the use
of the Prospectus is in effect and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and with the rules
and regulations of the Commission thereunder;
(v) such counsel have no reason to believe that the Registration Statement
(except as to the financial statements and schedules and other financial data
contained or incorporated by reference therein, as to which such counsel need
not express any opinion or belief) at the Effective Date contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus (except as to the financial statements and schedules and
other financial data contained or incorporated by reference therein, as to which
such counsel need not express any opinion or belief) as of its date or at the
Closing Date (or any later date on which Option Stock is purchased), contained
or contains any untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading;
<PAGE>
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel) and
11(c) of Form S-1 is to the best of such counsel's knowledge accurately and
adequately set forth therein in all material respects or no response is required
with respect to such Items, and the description of the Company's stock option
plans and the options granted and which may be granted thereunder set forth or
incorporated by reference in the Prospectus accurately and fairly presents the
information required to be shown with respect to said plans and options to the
extent required by the Securities Act and the rules and regulations of the
Commission thereunder;
(vi) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(vi) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company;
(ix) the Underwriting Agreement has been duly executed and delivered by or
on behalf of the Selling Securityholders and the Custody Agreement between the
Selling Securityholders and______________________, as Custodian, and the Power
of Attorney referred to in such Custody Agreement have been duly executed and
delivered by the several Selling Securityholders;
(x) the issue and sale by the Company of the shares of Stock sold by the
Company as contemplated by the Underwriting Agreement will not conflict with, or
result in a breach of, the Certificate of Incorporation or Bylaws of the Company
or any of its subsidiaries or any agreement or instrument known to such counsel
to which the Company or any of its subsidiaries is a party or any applicable law
or regulation, or so far as is known to such counsel, any order, writ,
injunction or decree, of any jurisdiction, court or governmental
instrumentality;
(xi) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement or such rights have been
satisfied;
(xi) good and marketable title to the shares of Stock sold by the Selling
Securityholders under the Underwriting Agreement, free and clear of all liens,
encumbrances, equities, security interests and claims, has been transferred to
the Underwriters who have severally purchased such shares of Stock under the
Underwriting Agreement, assuming for the purpose of this opinion that the
Underwriters purchased the same in good faith without notice of any adverse
claims;
(xii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Stock by
the Underwriters; and
(xiv) The Stock sold by the Selling Securityholders is listed and duly
admitted to trading on the Nasdaq National Market and the Stock issued and sold
by the Company will have been duly authorized for listing on the Nasdaq National
Market upon official notice of issuance.
____________________________________
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States, the State of California, or the
Delaware General Corporation Law upon opinions of local counsel satisfactory in
form and scope to counsel for the Underwriters. Copies of any opinions so
relied upon shall be delivered to the Representatives and to counsel for the
Underwriters and the foregoing opinion shall also state that counsel knows of no
reason the Underwriters are not entitled to rely upon the opinions of such local
counsel.
<PAGE>
In addition to the matters set forth above, counsel rendering the foregoing
opinion shall also include a statement to the effect that nothing has come to
the attention of such counsel that leads them to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial data contained or incorporated by reference therein, as to which such
counsel need not express any opinion or belief) at the Effective Date contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, that the Prospectus (except as to the financial statements and
schedules and other financial data contained or incorporated by reference
therein, as to which such counsel need not express any opinion or belief) as of
its date or at the Closing Date (or any later date on which Option Stock is
purchased), contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
<PAGE>
ANNEX B
MATTERS TO BE COVERED IN THE OPINION OF _______________
PATENT COUNSEL FOR THE COMPANY
Such counsel are familiar with the technology used by the Company in its
business and the manner of its use thereof and have read the Registration
Statement and the Prospectus, including particularly the portions of the
Registration Statement and the Prospectus referring to patents, trade secrets,
trademarks, service marks or other proprietary information or materials and:
(i) such counsel have no reason to believe that the Registration Statement
or the Prospectus (A) contains any untrue statement of a material fact with
respect to patents, trade secrets, trademarks, service marks or other
proprietary information or materials owned or used by the Company, or the
manner of its use thereof, or any allegation on the part of any person that
the Company is infringing any patent rights, trade secrets, trademarks,
service marks or other proprietary information or materials of any such
person or (B) omits to state any material fact relating to patents, trade
secrets, trademarks, service marks or other proprietary information or
materials owned or used by the Company, or the manner of its use thereof,
or any allegation of which such counsel have knowledge, that is required to
be stated in the Registration Statement or the Prospectus or is necessary
to make the statements therein not misleading;
(ii) to the best of such counsel's knowledge [and except as set forth in
the Prospectus under the caption "______________,"] there are no legal or
governmental proceedings pending relating to patent rights, trade secrets,
trademarks, service marks or other proprietary information or materials [of
the Company], and to the best of such counsel's knowledge no such
proceedings are threatened or contemplated by governmental authorities or
others;
(iii) such counsel do not know of any contracts or other documents,
relating to [governmental regulation affecting the Company or] the
Company's patents, trade secrets, trademarks, service marks or other
proprietary information or materials of a character required to be filed as
an exhibit to the Registration Statement or required to be described in the
Registration Statement or the Prospectus that are not filed or described as
required;
(iv) [except as set forth in the Prospectus,] to the best of such counsel's
knowledge, the Company is not infringing or otherwise violating any
patents, trade secrets, trademarks, service marks or other proprietary
information or materials, of others, and to the best of such counsel's
knowledge there are no infringements by others of any of the Company's
patents, trade secrets, trademarks, service marks or other proprietary
information or materials which in the judgment of such counsel could affect
materially the use thereof by the Company; and
(v) to the best of such counsel's knowledge, the Company owns or possesses
sufficient licenses or other rights to use all patents, trade secrets,
trademarks, service marks or other proprietary information or materials
necessary to conduct the business now being or proposed to be conducted by
the Company as described in the Prospectus.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement") is entered into
as of ____________, 1997 by and between Power Integrations, Inc., a California
corporation ("PI California"), and Power Integrations Delaware Corporation, a
Delaware corporation ("PI Delaware").
WITNESSETH:
----------
WHEREAS, PI Delaware is a corporation duly organized and existing under the
laws of the State of Delaware;
WHEREAS, PI California is a corporation duly organized and existing under
the laws of the State of California;
WHEREAS, on the date of this Merger Agreement, PI Delaware has authority to
issue 1,000 shares of Common Stock, par value $0.001 per share (the "PI Delaware
Common Stock"), of which 100 shares are issued and outstanding and owned by PI
California;
WHEREAS, on the date of this Merger Agreement, PI California has authority
to issue 100,000,000 shares of Common Stock (the "PI California Common Stock"),
of which ____________ shares are issued and outstanding, and 54,000,000 shares
of Preferred Stock (the "PI California Preferred Stock"), of which 45,863,796
shares are issued and outstanding;
WHEREAS, the respective Boards of Directors for PI Delaware and PI
California have determined that, for the purpose of effecting the
reincorporation of PI California in the State of Delaware, it is advisable and
to the advantage of said two corporations and their stockholders that PI
California merge with and into PI Delaware upon the terms and conditions herein
provided; and
WHEREAS, the respective Boards of Directors of PI Delaware and PI
California, the stockholders of PI California, and the sole stockholder of PI
Delaware have adopted and approved this Merger Agreement;
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, PI California and PI Delaware hereby agree to merge as follows:
1. Merger. PI California shall be merged with and into PI Delaware,
------
and PI Delaware shall survive the merger ("Merger"), effective upon the date
when this Merger Agreement is made effective in accordance with applicable law
(the "Effective Date").
1
<PAGE>
2. Governing Documents. The Certificate of Incorporation of PI
-------------------
Delaware shall be amended to read in full as follows:
FIRST: The name of the Corporation is Power Integrations, Inc.
-----
(hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
------
State of Delaware is Incorporating Services, Ltd., 15 East North
Street, in the City of Dover, County of Kent. The name of the
registered agent at that address is Incorporating Services, Ltd.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the
General Corporation Law of Delaware.
FOURTH:
------
STOCK
-----
The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Preferred Stock" and "Common Stock". The total
number of shares of Preferred Stock the Corporation shall have authority to
issue is 54,000,000, $0.001 par value per share, and the total number of shares
of Common Stock the Corporation shall have authority to issue is 100,000,000,
$0.001 par value per share. The Preferred Stock shall be divided into six
series, namely, "Series A Preferred Stock", consisting of 8,400,000 shares,
"Series B Preferred Stock", consisting of 8,000,000 shares, "Series C Preferred
Stock", consisting of 11,392,900 shares, "Series D Preferred Stock", consisting
of 3,280,000 shares, "Series E Preferred Stock", consisting of 12,300,000
shares, and "Series F Preferred Stock", consisting of 10,091,000 shares.
The Board of Directors is hereby authorized, within the limitations and
restrictions stated herein, to determine or alter the rights, preferences,
privileges and restrictions granted to or imposed upon a wholly unissued series
of Preferred Stock, and the number of shares constituting any such series and
the designation thereof, or any of them; and to increase or decrease the number
of shares constituting any such series and the designation thereof, or any of
them; and, except as to the Series D Preferred Stock, to increase or decrease
the number of shares of any series subsequent to the issue of shares of that
series, but, in respect of decreases, not below the number of shares of such
series then outstanding. In case the number of shares of any series should be
so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolutions originally fixing the
number of shares of such series.
The relative rights, preferences, privileges and restrictions granted to or
imposed upon the shares of the respective series of Preferred Stock are as
follows:
1. Dividends.
---------
2
<PAGE>
(a) Dividend Rights. The holders of outstanding Preferred Stock shall
---------------
be entitled to receive in any fiscal year, if, when and as declared by the Board
of Directors, out of any assets at the time legally available therefor,
distributions (as defined below) at the rate of Four Cents ($0.04) per annum,
respectively, per share of Series A Preferred Stock and Series F Preferred
Stock, Eight Cents ($0.08) per annum, respectively, per share of Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, and Six
Cents ($0.06) per annum per share of Series E Preferred Stock (as adjusted, in
each case, for stock splits, stock dividends, recapitalizations and the like),
prior and in preference to any distribution to the holders of Common Stock.
Distributions may be declared and paid upon Common shares in any fiscal year of
the Corporation only if distributions shall have been paid to or declared and
set apart upon all shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
and Series F Preferred Stock, at the rate set for such series for such fiscal
year of the Corporation. The right to such distributions on Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, and Series F Preferred Stock shall not be
cumulative and no right shall accrue to holders of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock by reason of the fact that
distributions on said shares are not declared in any prior year, nor shall any
undeclared distribution bear or accrue interest. Any declared but unpaid
distribution shall accrue interest at the minimum rate necessary to avoid
imputed interest under the Internal Revenue Code of 1986, as amended, from the
date such distribution was declared until the date such distribution is paid.
After distributions shall have been paid to or declared and set apart upon the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock
at the rate provided in this Article FOURTH, Section 1(a), for any one fiscal
year of the Corporation, if the Board of Directors elects to declare additional
distributions out of any assets legally available therefor, such additional
distributions shall be declared on all shares of Preferred Stock and Common
Stock, with the amount of such distribution for each share of Preferred Stock
equal to the amount of such distribution for one share of Common Stock
multiplied by the number of shares of Common Stock into which such share of
Preferred Stock is convertible as of the record date fixed for declaration of
such distribution. Distributions, if paid, or if declared and set apart for
payment, must be paid on, or declared and set apart for payment on, all
outstanding series of Preferred Stock contemporaneously, and if less than full
dividends are paid or declared and set apart for payment, the same percentage of
dividend rate will be paid on, or declared and set apart for payment on, each
outstanding share of Preferred Stock.
(b) Definition of "Distribution." For purposes of this Article
-----------------------------
FOURTH, Section 1, unless the context otherwise requires, "distribution" shall
mean the transfer of cash or property without consideration, whether by way of
dividend or otherwise, payable other than in Common Stock, or the purchase or
redemption of shares of this Corporation (other than repurchases of Common Stock
held by employees, directors or consultants of this Corporation pursuant to
agreements providing for such repurchase upon the termination of such person's
service to this Corporation) for cash or property, including any such transfer,
purchase or redemption by a subsidiary of this Corporation.
3
<PAGE>
(c) Consent to Repurchases. Each holder of shares of Preferred Stock
----------------------
shall be deemed to have consented to any repurchases by the Corporation of
shares of Common Stock issued to or held by employees, directors or consultants
pursuant to agreements providing for such repurchase upon the termination of
such person's service to this Corporation.
2. Preference on Liquidation.
-------------------------
(a) Amount, Priority, Etc.
---------------------
(i) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock
then outstanding shall be entitled to be paid, out of the assets of the
Corporation available for distribution to its stockholders, whether from
capital, surplus or earnings, before any payment shall be made in respect of the
Corporation's Common Stock, an amount equal to Fifty Cents ($0.50) per share of
Series A Preferred Stock, One Dollar ($1.00) per share of Series B Preferred
Stock, One Dollar ($1.00) per share of Series C Preferred Stock, One Dollar and
Twenty-five Cents ($1.25) per share of Series D Preferred Stock, Seventy-five
Cents ($0.75) per share of Series E Preferred Stock, and Fifty-five Cents
($0.55) per share of Series F Preferred Stock, for each such share held plus all
declared and unpaid dividends thereon to the date fixed for distribution (as
adjusted for stock splits, stock dividends, recapitalizations and the like). If,
upon liquidation, dissolution or winding up of the Corporation, the assets of
the Corporation available for distribution to its stockholders shall be
insufficient to pay the holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, and Series F Preferred Stock the full amounts to which they
shall be entitled pursuant to this Article FOURTH, Section 2(a)(i), the entire
assets of the Corporation available for distribution shall be distributed to the
holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, and Series
F Preferred Stock ratably according to the respective amounts which would be
payable in respect of the shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, and Series F Preferred Stock held by them upon such distribution if all
amounts payable on or with respect to said shares were paid in full.
(ii) After setting apart or paying in full the preferential
amounts due the holders of the Preferred Stock pursuant to Article FOURTH,
Section 2(a)(i), the remaining assets of the Corporation available for
distribution to stockholders, if any, shall be distributed to the holders of
Preferred Stock and Common Stock, with the amount of such distribution for each
share of Preferred Stock equal to the amount of such distribution for one share
of Common Stock (each such issued and outstanding share of Common Stock
entitling the holder thereof to receive an equal proportion of said remaining
assets) multiplied by the number of shares of Common Stock into which such share
of Preferred Stock is convertible as of the date fixed for such distribution.
(b) Merger. The merger or consolidation of the Corporation into or
------
with another corporation in which this Corporation shall not survive or in which
the stockholders of
4
<PAGE>
the Corporation shall receive in such transaction less than fifty percent (50%)
of the voting securities of the surviving corporation or the sale, transfer or
lease (but not including a transfer by pledge or mortgage to a bona fide lender)
of all or substantially all of the assets of the Corporation shall be deemed to
be a liquidation, dissolution or winding up of the Corporation as those terms
are used in this Article FOURTH, Section 2.
(c) Notice. In the event of any voluntary or involuntary liquidation,
------
dissolution or winding up of the Corporation, the Corporation shall, within
twenty (20) days after the date the Board of Directors approves such action, or
twenty (20) days prior to any stockholders' meeting called to approve such
action, or twenty (20) days after the commencement of any involuntary
proceeding, whichever is earlier, give each holder of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock written
notice of the proposed action. In addition to any other means of delivery, such
notice shall be sent by facsimile transmission to any holder of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, or Series F Preferred Stock who has
provided the Corporation with a facsimile transmission number in writing. Such
written notice shall describe the material terms and conditions of such proposed
action, including a description of the stock, cash and property to be received
by the holders of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
and Series F Preferred Stock upon consummation of the proposed action, and the
date of delivery thereof. If any material change in the facts set forth in the
written notice shall occur, the Corporation shall promptly give written notice
of such material change to each holder of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, and Series F Preferred Stock.
(d) Consummation of Liquidation. The Corporation shall not consummate
---------------------------
any voluntary or involuntary liquidation, dissolution or winding up of the
Corporation before the expiration of thirty (30) days after the mailing of the
initial written notice or twenty (20) days after the mailing of any subsequent
written notice, whichever is later; provided that any such 30-day or 20-day
period may be shortened upon the written consent of the holders of all of the
outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, and
Series F Preferred Stock.
(e) Appraisal. In the event of any voluntary or involuntary
---------
liquidation, dissolution or winding up of the Corporation which will involve the
distribution of assets other than cash, the Corporation shall promptly engage
competent independent appraisers reasonably acceptable to a majority of each of
the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, and Series F
Preferred Stock to determine the value of the assets to be distributed to the
holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, and
Series F Preferred Stock. The Corporation shall, upon receipt of such
appraiser's valuation, give prompt written notice of the appraiser's valuation
to each holder of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
and Series F Preferred Stock.
5
<PAGE>
3. Voting.
------
(a) General. Except as otherwise required by law or as set forth
-------
herein, the shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, and
Series F Preferred Stock shall be voted together and equally with the shares of
the Corporation's Common Stock as one class at any annual or special meeting of
stockholders of the Corporation, or may act by written consent in the same
manner as the Corporation's Common Stock, upon the following basis: each holder
of shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, and Series
F Preferred Stock shall be entitled to such number of votes for each share of
the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, and Series F
Preferred Stock held by him on the record date fixed for such meeting, or on the
effective date of such written consent, as shall be equal to the number of votes
that would be accorded to the number of whole shares of the Corporation's Common
Stock into which all of his or her shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, and Series F Preferred Stock are convertible immediately after
the close of business on the record date fixed for such meeting or the effective
date of such written consent.
(b) Special Voting Rights and Restrictions upon Series D Preferred
--------------------------------------------------------------
Stock.
-----
(i) Election of Directors; Quorum. For so long as there shall
be one million (1,000,000) shares of Series D Preferred Stock outstanding (as
adjusted for any stock split, stock dividend, recapitalization or similar event)
the holders of the Series D Preferred Stock shall be entitled to elect one (1)
director of the Corporation, and the number of directors of the Corporation
shall not exceed nine (9). The foregoing voting right may be exercised initially
by unanimous written consent of the holders of all of the outstanding shares of
Series D Preferred Stock, at a special meeting called pursuant to this Article
FOURTH, Section 3(b)(i) or at an annual meeting and thereafter, at annual
meetings of the stockholders of the Corporation. The director elected by the
holders of Series D Preferred Stock shall continue in office until his successor
shall be elected. Such director may be removed for cause in the same manner as
any other director of the Corporation, but may be removed without cause only by
the affirmative vote of a majority of the outstanding shares of Series D
Preferred Stock given at a meeting specially called for such purpose. Should
there be a vacancy in the directorship created by this Article FOURTH, Section
3(b)(i) for a period exceeding thirty (30) days for any reason, the appropriate
officer of the Corporation shall, upon the written request of holders of record
of thirty percent (30%) of the Series D Preferred Stock then outstanding
addressed to the secretary of the Corporation, call a special meeting of holders
of the Series D Preferred Stock for the purpose of electing such a director. At
any meeting of stockholders at which a Series D Preferred Stock director is to
be elected hereunder, the presence in person or by proxy of the holders of at
least one-third of the then outstanding shares of Series D Preferred Stock shall
be required and be sufficient to constitute a quorum of such series for the
election of the director (and any other business presented only to such series).
The absence of a quorum of such series at any meeting of stockholders of the
Corporation shall not prevent such other stockholders from electing other
directors (or taking action not required to be presented to the Series D
Preferred Stock). In lieu of the election of a director by the holders of the
Series D Preferred Stock at a special meeting of
6
<PAGE>
the holders of Series D Preferred Stock contemplated hereby, the holders of all
of the outstanding shares of Series D Preferred Stock may elect a director by
unanimous written consent.
(ii) Voting Restrictions. Notwithstanding the provisions of Article
-------------------
FOURTH, Section 3(a) above, and except as provided in Article FOURTH, Section
3(b)(i), in this Article FOURTH, Section 3(b)(ii) and in Article FOURTH, Section
7, with respect to all matters on which holders of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series E Preferred Stock,
and Series F Preferred Stock vote together with the Common Stock as a class, the
Series D Preferred Stock shall be automatically voted for, against or in
abstention, in proportion to the votes cast for, against or in abstention
(whether at a meeting or by written consent) of the outstanding Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock and Common Stock and where the
aforesaid Preferred Stock is voted or takes action by written consent as a
single class apart from the Common Stock, the Series D Preferred Stock shall
automatically be voted for, against or in abstention, in proportion to the votes
cast for, against or in abstention (whether at a meeting or by written consent)
of the outstanding Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock. In the
following circumstances, however, the Series D Preferred Stock shall be voted by
the holders thereof, in their absolute discretion but as a single class, as the
case may be and as the matter is presented, either with the holders of the
Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred
Stock, Series E Preferred Stock, and Series F Preferred Stock, voting as a
single class, or with the aforesaid Preferred Stock voting together with the
Common Stock:
(1) in respect of any transaction involving a Change of
Control (as defined below) of the Corporation, unless in such case a majority of
the outstanding Series D Preferred Stock has elected to exercise the repurchase
right provided in Article FOURTH, Section 6 below and the Corporation has
legally available funds to effect such repurchase; and
(2) in respect of any conversion referred to in Article
FOURTH, Section 4(a)(ii) below.
(iii) Definition of Change of Control. A Change in Control shall
-------------------------------
be deemed to have occurred on the effective date of any one or more of the
following events:
(1) a reorganization or merger under which a vote of the
outstanding shares of the Corporation is required under the Delaware
Corporations Code;
(2) the merger or consolidation of the Corporation into or
with another Person (as defined below) in which the Corporation shall not
survive or in which the stockholders of the Corporation shall receive in the
transaction less than fifty percent (50%) of the voting securities of the
surviving Person;
(3) the sale, lease or transfer of all or substantially
all of the assets of the Corporation (but not including a transfer by pledge or
mortgage to a bona fide lender);
---- ----
7
<PAGE>
(4) any Person or Group (as such terms are defined in
Regulation 13d under the Securities Act of 1934, as amended) shall acquire 40%
or more of the Corporation's then outstanding Voting Stock (which shall mean any
and all shares of common and preferred stock, capital stock, rights to purchase,
warrants, options, participations of or interests in capital stock which then
entitle the holder thereof or would, upon payment of an exercise or Conversion
Price, entitle such holder to vote in the election of the directors of the
Corporation); or
(5) during any twelve-month period, the individuals who
constituted the Board of Directors at the beginning of such period shall cease
to constitute two-thirds (2/3) thereof (but excluding, for purposes of
calculating such two-thirds, any changes due to death, retirement at normal
retirement age or the nomination by a group theretofore contractually entitled
to nominate a director of a new individual in place of a previously nominated
individual).
4. Conversion Rights.
------------------
(a) Optional and Automatic Conversion. Each share of Series A
---------------------------------
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock shall be
convertible at the option of the holder thereof at any time into fully paid and
nonassessable shares of Common Stock of the Corporation. Each and every share
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock
shall automatically be converted into fully paid and nonassessable shares of
Common Stock of the Corporation immediately upon the earlier of (i) the closing
of a primary sale of the Corporation's securities in an underwritten registered
public offering with an aggregate offering price to the public of at least Five
Million Dollars ($5,000,000) and at a per share price not less than the greater
of (A) One Dollar ($1.00) per share and (B) the then effective Conversion Price
of the Series D Preferred Stock (in both cases adjusted to reflect stock splits,
reverse stock splits, stock dividends and stock recapitalizations) or (ii) the
vote or consent in writing of over fifty percent (50%) of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, and Series F Preferred Stock then outstanding,
voting together as a single class (except as otherwise required by law)
approving the conversion of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, and Series F Preferred Stock into Common Stock.
(b) Conversion Price. The number of shares of Common Stock into which
----------------
each share of the Series A Preferred Stock may be converted shall be determined
by dividing Fifty Cents ($0.50) by the Series A Conversion Price (determined as
hereinafter provided) in effect at the time of the conversion. The number of
shares of Common Stock into which each share of Series B Preferred Stock may be
converted shall be determined by dividing One Dollar ($1.00) by the Series B
Conversion Price (determined as hereinafter provided) in effect at the time of
conversion. The number of shares of Common Stock into which each share of Series
C Preferred Stock may be converted shall be determined by dividing One Dollar
($1.00) by the Series C Conversion Price (determined as hereinafter provided) in
effect at the time of conversion. The number of shares of Common Stock into
which each share of Series D Preferred Stock may be
8
<PAGE>
converted shall be determined by dividing One Dollar Twenty-Five Cents ($1.25)
by the Series D Conversion Price (determined as hereinafter provided) in effect
at the time of conversion. The number of shares of Common Stock into which each
share of Series E Preferred Stock may be converted shall be determined by
dividing Seventy-Five Cents ($0.75) by the Series E Conversion Price (determined
as hereinafter provided) in effect at the time of conversion. The number of
shares of Common Stock into which each share of Series F Preferred Stock may be
converted shall be determined by dividing Fifty-Five Cents ($0.55) by the Series
F Conversion Price (determined as hereinafter provided) in effect at the time of
conversion. The initial Series A Conversion Price per share, Series B Conversion
Price per share, Series C Conversion Price per share, Series D Conversion Price
per share, Series E Conversion Price, and Series F Conversion Price per share at
which shares of Common Stock shall be issuable upon conversion of any shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, and Series F Preferred
Stock, as the case may be, shall be Forty-nine Cents ($0.49), Eighty-five and
two-tenths Cents ($0.852), Eighty-five and two-tenths Cents ($0.852), Eighty-
five Cents ($0.85), Sixty-nine and Six-tenths Cents ($0.696), and Fifty-three
and nine tenths Cents ($0.539), respectively, subject to adjustment as provided
in Article FOURTH, Section 5 hereof.
(c) Procedure for Conversion. The holder of any shares of Series A
------------------------
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, or Series F Preferred Stock may
exercise the conversion rights as to such shares or any part thereof by
delivering to the Corporation during regular business hours, at the
Corporation's principal office or at the office of any transfer agent of the
Corporation for the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, or Series F
Preferred Stock, as the case may be, or at such other place as may be designated
by the Corporation, the certificate or certificates for the shares to be
converted, duly endorsed for transfer to the Corporation (if required by it),
accompanied by written notice stating that the holder elects to convert such
shares. Conversion shall be deemed to have been effected on the date when such
delivery is made, and such date is referred to herein as the "Conversion Date".
As promptly as practicable thereafter the Corporation shall issue and deliver to
or upon the written order of such holder, at such office or other place
designated by the Corporation, a certificate or certificates for the number of
full shares of Common Stock to which such holder is entitled and a check for
cash with respect to any fractional interest in a share of Common Stock as
provided in subsection 4(d) below. The holder shall be deemed to have become a
stockholder of record on the applicable Conversion Date unless the transfer
books of the Corporation are closed on that date, in which event the holder
shall be deemed to have become a stockholder of record on the next succeeding
date on which the transfer books are open, but the Conversion Price shall be
that in effect on the Conversion Date. Upon conversion of only a portion of the
number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, or Series F
Preferred Stock, as the case may be, represented by a certificate surrendered
for conversion, the Corporation shall issue and deliver to or upon the written
order of the holder of the certificate so surrendered for conversion, at the
expense of the Corporation, a new certificate covering the number of shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
9
<PAGE>
Stock, Series D Preferred Stock, Series E Preferred Stock, or Series F Preferred
Stock, as the case may be, representing the unconverted portion of the
certificate so surrendered.
(d) No Fractional Shares. No fractional shares of Common Stock or
--------------------
scrip shall be issued upon conversion of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, or Series F Preferred Stock. If more than one share of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, or Series F Preferred Stock
shall be surrendered for conversion at any one time by the same holder, the
number of full shares of Common Stock issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, or Series F Preferred Stock so surrendered.
Instead of any fractional shares of Common Stock which would otherwise be
issuable upon conversion of any shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, or Series F Preferred Stock, the Corporation shall pay a cash
adjustment in respect of such fractional interest equal to the fair market value
of such fractional interest as determined by the Corporation's Board of
Directors.
(e) Taxes. The Corporation 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 Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock, or Series F Preferred Stock pursuant hereto. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that in which the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, or
Series F Preferred Stock so converted were registered, and no such issue or
delivery shall be made unless and until the person requesting such issue has
paid to the Corporation the amount of any such tax, or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(f) Common Stock Reserve. The Corporation shall at all times reserve
--------------------
and keep available, out of its authorized but unissued Common Stock, solely for
the purpose of effecting the conversion of the Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, and Series F Preferred Stock, the full number of shares of
Common Stock issuable upon the conversion of all Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, and Series F Preferred Stock from time to time
outstanding. The Corporation shall from time to time (subject to obtaining
necessary director and stockholder action), in accordance with the laws of the
State of Delaware, increase the authorized amount of its Common Stock if at any
time the authorized number of shares of its Common Stock remaining unissued
shall not be sufficient to permit the conversion of all of the shares of Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock at the
time outstanding.
10
<PAGE>
(g) Registration of Common Stock Issued Upon Conversion. If any
---------------------------------------------------
shares of Common Stock to be reserved for the purpose of conversion of shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, or Series F Preferred Stock
require registration or listing with, or approval of, any governmental
authority, stock exchange or other regulatory body under any federal or state
law or regulation or otherwise, before such shares may be validly issued or
delivered upon conversion, the Corporation will in good faith and as
expeditiously as possible endeavor to secure such registration, listing or
approval, as the case may be.
(h) Status of Common Stock Issued Upon Conversion. All shares of
---------------------------------------------
Common Stock which may be issued upon conversion of the shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, or Series F Preferred Stock will upon
issuance by the Corporation be validly issued, fully paid and non-assessable and
free from all taxes, liens and charges with respect to the issuance thereof.
(i) Status of Converted Stock. All certificates of Series A Preferred
-------------------------
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, or Series F Preferred Stock surrendered for
conversion shall be appropriately canceled on the books of the Corporation, and
the shares so converted shall be restored to the status of authorized but
unissued Preferred Stock of the Corporation, undesignated as to series.
(j) Notice of Certain Events. In case:
------------------------
(i) the Corporation shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend, or any
other distribution, payable otherwise than in cash; or
(ii) the Corporation shall take a record of the holders of its
Common Stock for the purpose of entitling them to subscribe for or purchase any
shares of stock of any class or to receive any other rights; or
(iii) of any capital reorganization of the Corporation,
reclassification of the capital stock of the Corporation (other than a
subdivision or combination of its outstanding shares of Common Stock),
consolidation or merger of the Corporation with or into another Corporation or
conveyance of all or substantially all of the assets of the Corporation to
another Corporation; then, and in any such case, the Corporation shall cause to
be mailed by first class mail to the transfer agent for the Preferred Stock, and
to the holders of record of the outstanding Preferred Stock, at least twenty
(20) days prior to the date hereinafter specified, a notice stating the date on
which (x) a record is to be taken for the purpose of such dividend, distribution
or rights, or (y) such reclassification, reorganization, consolidation, merger
or conveyance is to take place and the date, if any is to be fixed, as of which
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up. In addition to any other means of
delivery, such notice shall be sent by facsimile transmission to any holder of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, or Series F
11
<PAGE>
Preferred Stock who has provided the Corporation with a facsimile transmission
number in writing.
5. Adjustment of Conversion Price. The Conversion Price with respect to
------------------------------
the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock, or Series F Preferred
Stock, as the case may be, (the term "Conversion Price" as used herein without
description as to a particular series of Preferred Stock shall refer to the
respective conversion price of each series of Preferred Stock) from time to time
in effect shall be subject to adjustment from time to time as follows:
(a) Stock Dividends, Stock Splits, Etc. In case the Corporation shall
at any time subdivide the outstanding shares of Common Stock, or shall issue a
stock dividend on its outstanding Common Stock, the Conversion Price in effect
immediately prior to such subdivision or the issuance of such dividend shall be
proportionately decreased, and in case the Corporation shall at any time combine
the outstanding shares of Common Stock, the Conversion Price in effect
immediately prior to such combination shall be proportionately increased,
concurrently with such subdivision, dividend or combination, as the case may be.
(b) Reorganization, Etc. In case of any capital reorganization or any
-------------------
reclassification of the capital stock of the Corporation or in case of the
consolidation or merger of the Corporation with or into another corporation or
the conveyance of all or substantially all of the assets of the Corporation to
another corporation (but not including any conveyance of assets deemed to be a
liquidation, dissolution, or winding up of the Corporation pursuant to Article
FOURTH, Section 2(b) above and without affecting the rights of the Series D
Preferred Stock pursuant to Article FOURTH, Section 6 below), each share of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock
shall thereafter be convertible into the number of shares of stock or other
securities or property to which a holder of the number of shares of Common Stock
of the Corporation deliverable upon conversion of such Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, and Series F Preferred Stock would have been entitled
upon such reorganization, reclassification, consolidation, merger or conveyance;
and, in any such 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 the Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock, to the
end that the provisions set forth herein (including provisions with respect to
changes in and other adjustments of the Conversion Price) shall thereafter be
applicable, as nearly as reasonably may be, in relation to any share of stock or
other property thereafter deliverable upon the conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock.
(c) Lower Priced Issuances.
----------------------
(i) Upon the issuance by the Corporation, at any time after
the date of the filing of this Certificate of Incorporation, of Common Stock, or
any right or option to
12
<PAGE>
purchase Common Stock or stock convertible into Common Stock, or any obligation,
share of stock or other security convertible into or exchangeable for Common
Stock for a consideration per share less than the Series A Conversion Price, the
Series B Conversion Price, the Series C Conversion Price, the Series D
Conversion Price, the Series E Conversion Price, and/or the Series F Conversion
Price in effect immediately prior to the time of such issue or sale, other than
an issuance of stock or securities pursuant to subsection 5(a) or 5(b) or the
issuance of shares of Common Stock upon conversion of any Preferred Stock, then,
upon such issue or sale, the relevant Conversion Price shall be reduced to a
price (calculated to the nearest tenth of a cent) determined by dividing:
(1) an amount equal to the sum of (x) the number of shares
of Common Stock outstanding immediately prior to such issue or sale multiplied
by the then existing Conversion Price, (y) the number of shares of Common Stock
issuable upon conversion or exchange of any obligations or of any shares of
stock of the Corporation outstanding immediately prior to such issue or sale
multiplied by the then existing Conversion Price and (z) an amount equal to the
aggregate "consideration actually received" by the Corporation upon such issue
or sale, by
(2) the sum of the number of shares of Common Stock
outstanding immediately after such issue or sale and the number of shares of
Common Stock issuable upon conversion or exchange of any obligations or of any
shares of stock of the Corporation outstanding immediately after such issue or
sale.
(ii) Calculation of Consideration, Outstanding Shares, Etc. For
-----------------------------------------------------
purposes of this subsection 5(c), the following provisions shall be applicable:
(1) Cash Consideration. In the case of an issue or sale for
------------------
cash of shares of Common Stock, the "consideration actually received" by the
Corporation therefor shall be deemed to be the amount of cash received, before
deducting therefrom any commissions or expenses paid by the Corporation.
(2) Non-cash Consideration. In case of the issuance
----------------------
(otherwise than upon conversion or exchange of obligations or shares of stock of
the Corporation) of additional shares of Common Stock for a consideration other
than cash or a consideration partly other than cash, the amount of the
"consideration actually received" other than cash received by the Corporation
for such shares shall be deemed to be the value of such consideration as
determined by the Board of Directors.
(3) Options, Warrants, Etc. In case of the issuance by the
----------------------
Corporation in any manner of any rights to subscribe for or to purchase shares
of Common Stock, or any options for the purchase of shares of Common Stock or
stock convertible into Common Stock, all shares of Common Stock or stock
convertible into Common Stock to which the holders of such rights or options
shall be entitled to subscribe for or purchase pursuant to such rights or
options shall be deemed issued and "outstanding" as of the date of the offering
of such rights or the granting of such options, as the case may be, and the
minimum aggregate consideration named in such rights or options for the shares
of Common Stock or stock convertible into Common
13
<PAGE>
Stock covered thereby, plus the consideration, if any, received by the
Corporation for such rights or options, shall be deemed to be the "consideration
actually received" by the Corporation (as of the date of the offering of such
rights or the granting of such options, as the case may be) for the issuance of
such shares.
(4) Convertible Securities. In case of the issuance or
----------------------
issuances by the Corporation in any manner of any obligations or of any shares
of stock of the Corporation that shall be convertible into or exchangeable for
Common Stock, all shares of Common Stock issuable upon the conversion or
exchange of such obligations or shares shall be deemed issued as of the date
such obligations or shares are issued, and the amount of the "consideration
actually received" by the Corporation for such additional shares of Common Stock
shall be deemed to be the total of (x) the amount of consideration received by
the Corporation upon the issuance of such obligations or shares, as the case may
be, plus (y) the minimum aggregate consideration, if any, other than such
obligations or shares, receivable by the Corporation upon such conversion or
exchange, except in adjustment of dividends.
(5) Readjustment Upon Expiration of Options, Etc. On the
expiration of any rights or options referred to in subsection 5(c)(2)(3), or the
termination of any right of conversion or exchange referred to in subsection
5(c)(2)(4), or any change in the number of shares of Common Stock deliverable
upon exercise of such options or rights or upon conversion of or exchange of
such convertible or exchangeable securities, or upon the repurchase of shares of
Common Stock which have been issued pursuant to the Corporation's stock option
plan and were subject to repurchase upon the terms of the plan, each Conversion
Price then in effect shall forthwith be readjusted to such Conversion Price as
would have obtained had the adjustments made upon the issuance of such option,
right or convertible or exchangeable securities been made upon the basis of the
delivery of only the number of shares of Common Stock actually delivered or to
be delivered upon the exercise of such rights or options or upon the conversion
or exchange of such securities.
(6) Non-triggering Issuances. Anything herein to the
------------------------
contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Conversion Price with respect to the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series E Preferred Stock, or
Series F Preferred Stock as a result of the grant of options to purchase Common
Stock, or the issuance of Common Stock to officers, employees, directors or
consultants of the Corporation or its subsidiaries pursuant to stock option or
stock purchase plans or agreements approved by the Corporation's Board of
Directors; provided, that with respect to the Series D Preferred Stock, the
Corporation shall be required to commence making such adjustments when in excess
of 2,125,775 shares (net of repurchases, cancellations, terminations and
expirations and adjusted for stock splits, stock dividends, recapitalizations
and the like) of Common Stock have, after the date of the issuance of such
Series D Preferred Stock, been subject to the grant of options or otherwise
issued to officers, employees, directors or consultants of the Corporation or
its subsidiaries pursuant to stock option plans, stock purchase plans or
agreements approved by the Corporation's Board of Directors.
(d) Certificate of Adjustment. Upon the occurrence of each adjustment
-------------------------
or readjustment of a Conversion Price pursuant to this Article FOURTH, Section
5, the Corporation,
14
<PAGE>
at its expense, shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and furnish to each holder of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock, and/or Series F Preferred Stock
affected thereby a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, or Series F Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting forth
(1) such adjustment or readjustment, (2) each Conversion Price at the time in
effect, and (3) the number of shares of Common Stock and the amount, if any, of
other property which at the time would be received upon the conversion of his or
her shares.
6. Change of Control Repurchase Right. In the event a Change of Control
----------------------------------
(as defined above) shall occur, the holders of the Series D Preferred Stock
shall have the right to require that the Corporation repurchase, on the last day
of the fiscal quarter of the Corporation following the effective date of the
Change of Control (the "Change of Control Payment Date") all or any portion of
such holders' outstanding Series D Preferred Stock at the Change of Control
Purchase Price; provided that the foregoing repurchase right may be waived by
the holders of a majority of the outstanding Series D Preferred Stock.
(a) Change of Control Purchase Price. The Change of Control Purchase
--------------------------------
Price per share of the Series D Preferred Stock shall be the original purchase
price paid for the Series D Preferred Stock plus (i) an amount equal to 8% per
annum, compounded annually, of such purchase price from the date of issuance of
the series D Preferred Stock and less (ii) all cash dividends theretofore paid
in respect of such Series D Preferred Stock.
(b) Repurchase Offer. Not less than 20 business days before the
----------------
effective date of the Change of Control (the "Change of Control Effective
Date"), the Corporation shall mail to the holders of Series D Preferred Stock at
their last registered addresses, notice of an offer to purchase (the "Change of
Control Offer") . The Change of Control Offer shall remain open from the time of
mailing until the fifth business day preceding the Change of Control Effective
Date. The notice, which shall govern the terms of the Change of Control Offer,
shall state:
(i) that the Change of Control Offer is being made pursuant to
this Article FOURTH, Section 6 and that all shares of Series D Preferred Stock
duly tendered will be accepted for payment;
(ii) the purchase price for the Series D Preferred Stock and
the Change of Control Payment Date;
(iii) the name and address of the paying agent, if any;
(iv) whether or not any shares of Series D Preferred Stock not
tendered will continue to remain outstanding;
15
<PAGE>
(v) that the holders electing to have their shares of Series D
Preferred Stock purchased pursuant to a Change of Control Offer will be required
to surrender their shares of Series D Preferred Stock to the Corporation prior
to the close of business on the Change of Control Effective Date;
(vi) that holders will be entitled to withdraw their election
with respect to any or all of the Series D Preferred Stock tendered if the
Corporation, not later than the close of business on the business day that is
three business days preceding the Change of Control Effective Date, receives a
telegram, telex, facsimile transmission or letter setting forth the name of the
holder, the number of shares of Series D Preferred Stock the holder had
previously delivered for purchase and a statement that such holder is
withdrawing this election to have some or all of such shares purchased;
(vii) that holders whose shares of Series D Preferred Stock are
purchased only in part will be issued shares representing the unpurchased
portion of the Series D Preferred Stock surrendered;
(viii) the instructions that holders must follow in order to
tender their shares of Series D Preferred Stock; and
(ix) the circumstances and relevant facts regarding such Change
of Control.
On the Change of Control Payment Date, the Corporation shall (i) accept for
payment shares of Series D Preferred Stock tendered pursuant to the Change of
Control Offer, and (ii) deposit with the paying agent, if any, money or
securities not subject to investment letter or other similar restriction on free
marketability and listed or approved for listing upon notice of issuance on a
national securities exchange or designated or approved for designation upon
issuance as a national market system security on an interdealer quotation system
by the National Association of Securities Dealers, Inc., sufficient to pay the
purchase price of all securities so tendered, as the case may be. The
Corporation or the paying agent, if any, shall promptly mail to the holder of
shares of Series D Preferred Stock so accepted for payment an amount equal to
the Change of Control Purchase Price, and the transfer agent shall promptly
issue and mail to such holders a new certificate for any unpurchased portion of
the shares of Series D Preferred Stock surrendered.
7. Changes Affecting Preferred Stock.
----------------------------------
(a) Series A Preferred Stock, Series B Preferred Stock, Series C
------------------------------------------------------------
Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock. Except
- -----------------------------------------------------------------------
where a separate series vote is required by law, so long as at least 3,000,000
shares of Series A Preferred Stock, or 2,000,000 shares of Series B Preferred
Stock, or 1,100,000 shares of Series C Preferred Stock, or 2,000,000 shares of
Series E Preferred Stock, or 2,750,000 shares of Series F Preferred Stock are
outstanding (in each case, as adjusted for any stock split, stock dividend,
reclassification or similar event), the Corporation shall not, without first
obtaining the approval by vote or written consent, in the manner provided by
law, of the holders of at least fifty percent (50%) of the total number of
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series E
16
<PAGE>
Preferred Stock, and Series F Preferred Stock outstanding, voting together as a
class, (1) alter or change any of the powers, preferences, privileges or rights
of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series E Preferred Stock, or Series F Preferred Stock; (2) increase or
decrease the authorized number of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series E Preferred Stock, or Series F
Preferred Stock; (3) amend the provisions of this Article FOURTH, Section 7(a);
(4) create any new class or series of shares of preferred stock on a parity with
or prior to the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series E Preferred Stock, or Series F Preferred Stock with
respect to dividends or liquidation preference; (5) sell, lease, convey,
exchange, transfer or otherwise dispose of all or substantially all of its
assets (other than for the purposes of securing payment of any contract or
obligation); or (6) merge or consolidate with or into any other corporation
except into or with a wholly owned subsidiary.
(b) Series D Preferred Stock. So long as at least 1,000,000 shares of
------------------------
Series D Preferred Stock are outstanding (as adjusted for any stock split, stock
dividend, reclassification or similar event), the Series D Preferred Stock shall
be counted together with the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock
entitled to vote thereon for purposes of determining whether there has been
approval by at least 50% of such Preferred Stock as required by Article FOURTH,
Section 7(a) above for any of the actions enumerated in clauses (1), (2) and (3)
thereof, provided that, insofar as any of the foregoing would adversely affect
the Series D Preferred Stock, so long as at least 1,000,000 shares of Series D
Preferred Stock are outstanding (as adjusted as aforesaid), the Corporation
shall take no such action without first obtaining the approval of the holders of
at least two-thirds (2/3rds) of such Series D Preferred Stock, voting as a
separate series, except that no such separate vote of the Series D Preferred
Stock shall be required (i) with respect to clause (3) unless the manner in
which the Series D Preferred Stock would be affected thereby would be different
from the manner in which the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock
would be affected or (ii) with respect to clause (1) if such separate vote would
not be required under clause (3) and if the only reason for such separate vote
(in the absence of this exception) would be the indirect effect of a new class
or series of Preferred Stock on the powers, preferences, privileges or rights of
any outstanding series of Preferred Stock.
FIFTH: The following provisions are inserted for the management of the
-----
business and the conduct of the affairs of the Corporation, and
for further definition, limitation and regulation of the powers
of the Corporation and of its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. In addition to
the powers and authority expressly conferred upon them by statute
or by this Certificate of Incorporation or the Bylaws of the
Corporation, the directors are hereby empowered to exercise all
such powers and do all such acts and things as may be exercised
or done by the Corporation.
17
<PAGE>
B. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
C. On and after the closing date of the first sale of the
Corporation's Common Stock pursuant to a firmly underwritten
registered public offering which results in the automatic
conversion of the Corporation's Preferred Stock (the "IPO"), any
action required or permitted to be taken by the stockholders of
the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be
effected by any consent in writing by such stockholders. Prior to
such sale, unless otherwise provided by law, any action which may
otherwise be taken at any meeting of the stockholders may be
taken without a meeting and without prior notice, if a written
consent describing such actions is signed by the holders of
outstanding shares having not less than the minimum number of
votes which would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were
present and voted.
D. Special meetings of stockholders of the Corporation may be called
only (1) 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 for adoption) or (2) by the holders of not
less than ten percent (10%) of all of the shares entitled to cast
votes at the meeting.
SIXTH:
-----
A. The number of directors shall initially be set at five (5) and,
thereafter, shall be fixed from time to time exclusively 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 for adoption).
Upon the closing of the IPO, the directors shall be divided into
three classes with the term of office of the first class (Class
I) to expire at the first annual meeting of the stockholders
following the IPO; the term of office of the second class (Class
II) to expire at the second annual meeting of stockholders held
following the IPO; the term of office of the third class (Class
III) to expire at the third annual meeting of stockholders; and
thereafter for each such term to expire at each third succeeding
annual meeting of stockholders after such election. Subject to
the rights of the holders of any series of Preferred Stock then
outstanding, a vacancy resulting from the removal of a director
by the stockholders as provided in Article SIXTH, Section C below
may be filled at a special meeting of the stockholders held for
that purpose. All directors shall hold office until the
expiration of the term for which elected, and until their
respective
18
<PAGE>
successors are elected, except in the case of the
death, resignation, or removal of any director.
B. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting
from any increase in the authorized number of directors or any
vacancies in the Board of Directors resulting from death,
resignation or other cause (other than removal from office by a
vote of the stockholders) may be filled only by a majority vote
of the directors then in office, though less than a quorum, and
directors so chosen shall hold office for a term expiring at the
next annual meeting of stockholders at which the term of office
of the class to which they have been elected expires, and until
their respective successors are elected, except in the case of
the death, resignation, or removal of any director. No decrease
in the number of directors constituting the Board of Directors
shall shorten the term of any incumbent director.
C. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, with or
without cause, but only by the affirmative vote of the holders of
at least a majority of the voting power of all of the then
outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors, voting together
as a single class. Vacancies in the Board of Directors resulting
from such removal may be filled by a majority of the directors
then in office, though less than a quorum, or by the stockholders
as provided in Article SIXTH, Section A above. Directors so
chosen shall hold office for a term expiring at the next annual
meeting of stockholders at which the term of office of the class
to which they have been elected expires, and until their
respective successors are elected, except in the case of the
death, resignation, or removal of any director.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or
-------
repeal Bylaws of the Corporation. Any adoption, amendment or
repeal of Bylaws of the Corporation by the Board of Directors
shall require the approval of a majority of the total number of
authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any resolution
providing for adoption, amendment or repeal is presented to the
Board). The stockholders shall also have power to adopt, amend or
repeal the Bylaws of the Corporation. Any adoption, amendment or
repeal of Bylaws of the Corporation by the stockholders shall
require, in addition to any vote of the holders of any class or
series of stock of the Corporation required by law or by this
Certificate of Incorporation, the affirmative vote of the holders
of at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of all of the then outstanding shares of the capital
stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class .
19
<PAGE>
EIGHTH: A director of the Corporation shall not be personally liable to
------
the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involved intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which
the director derived an improper personal benefit.
If the Delaware General Corporation Law is hereafter amended to
authorize the further elimination or limitation of the liability
of a director, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing provisions of this
Article EIGHTH by the stockholders of the Corporation shall not
adversely affect any right or protection of a director of the
Corporation existing at the time of such repeal or modification.
NINTH: The Corporation reserves the right to amend or repeal any
-----
provision contained in this Certificate of Incorporation in the
manner prescribed by the laws of the State of Delaware and all
rights conferred upon stockholders are granted subject to this
reservation; provided, however, that, notwithstanding any other
-------- -------
provision 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 vote of the holders of any class or series of
the stock of this Corporation required by law or by this
Certificate of Incorporation, the affirmative vote of the holders
of at least 66-2/3% of the voting power of all of the then
outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of directors, voting
together as a single class, shall be required to amend or repeal
this Article NINTH, Article FIFTH, Article SIXTH, Article SEVENTH
or Article EIGHTH.
The Certificate of Incorporation of PI Delaware, as amended herein, shall
continue to be the Certificate of Incorporation of PI Delaware as the surviving
Corporation without change or amendment until further amended in accordance with
the provisions thereof and applicable laws. The Bylaws of PI Delaware, in
effect on the Effective Date, shall continue to be the Bylaws of PI Delaware as
the surviving Corporation without change or amendment until further amended in
accordance with the provisions thereof and applicable laws.
3. Directors and Officers. The directors and officers of PI California
----------------------
shall become the directors and officers of PI Delaware upon the Effective Date
and any committee of the Board of Directors of PI California shall become the
members of such committees for PI Delaware.
20
<PAGE>
4. Succession. On the Effective Date, PI Delaware shall succeed to PI
----------
California in the manner of and as more fully set forth in Section 259 of the
General Corporation Law of the State of Delaware.
5. Further Assurances. From time to time, as and when required by PI
------------------
Delaware or by its successors and assigns, there shall be executed and delivered
on behalf of PI California such deeds and other instruments, and there shall be
taken or caused to be taken by it such further and other action, as shall be
appropriate or necessary in order to vest, perfect or confirm, of record or
otherwise, in PI Delaware the title to and possession of all the property,
interests, assets, rights, privileges, immunities, powers, franchises and
authority of PI California, and otherwise to carry out the purposes of this
Merger Agreement and the officers and directors of PI Delaware are fully
authorized in the name and on behalf of PI California or otherwise to take any
and all such action and to execute and deliver any and all such deeds and other
instruments.
6. Stock of PI California.
----------------------
a. Common Stock. Upon the Effective Date, by virtue of the Merger
------------
and without any action on the part of the holder thereof, each share of PI
California Common Stock outstanding immediately prior thereto shall be changed
and converted into one fully paid and nonassessable share of PI Delaware Common
Stock.
b. Preferred Stock. Upon the Effective Date, by virtue of the
---------------
Merger and without any action on the part of the holder thereof, each share of
each series of PI California Preferred Stock outstanding immediately prior
thereto shall be changed and converted into one fully paid and nonassessable
share of PI Delaware Preferred Stock of an equivalent series.
7. Stock Certificates. On and after the Effective Date, all of the
------------------
outstanding certificates which prior to that time represented shares of PI
California stock shall be deemed for all purposes to evidence ownership of and
to represent the shares of PI Delaware stock into which the shares of PI
California stock represented by such certificates have been converted as herein
provided. The registered owner on the books and records of PI Delaware or its
transfer agent of any such outstanding stock certificate shall, until such
certificate shall have been surrendered for transfer or otherwise accounted for
to PI Delaware or its transfer agent, have and be entitled to exercise any
voting and other rights with respect to and to receive any dividend and other
distributions upon the shares of PI Delaware stock evidenced by such outstanding
certificate as above provided.
8. Options and Warrants. Upon the Effective Date, each outstanding
--------------------
option, warrant or other right to purchase shares of PI California stock,
including those options granted under the 1988 Stock Option Plan, the 1997 Stock
Option Plan and the 1997 Outside Directors Stock Option Plan (the "Option
Plans") of PI California, shall be converted into and become an option, warrant,
or right to purchase the identical number of shares of PI Delaware stock at a
price per share equal to the exercise price of the option, warrant or right to
purchase PI California stock, and upon the same terms and subject to the same
conditions as set forth in the Option Plans and other agreements entered into by
PI California pertaining to such options, warrants, or rights. A number of
shares of PI Delaware stock shall be reserved for purposes of such options,
warrants,
21
<PAGE>
and rights equal to the number of shares of PI California stock so reserved as
of the Effective Date. As of the Effective Date, PI Delaware shall assume all
obligations of PI California under agreements pertaining to such options,
warrants, and rights, including the Option Plans, and the outstanding options,
warrants, or other rights, or portions thereof, granted pursuant thereto.
9. Other Employee Benefit Plans. As of the Effective Date, PI Delaware
----------------------------
hereby assumes all obligations of PI California under any and all employee
benefit plans in effect as of said date or with respect to which employee rights
or accrued benefits are outstanding as of said date, including but not limited
to the 1997 Employee Stock Purchase Plan. A number of shares of PI Delaware
stock shall be reserved for purposes of such plans equal to the number of shares
of PI California stock so reserved as of the Effective Date. As of the
Effective Date, PI Delaware shall assume all obligations of PI California under
agreements pertaining to such plans, and the outstanding rights granted pursuant
thereto.
10. Outstanding Common Stock of PI Delaware. Forthwith upon the Effective
---------------------------------------
Date, the One Hundred (100) shares of PI Delaware Common Stock presently issued
and outstanding in the name of PI California shall be canceled and retired and
resume the status of authorized and unissued shares of PI Delaware Common Stock,
and no shares of PI Delaware Common Stock or other securities of PI Delaware
shall be issued in respect thereof.
11. Covenants of PI Delaware. PI Delaware covenants and agrees that it
------------------------
will, on or before the Effective Date:
a. Qualify to do business as a foreign corporation in the State of
California, and in all other states in which PI California is so qualified and
in which the failure so to qualify would have a material adverse impact on the
business or financial condition of PI Delaware. In connection therewith, PI
Delaware shall irrevocably appoint an agent for service of process as required
under the provisions of Section 2105 of the California Corporations Code and
under applicable provisions of state law in other states in which qualification
is required hereunder.
b. File any and all documents with the California Franchise Tax
Board necessary to the assumption by PI Delaware of all of the franchise tax
liabilities of PI California.
12. Amendment. At any time before or after approval and adoption by the
---------
stockholders of PI California, this Merger Agreement may be amended in any
manner as may be determined in the judgment of the respective Boards of
Directors of PI Delaware and PI California to be necessary, desirable or
expedient in order to clarify the intention of the parties hereto or to effect
or facilitate the purposes and intent of this Merger Agreement.
13. Abandonment. At any time before the Effective Date, this Merger
-----------
Agreement may be terminated and the Merger may be abandoned by the Board of
Directors of either PI California or PI Delaware or both, notwithstanding
approval of this Merger Agreement by the sole stockholder of PI Delaware and the
stockholders of PI California.
22
<PAGE>
14. Counterparts. In order to facilitate the filing and recording of this
------------
Merger Agreement, the same may be executed in any number of counterparts, each
of which shall be deemed to be an original.
IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved
by resolution of the Board of Directors of PI California and PI Delaware, is
hereby executed on behalf of each of said two corporations by their respective
officers thereunto duly authorized.
POWER INTEGRATIONS DELAWARE
CORPORATION, a Delaware corporation
By: ________________________________
Howard F. Earhart, President
POWER INTEGRATIONS, INC., a California
corporation
By: ________________________________
Howard F. Earhart, President
23
<PAGE>
CERTIFICATE OF SECRETARY
OF
POWER INTEGRATIONS DELAWARE CORPORATION
(a Delaware corporation)
I, Robert Staples, the Secretary of Power Integrations Delaware
Corporation, a Delaware corporation (the "Corporation"), hereby certify that the
Agreement and Plan of Merger to which this Certificate is attached was duly
signed on behalf of the Corporation by its President under the corporate seal of
the Corporation and was duly approved and adopted by a unanimous vote of the
outstanding stock entitled to vote thereon by written consent of the sole
stockholder of the Corporation dated ____________, 1997.
Executed effective on the ____________ day of _________, 1997.
____________________________________
Robert G. Staples
24
<PAGE>
CERTIFICATE OF APPROVAL OF
AGREEMENT AND PLAN OF MERGER OF
POWER INTEGRATIONS, INC.
(a California corporation)
Howard F. Earhart and Robert G. Staples certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of Power Integrations, Inc., a California corporation (the
"Corporation").
2. This Certificate is attached to the Agreement and Plan of Merger dated
as of ____________, 1997, providing for the merger of the Corporation with and
into a Delaware corporation.
3. The Agreement and Plan of Merger in the form attached hereto (the
"Merger Agreement") was approved by the Board of Directors of the Corporation at
a meeting duly noticed and held on September __, 1997.
4. The total number of outstanding shares of the Corporation entitled to
vote on the merger was ____________ shares of Common Stock, 7,900,000 shares of
Series A Preferred Stock, 7,489,000 shares of Series B Preferred Stock,
11,170,400 shares of Series C Preferred Stock, 3,200,000 shares of Series D
Preferred Stock, 7,013,396 shares of Series E Preferred Stock and 9,091,000
shares of Series F Preferred Stock.
5. The principal terms of the Merger Agreement were approved by an
affirmative vote which exceeded the vote required, such vote being a majority of
the total number of outstanding shares of Common Stock and a majority of the
outstanding shares of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock, voting separately as a class.
Dated: ____________, 1997.
___________________________________
Howard F. Earhart, President
____________________________________
Robert G. Staples, Secretary
25
<PAGE>
The undersigned, Howard F. Earhart and Robert G. Staples, President and
Secretary, respectively, of Power Integrations, Inc., a California corporation,
declare under penalty of perjury under the laws of the State of California that
the matters set forth in this Certificate are true and correct of their own
knowledge.
Executed at San Jose, California, on ____________, 1997.
____________________________________
Howard F. Earhart, President
____________________________________
Robert G. Staples, Secretary
26
<PAGE>
EXHIBIT 3.1A
CERTIFICATE OF INCORPORATION
OF
POWER INTEGRATIONS DELAWARE CORPORATION
FIRST: The name of this corporation is Power Integrations Delaware
-----
Corporation (hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in
------
the State of Delaware is Incorporating Services, Ltd., 15 East North Street, in
the City of Dover, County of Kent. The name of the registered agent at that
address is Incorporating Services, Ltd.
THIRD: The purpose of the Corporation is to engage in any lawful act
-----
or activity for which a corporation may be organized under the General
Corporation Law of Delaware.
FOURTH: The total number of shares of stock which the Corporation
------
shall have authority to issue is One Thousand (1,000) shares of Common Stock,
par value $0.001 per share (the "Common Stock").
FIFTH: The name and mailing address of the incorporator is:
-----
Lynn Rooke
c/o Gray Cary Ware & Freidenrich
400 Hamilton Avenue
Palo Alto, CA 94301
SIXTH: The business and affairs of the Corporation shall be managed
-----
by or under the direction of the Board of Directors. In addition to the powers
and authority expressly conferred upon them by Statute or by this Certificate of
Incorporation or the Bylaws of the Corporation, the directors are hereby
empowered to exercise all such powers and do all such acts and things as
<PAGE>
may be exercised or done by the Corporation. Election of directors need not be
by written ballot unless the Bylaws so provide.
SEVENTH: The Board of Directors is authorized to make, adopt, amend,
-------
alter or repeal the Bylaws of the Corporation. The stockholders shall also have
power to make, adopt, amend, alter or repeal the Bylaws of the Corporation.
EIGHTH: This Corporation reserves the right to amend or repeal any of
------
the provisions contained in this Certificate of Incorporation in any manner now
or hereafter permitted by law, and the rights of the stockholders of this
Corporation are granted subject to this reservation.
NINTH: To the fullest extent permitted by the Delaware General
-----
Corporation Law, a director of this Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. Any repeal or modification of the foregoing provisions of
this Article NINTH by the stockholders of the Corporation shall not adversely
affect any right or protection of a director of the Corporation existing at the
time of such repeal or modification.
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming
a corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and accordingly, have hereto set my hand this 12 day of August, 1997.
__________________________________
Lynn Rooke
<PAGE>
EXHIBIT 3.1B
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION OF
POWER INTEGRATIONS, INC.
We, Howard F. Earhart, President and Chief Executive Officer, and Robert G.
Staples, Secretary of Power Integrations, Inc. (the "Corporation"), a
corporation duly organized and existing under the General Corporation Law of the
State of Delaware, in accordance with the provisions of Section 242 thereof, DO
HEREBY CERTIFY:
FIRST: That the amendment to the Corporation's Certificate of
Incorporation set forth in the following resolution has been approved in
accordance with the provisions of Section 242 of the General Corporation Law of
the State of Delaware.
"RESOLVED, that at the effective time of this amendment and without further
action on the part of the Corporation or the holders of its stock, each 6.8
shares of Common Stock of the Corporation outstanding or held in treasury
immediately prior thereto shall be changed and converted into one (1) fully paid
and nonassessable share of Common Stock of the Corporation, and at such time
each holder of record of Common Stock shall, without further action, be and
become the holder of one (1) share of Common Stock for each 6.8 shares of Common
Stock held of record immediately prior thereto. No fractional shares shall be
issued as a result of such reverse stock split and in lieu of any fractional
shares, the Corporation shall pay cash equal to such fraction multiplied by the
fair market value of the Common Stock as determined by the Board of Directors of
the Corporation.
RESOLVED, that Paragraph ONE of Article FOURTH of the Corporation's
Certificate of Incorporation is hereby amended to read in its entirety as
follows:
FOURTH:
- ------
STOCK
-----
The Corporation is authorized to issue two classes of stock to be designated,
respectively, "Preferred Stock" and "Common Stock". The total number of shares
of Preferred Stock the Corporation shall have authority to issue is _________,
$0.001 par value per share, and the total number of shares of Common Stock the
Corporation shall have authority to issue is 40,000,000, $0.001 par value per
share. The Preferred Stock shall be divided into six series, namely, "Series A
Preferred Stock", consisting of 7,900,000 shares, "Series B Preferred Stock",
consisting of 7,489,000 shares, "Series C Preferred Stock", consisting of
11,170,400 shares, "Series D Preferred Stock", consisting of 3,200,000 shares,
"Series E Preferred Stock", consisting of ________ shares, and "Series F
Preferred Stock", consisting of _________ shares."
<PAGE>
IN WITNESS WHEREOF, this Certificate of Amendment of Certificate of
Incorporation has been executed on behalf of the Corporation by its President
and Chief Executive Officer and attested by Robert G. Staples, its Secretary,
this ____ day of ______, 1997.
POWER INTEGRATIONS, INC.
By:____________________________
Howard F. Earhart, President and
Chief Executive Officer
Attest:
By:____________________________
Robert G. Staples, Secretary
-2-
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
POWER INTEGRATIONS DELAWARE CORPORATION
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I STOCKHOLDERS................................................ 1
Section 1.1 Annual Meeting.............................................. 1
Section 1.2 Special Meetings............................................ 1
Section 1.3 Notice of Meetings.......................................... 1
Section 1.4 Quorum...................................................... 1
Section 1.5 Conduct of the Stockholders' Meeting........................ 2
Section 1.6 Conduct of Business......................................... 2
Section 1.7 Notice of Stockholder Business.............................. 2
Section 1.8 Proxies and Voting.......................................... 3
Section 1.9 Stock List.................................................. 3
ARTICLE II BOARD OF DIRECTORS.......................................... 4
Section 2.1 Number and Term of Office................................... 4
Section 2.2 Vacancies and Newly Created Directorships................... 4
Section 2.3 Removal..................................................... 4
Section 2.4 Regular Meetings............................................ 5
Section 2.5 Special Meetings............................................ 5
Section 2.6 Quorum...................................................... 5
Section 2.7 Participation in Meetings by Conference Telephone........... 5
Section 2.8 Conduct of Business......................................... 5
Section 2.9 Powers...................................................... 5
Section 2.10 Compensation of Directors................................... 6
Section 2.11 Nomination of Director Candidates........................... 6
ARTICLE III COMMITTEES.................................................. 7
Section 3.1 Committees of the Board of Directors........................ 7
Section 3.2 Conduct of Business......................................... 8
ARTICLE IV OFFICERS.................................................... 8
Section 4.1 Generally................................................... 8
Section 4.2 Chairman of the Board....................................... 8
Section 4.3 President................................................... 8
Section 4.4 Vice President.............................................. 8
Section 4.5 Treasurer................................................... 8
Section 4.6 Secretary................................................... 9
Section 4.7 Delegation of Authority..................................... 9
Section 4.8 Removal..................................................... 9
Section 4.9 Action With Respect to Securities of Other Corporations..... 9
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE V STOCK....................................................... 9
Section 5.1 Certificates of Stock....................................... 9
Section 5.2 Transfers of Stock.......................................... 9
Section 5.3 Record Date................................................. 9
Section 5.4 Lost, Stolen or Destroyed Certificates...................... 10
Section 5.5 Regulations................................................. 10
ARTICLE VI NOTICES..................................................... 10
Section 6.1 Notices..................................................... 10
Section 6.2 Waivers..................................................... 10
ARTICLE VII MISCELLANEOUS............................................... 10
Section 7.1 Facsimile Signatures........................................ 10
Section 7.2 Corporate Seal.............................................. 11
Section 7.3 Reliance Upon Books, Reports and Records.................... 11
Section 7.4 Fiscal Year................................................. 11
Section 7.5 Time Periods................................................ 11
ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS................... 11
Section 8.1 Right to Indemnification.................................... 11
Section 8.2 Right of Claimant to Bring Suit............................. 12
Section 8.3 Non-Exclusivity of Rights................................... 12
Section 8.4 Indemnification Contracts................................... 12
Section 8.5 Insurance................................................... 13
Section 8.6 Effect of Amendment......................................... 13
ARTICLE IX AMENDMENTS.................................................. 13
Section 9.1 Amendment of Bylaws......................................... 13
</TABLE>
<PAGE>
POWER INTEGRATIONS DELAWARE CORPORATION
A DELAWARE CORPORATION
BYLAWS
ARTICLE I
STOCKHOLDERS
------------
Section 1.1 Annual Meeting. An annual meeting of the stockholders,
----------- --------------
for the election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall each year fix, which date shall be within thirteen months
subsequent to the later of the date of incorporation or the last annual meeting
of stockholders.
Section 1.2 Special Meetings. Special meetings of the stockholders, for
----------- ----------------
any purpose or purposes prescribed in the notice of the meeting, may be called
only (i) by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there
exists any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board of Directors for adoption) or (ii) by the
holders of not less than 10% of all shares entitled to cast votes at the
meeting, voting together as a single class and shall be held at such place, on
such date, and at such time as they shall fix. Business transacted at special
meetings shall be confined to the purpose or purposes stated in the notice.
Section 1.3 Notice of Meetings. Written notice of the place, date, and
----------- ------------------
time of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 1.4 Quorum. At any meeting of the stockholders, the holders of a
----------- ------
majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of a larger number may be
required by law.
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If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date,
or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, then except as otherwise required by law, those
present at such adjourned meeting shall constitute a quorum, and all matters
shall be determined by a majority of the votes cast at such meeting.
Section 1.5 Conduct of the Stockholders' Meeting. At every meeting
----------- ------------------------------------
of the stockholders, the Chairman, if there is such an officer, or if not, the
President of the Corporation, or in his absence the Vice President designated by
the President, or in the absence of such designation any Vice President, or in
the absence of the President or any Vice President, a chairman chosen by the
majority of the voting shares represented in person or by proxy, shall act as
Chairman. The Secretary of the Corporation or a person designated by the
Chairman shall act as Secretary of the meeting. Unless otherwise approved by
the Chairman, attendance at the stockholders' meeting is restricted to
stockholders of record, persons authorized in accordance with Section 8 of
these Bylaws to act by proxy, and officers of the Corporation.
Section 1.6 Conduct of Business. The Chairman shall call the meeting to
----------- -------------------
order, establish the agenda, and conduct the business of the meeting in
accordance therewith or, at the Chairman's discretion, it may be conducted
otherwise in accordance with the wishes of the stockholders in attendance. The
date and time of the opening and closing of the polls for each matter upon which
the stockholders will vote at the meeting shall be announced at the meeting.
The Chairman shall also conduct the meeting in an orderly manner, rule on
the precedence of and procedure on, motions and other procedural matters, and
exercise discretion with respect to such procedural matters with fairness and
good faith toward all those entitled to take part. The Chairman may impose
reasonable limits on the amount of time taken up at the meeting on discussion in
general or on remarks by any one stockholder. Should any person in attendance
become unruly or obstruct the meeting proceedings, the Chairman shall have the
power to have such person removed from participation. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 1.6 and
Section 1.7, below. The Chairman of a meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting and in accordance with the provisions of this Section 1.6
and Section 1.7, and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
Section 1.7 Notice of Stockholder Business. At an annual or special
----------- ------------------------------
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before a
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)
properly brought before the meeting by or at the direction of the Board of
Directors, (c) properly brought before an annual meeting by a stockholder, or
(d) properly brought before a special meeting by a stockholder, but if, and only
if, the notice of a special meeting provides for
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business to be brought before the meeting by stockholders. For business to be
properly brought before a 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 proposal to be presented at an annual meeting shall
be received at the Corporation's principal executive offices not less than 120
calendar days in advance of the date that the Corporation's (or the
Corporation's predecessor's) proxy statement was released to stockholders in
connection with the previous year's annual meeting of stockholders, except that
if no annual meeting was held in the previous year or the date of the annual
meeting has been changed by more than 30 calendar days from the date
contemplated at the time of the previous year's proxy statement, or in the event
of a special meeting, notice by the stockholder to be timely must be received
not later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual or special meeting
(a) a brief description of the business desired to be brought before the annual
or special meeting and the reasons for conducting such business at the special
meeting, (b) the name and address, as they appear on the Corporation's books, of
the stockholder proposing such business, (c) the class and number of shares of
the Corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business.
Section 1.8 Proxies and Voting. At any meeting of the stockholders,
----------- ------------------
every stockholder entitled to vote may vote in person or by proxy authorized by
an instrument in writing or by a transmission permitted by law filed in
accordance with the procedure established for the meeting. No stockholder may
authorize more than one proxy for his shares.
Each stockholder shall have one vote for every share of stock entitled to
vote which is registered in his or her name on the record date for the meeting,
except as otherwise provided herein or required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law, all other matters shall be determined by a
majority of the votes cast.
Section 1.9 Stock List. A complete list of stockholders entitled
----------- ----------
to vote at any meeting of stockholders, arranged in alphabetical order for each
class of stock and showing the address of each such stockholder and the number
of shares registered in his or her name, shall be open to the examination of any
such 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 so specified, at the
place where the meeting is to be held.
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The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such who is
present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 Number and Term of Office. The number of directors shall
----------- -------------------------
initially be five (5) and, thereafter, shall be fixed from time to time
exclusively 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 for adoption). Upon the closing of the
first sale of the Corporation's common stock pursuant to a firmly underwritten
registered public offering (the "IPO"), the directors shall be divided into
three classes, with the term of office of the first class to expire at the first
annual meeting of stockholders held after the IPO, the term of office of the
second class to expire at the second annual meeting of stockholders held after
the IPO, the term of office of the third class to expire at the third annual
meeting of stockholders held after the IPO and thereafter for each such term to
expire at each third succeeding annual meeting of stockholders after such
election. A vacancy resulting from the removal of a director by the stockholders
as provided in Article II, Section 2.3 below may be filled at special
meeting of the stockholders held for that purpose. All directors shall hold
office until the expiration of the term for which elected and until their
respective successors are elected, except in the case of the death, resignation
or removal of any director.
Section 2.2 Vacancies and Newly Created Directorships. Subject to the
----------- -----------------------------------------
rights of the holders of any series of Preferred Stock then outstanding, newly
created directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification or other cause (other than removal
from office by a vote of the stockholders) may be filled only by a majority vote
of the directors then in office, though less than a quorum, and directors so
chosen shall hold office for a term expiring at the next annual meeting of
stockholders. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Section 2.3 Removal. Subject to the rights of holders of any series of
----------- -------
Preferred Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, with or without cause, but
only by the affirmative vote of the holders of at least a majority of the voting
power of all of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class. Vacancies in the Board of Directors resulting from such removal
may be filled by a majority of the directors then in office, though less than a
quorum, or by the stockholders as provided in Article II, Section 2.1 above.
Directors so chosen shall hold office until the new annual meeting of
stockholders.
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Section 2.4 Regular Meetings. Regular meetings of the Board of
----------- ----------------
Directors shall be held at such place or places, on such date or dates, and at
such time or times as shall have been established by the Board of Directors and
publicized among all directors. A notice of each regular meeting shall not be
required.
Section 2.5 Special Meetings. Special meetings of the Board of
----------- ----------------
Directors may be called by one-third of the directors then in office (rounded up
to the nearest whole number) or by the chief executive officer and shall be held
at such place, on such date, and at such time as they or he or she shall fix.
Notice of the place, date, and time of each such special meeting shall be given
each director by whom it is not waived by mailing written notice not fewer than
five (5) days before the meeting or by telegraphing or personally delivering the
same not fewer than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
Section 2.6 Quorum. At any meeting of the Board of Directors, a
----------- ------
majority of the total number of authorized directors shall constitute a quorum
for all purposes. If a quorum shall fail to attend any meeting, a majority of
those present may adjourn the meeting to another place, date, or time, without
further notice or waiver thereof.
Section 2.7 Participation in Meetings by Conference Telephone. Members
----------- -------------------------------------------------
of the Board of Directors, or of any committee thereof, may participate in a
meeting of such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and such participation shall constitute presence in
person at such meeting.
Section 2.8 Conduct of Business. At any meeting of the Board of
----------- -------------------
Directors, business shall be transacted in such order and manner as the Board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise provided herein or
requited by law. Action may be taken by the Board of Directors without a
meeting if all members thereof consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors.
Section 2.9 Powers. The Board of Directors may, except as otherwise
----------- ------
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation, including, without limiting the
generality of the foregoing, the unqualified power:
(a) To declare dividends from time to time in accordance with
law;
(b) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(c) To authorize the creation, making and issuance, in such form
as it may determine, of written obligations of every kind, negotiable or non-
negotiable, secured or unsecured, and to do all things necessary in connection
therewith;
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(d) To remove any officer of the Corporation with or without
cause, and from time to time to devolve the powers and duties of any officer
upon any other person for the time being;
(e) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
(f) To adopt from time to time such stock, option, stock
purchase, bonus or other compensation plans for directors, officers, employees
and agents of the Corporation and its subsidiaries as it may determine;
(g) To adopt from time to time such insurance, retirement, and
other benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and
(h) To adopt from time to time regulations, not inconsistent
with these bylaws, for the management of the Corporation's business and affairs.
Section 2.10 Compensation of Directors. Directors, as such, may
------------ -------------------------
receive, pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the Board of Directors.
Section 2.11 Nomination of Director Candidates. Subject to the rights of
------------ ---------------------------------
holders of any class or series of Preferred Stock then outstanding, nominations
for the election of Directors may be made by the Board of Directors or a proxy
committee appointed by the Board of Directors or by any stockholder entitled to
vote in the election of Directors generally. However, any stockholder entitled
to vote in the election of Directors generally may nominate one or more persons
for election as Directors at a meeting only if timely notice of such
stockholder's intent to make such nomination or nominations has been given in
writing to the Secretary of the Corporation. To be timely, a stockholder
nomination for a director to be elected at an annual meeting shall be received
at the Corporation's principal executive offices not less than 120 calendar days
in advance of the date that the Corporation's (or the Corporation's
Predecessor's) Proxy statement was released to stockholders in connection with
the previous year's annual meeting of stockholders, except that if no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than 30 calendar days from the date contemplated at the time of
the previous year's proxy statement, or in the event of a nomination for
director to be elected at a special meeting, notice by the stockholders to be
timely must be received not later than the close of business on the tenth day
following the day on which such notice of the date of the special meeting was
mailed or such public disclosure was made. Each such notice shall set forth: (a)
the name and address of the stockholder who intends to make the nomination and
of the person or persons to be nominated; (b) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to vote
for the election of Directors on the date of such notice and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (c) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons
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(naming such person or persons) pursuant to which the nomination or nominations
are to be made by the stockholder; (d) such other information regarding each
nominee proposed by such stockholder as would be required to be included in a
proxy statement filed pursuant to the proxy rules of the Securities and
Exchange Commission, had the nominee been nominated, or intended to be
nominated, by the Board of Directors; and (e) the consent of each nominee to
serve as a director of the Corporation if so elected.
In the event that a person is validly designated as a nominee in accordance
with this Section 2.11 and shall thereafter become unable or unwilling to
stand for election to the Board of Directors, the Board of Directors or the
stockholder who proposed such nominee, as the case may be, may designate a
substitute nominee upon delivery, not fewer than five days prior to the date of
the meeting for the election of such nominee, of a written notice to the
Secretary setting forth such information regarding such substitute nominee
as would have been required to be delivered to the Secretary pursuant to
this Section 2.11 had such substitute nominee been initially proposed as a
nominee. Such notice shall include a signed consent to serve as a director of
the Corporation, if elected, of each such substitute nominee.
If the chairman of the meeting for the election of Directors determines
that a nomination of any candidate for election as a Director at such meeting
was not made in accordance with the applicable provisions of this Section
2.11, such nomination shall be void; provided, however, that nothing in this
Section 2.11 shall be deemed to limit any voting rights upon the occurrence
of dividend arrearages provided to holders of Preferred Stock pursuant to the
Preferred Stock designation for any series of Preferred Stock.
ARTICLE III
COMMITTEES
Section 3.1 Committees of the Board of Directors. The Board of
----------- ------------------------------------
Directors, by a vote of a majority of the whole Board, may from time to time
designate committees of the Board, with such lawfully delegable powers and
duties as it thereby confers, to serve at the pleasure of the Board and shall,
for those committees and any others provided for herein, elect a director or
directors to serve as the member or members, designating, if it desires, other
directors as alternate members who may replace any absent or disqualified member
at any meeting of the committee. Any committee so designated may exercise the
power and authority of the Board of Directors to declare a dividend, to
authorize the issuance of stock or to adopt a certificate of ownership and
merger pursuant to Section 253 of the Delaware General Corporation Law if
the resolution which designates the committee or a supplemental resolution of
the Board of Directors shall so provide. In the absence or disqualification of
any member of any committee and any alternate member in his place, the member or
members of the committee present at the meeting and not disqualified from
voting, whether or not he or she or they constitute a quorum, may by unanimous
vote appoint another member of the Board of Directors to act at the meeting in
the place of the absent or disqualified member.
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Section 3.2 Conduct of Business. Each committee may determine the
----------- -------------------
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings; one-
third of the authorized members shall constitute a quorum unless the committee
shall consist of one or two members, in which event one member shall constitute
a quorum; and all matters shall be determined by a majority vote of the members
present. Action may be taken by any committee without a meeting if all members
thereof consent thereto in writing, and the writing or writings are filed with
the minutes of the proceedings of such committee.
ARTICLE IV
OFFICERS
Section 4.1 Generally. The officers of the Corporation shall consist of
----------- ---------
a President, one or more Vice Presidents, a Secretary and a Treasurer. The
Corporation may also have, at the discretion of the Board of Directors, a
Chairman of the Board and such other officers as may from time to time be
appointed by the Board of Directors. Officers shall be elected by the Board of
Directors, which shall consider that subject at its first meeting after every
annual meeting of stockholders. Each officer shall hold office until his or her
successor is elected and qualified or until his or her earlier resignation or
removal. The Chairman of the Board, if there shall be such an officer, and the
President shall each be members of the Board of Directors. Any number of offices
may he held by the same person.
Section 4.2 Chairman of the Board. The Chairman of the Board, if there
----------- ---------------------
shall be such an officer, shall, if present, preside at all meetings of the
Board of Directors, and exercise and perform such other powers and duties as may
be from time to time assigned to him by the Board of Directors or prescribed by
these bylaws.
Section 4.3 President. The President shall be the chief executive
----------- ---------
officer of the Corporation. Subject to the provisions of these bylaws and to
the direction of the Board of Directors, he or she shall have the responsibility
for the general management and control of the business and affairs of the
Corporation and shall perform all duties and have all powers which are commonly
incident to the office of chief executive or which are delegated to him or her
by the Board of Directors. He or she shall have power to sign all stock
certificates, contracts and other instruments of the Corporation which are
authorized and shall have general supervision and direction of all of the other
officers, employees and agents of the Corporation.
Section 4.4 Vice President. Each Vice President shall have such powers
----------- --------------
and duties as may be delegated to him or her by the Board of Directors. One
Vice President shall be designated by the Board to perform the duties and
exercise the powers of the President in the event of the President's absence or
disability.
Section 4.5 Treasurer. Unless otherwise designated by the Board of
----------- ---------
Directors, the Chief Financial Officer of the Corporation shall be the
Treasurer. The Treasurer shall have the
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responsibility for maintaining the financial records of the Corporation and
shall have custody of all monies and securities of the Corporation. He or she
shall make such disbursements of the funds of the Corporation as are authorized
and shall render from time to time an account of all such transactions and of
the financial condition of the Corporation. The Treasurer shall also perform
such other duties as the Board of Directors may from time to time prescribe.
Section 4.6 Secretary. The Secretary shall issue all authorized
----------- ---------
notices for, and shall keep, or cause to be kept, minutes of all meetings of the
stockholders, the Board of Directors, and all committees of the Board of
Directors. He or she shall have charge of the corporate books and shall perform
such other duties as the Board of Directors may from time to time prescribe.
Section 4.7 Delegation of Authority. The Board of Directors may from
----------- -----------------------
time to time delegate the powers or duties of any officer to any other officers
or agents, notwithstanding any provision hereof.
Section 4.8 Removal. Any officer of the Corporation may be removed at
----------- -------
any time, with or without cause, by the Board of Directors.
Section 4.9 Action With Respect to Securities of Other Corporations.
----------- -----------------------------------------------------------
Unless otherwise directed by the Board of Directors, the President or any
officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
ARTICLE V
STOCK
Section 5.1 Certificates of Stock. Each stockholder shall be entitled
----------- ---------------------
to a certificate signed by, or in the name of the Corporation by, the President
or a Vice President, and by the Secretary or an Assistant Secretary, or
the Treasurer or an Assistant Treasurer, certifying the number of shares owned
by him or her. Any of or all the signatures on the certificate may be facsimile.
Section 5.2 Transfers of Stock. Transfers of stock shall be made only
----------- ------------------
upon the transfer books of the Corporation kept at an office of the Corporation
or by transfer agents designated to transfer shares of the stock of the
Corporation. Except where a certificate is issued in accordance with Section
4 of Article V of these bylaws, an outstanding certificate for the number of
shares involved shall be surrendered for cancellation before a new certificate
is issued therefor.
Section 5.3 Record Date. The Board of Directors may fix a record date,
----------- -----------
which shall not be more than sixty (60) nor fewer than ten (10) days before the
date of any meeting of stockholders, nor more than sixty (60) days prior to the
time for the other action hereinafter
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described, as of which there shall be determined the stockholders who are
entitled: to notice of or to vote at any meeting of stockholders or any
adjournment thereof; to receive payment of any dividend or other distribution or
allotment of any rights; or to exercise any rights with respect to any change,
conversion or exchange of stock or with respect to any other lawful action.
Section 5.4 Lost, Stolen or Destroyed Certificates. In the event of the
----------- --------------------------------------
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds of indemnity.
Section 5.5 Regulations. The issue, transfer, conversion and
----------- -----------
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE VI
NOTICES
Section 6.1 Notices. Except as otherwise specifically provided herein
----------- -------
or required by law, all notices required to be given to any stockholder,
director, officer, employee or agent shall be in writing and may in every
instance be effectively given by hand delivery to the recipient thereof, by
depositing such notice in the mails, postage paid, or by sending such notice by
prepaid telegram, mailgram, telecopy or commercial courier service. Any such
notice shall be addressed to such stockholder, director, officer, employee or
agent at his or her last known address as the same appears on the books of the
Corporation. The time when such notice shall be deemed to be given shall be the
time such notice is received by such stockholder, director, officer, employee or
agent, or by any person accepting such notice on behalf of such person, if hand
delivered, or the time such notice is dispatched, if delivered through the mails
or be telegram or mailgram.
Section 6.2 Waivers. A written waiver of any notice, signed by a
----------- -------
stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Facsimile Signatures. In addition to the provisions for use
----------- --------------------
of facsimile signatures elsewhere specifically authorized in these bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
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Section 7.2 Corporate Seal. The Board of Directors may provide a
----------- --------------
suitable seal, containing the name of the Corporation, which seal shall be in
the charge of the Secretary. If and when so directed by the Board of
Directors or a committee thereof, duplicates of the seal may be kept and used by
the Treasurer or by an Assistant Secretary or Assistant Treasurer.
Section 7.3 Reliance Upon Books, Reports and Records. Each director,
----------- ----------------------------------------
each member of any committee designated by the Board of Directors, and each
officer of the Corporation shall, in the performance of his duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation, including reports made to the Corporation by any of its
officers, by an independent certified public accountant, or by an appraiser
selected with reasonable care.
Section 7.4 Fiscal Year. The fiscal year of the Corporation shall be as
----------- -----------
fixed by the Board of Directors.
Section 7.5 Time Periods. In applying any provision of these bylaws
----------- ------------
which require that an act be done or not done a specified number of days prior
to an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 8.1 Right to Indemnification. Each person who was or is made a
----------- ------------------------
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative, is or was a director, officer or employee of
the Corporation or is or was serving at the request of the Corporation as a
director, officer or employee of another corporation, or of a Partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer or employee or in any other capacity
while serving as a director, officer or employee, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by Delaware Law, as
the same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than said Law permitted the Corporation
to provide prior to such amendment) against all expenses, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties,
amounts paid or to be paid in settlement and amounts expended in seeking
indemnification granted to such person under applicable law, this bylaw or any
agreement with the Corporation) reasonably incurred or suffered by such person
in connection therewith and such indemnification shall continue as to a person
who has ceased to be a director, officer or employee and shall inure to the
benefit of his or her heirs, executors and administrators; provided, however,
-------- -------
that, except as provided in Section 8.2 of this Article VIII, the
Corporation shall indemnify any such person seeking indemnity in connection
11
<PAGE>
with an action, suit or proceeding (or part thereof) initiated by such person
only if (a) such indemnification is expressly required to be made by law, (b)
the action, suit or proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation, (c) 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, or (d) the action, suit
or proceeding (or part thereof) is brought to establish or enforce a right to
indemnification under an indemnity agreement or any other statute or law or
otherwise as required under Section 145 of the Delaware General Corporation Law.
Such right shall be a contract right and shall include the right to be paid by
the Corporation expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that, unless the Delaware General
-------- -------
Corporation Law then so prohibits, the payment of such expenses incurred by a
director or officer of the Corporation in his or her capacity as a director or
officer (and not in any other capacity in which service was or is tendered by
such person while a director or officer, including, without limitation. service
to an employee benefit plan) in advance of the final disposition of such
proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it should be determined ultimately that such director or officer
is not entitled to be indemnified under this Section or otherwise.
Section 8.2 Right of Claimant to Bring Suit. If a claim under Section
----------- -------------------------------
8.1 of this Article VIII is not paid in full by the Corporation within ninety
(90) days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if such suit is not frivolous or
brought in bad faith, the claimant shall be entitled to be paid also the expense
of prosecuting such claim. The burden of proving such claim shall be on the
claimant. It shall be a defense to any such action (other then an action brought
to enforce a claim for expenses incurred in defending any proceeding in advance
of its final disposition where the required undertaking, if any, has been
tendered to this Corporation) that the claimant has not met the standards of
conduct which 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 he or she 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 8.3 Non-Exclusivity of Rights. The rights conferred on any
----------- -------------------------
person in Sections 8.1 and 8.2 shall not be exclusive of any other right which
such persons may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 8.4 Indemnification Contracts. The Board of Directors is
----------- -------------------------
authorized to enter into a contract with any director, officer, employee or
agent of the Corporation, or any person serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans,
12
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providing for indemnification rights equivalent to or, if the Board of Directors
so determines, greater than, those provided for in this Article VIII.
Section 8.5 Insurance. The Corporation shall maintain insurance to the
----------- ---------
extent reasonably available, at its expense, to protect itself and any such
director, officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the Delaware
General Corporation Law.
Section 8.6 Effect of Amendment. Any of Amendment Any amendment, repeal
----------- -------------------
or modification of any provision of this Article VIII by the stockholders and
the directors of the Corporation shall not adversely affect any right or
protection of a director or officer of the Corporation existing at the time of
such amendment, repeal or modification.
ARTICLE IX
AMENDMENTS
Section 9.1 Amendment of Bylaws. The Board of Directors is expressly
----------- -------------------
empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption,
amendment or repeal of Bylaws of the Corporation by the Board of Directors shall
require the approval of a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any resolution providing for adoption, amendment or repeal is
presented to the Board). The stockholders shall also have power to adopt, amend
or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of
Bylaws of the Corporation by the stockholders shall require, in addition to any
vote of the holders of any class or series of stock of the Corporation required
by law or by the Certificate of Incorporation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class.
13
<PAGE>
CERTIFICATE OF SECRETARY
------------------------
I hereby certify that I am the duly elected and acting Secretary of
Power Integrations Delaware Corporation, a Delaware corporation (the
"Corporation"), and that the foregoing Bylaws, comprising thirteen (13) pages,
constitute the Bylaws of the Corporation as duly adopted at a meeting of the
Board of Directors of the Corporation on ______________, 1997.
IN WITNESS WHEREOF, I have hereunto subscribed my name on _______________,
1997.
______________________________
Robert G. Staples
14
<PAGE>
EXHIBIT 4.1
FIFTH
AMENDED AND RESTATED
RIGHTS AGREEMENT
----------------
THIS FIFTH AMENDED AND RESTATED RIGHTS AGREEMENT is entered into as of the
27th day of April 1995, by and among Power Integrations, Inc., a California
corporation (the "Company"), the undersigned holders of common stock of the
Company (the "Common Shareholders"), the undersigned holders of Preferred Stock
of the Company (the "Preferred Shareholders") and the undersigned purchasers of
Series F Preferred Stock (the "Purchasers").
RECITALS:
--------
A. The Company, the Common Shareholders and the Preferred Shareholders
are parties to that certain Fourth Amended and Restated Rights Agreement dated
as of March 11, 1994, as amended (the "Prior Rights Agreement"), pursuant to
which the Common Shareholders, the holders of outstanding shares of Series A
Preferred Stock of the Company, the holders of outstanding shares of Series B
Preferred Stock of the Company, the holders of outstanding shares of or warrants
to purchase Series C Preferred Stock of the Company, the holders of outstanding
shares of Series D Preferred Stock of the Company, and the holders of
outstanding shares of Series E Preferred Stock of the Company (the "Prior
Holders") have been granted by the Company certain registration rights (the
"Prior Registration Rights") and a right of first refusal (the "Right of First
Refusal") and pursuant to which certain of the Prior Holders have agreed as to
the voting of their shares of the Company with respect to the number of
authorized directors of the Company and the election of certain designees to the
Company's Board of Directors.
B. The Company and the Purchasers are entering into a Series F Preferred
Stock Purchase Agreement (the "Series F Agreement") of even date herewith
pursuant to which the Company is selling and issuing up to 9,091,000 shares of
Series F Preferred Stock and, in connection therewith, the parties hereto desire
that (i) the Prior Rights Agreement be forever waived and terminated and be
superseded and replaced in its entirety by this Agreement; (ii) the Company
grant the parties certain registration rights and rights of first refusal as set
forth herein; (iii) the Common Shareholders, the Preferred Shareholders and the
Purchasers enter into the voting agreements set forth herein; and (iv) all such
rights be conformed and coordinated upon the terms hereinafter set forth. The
outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock, all
shares of Series C Preferred Stock issuable upon exercise of any outstanding
warrant to purchase Series C Preferred Stock, and the shares of Series F
Preferred Stock to be issued pursuant to the Series F Agreement are hereinafter
collectively referred to as the "Preferred Shares".
1
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C. The Company has agreed to grant to two equipment lessors, the
placement agent for its March 1994 Series E Preferred Stock financing, and a
bank certain registration rights, in the case of one lessor, with respect to
shares of Common Stock issuable upon exercise of warrants held by such lessor,
and in the case of the other lessor, the placement agent and the bank, with
respect to shares of Common Stock issuable upon conversion of shares of
Preferred Stock issuable upon exercise of warrants held by them.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and covenants herein contained, the parties hereby agree as follows:
1. Waiver and Termination of Prior Rights and Prior Voting Agreement.
-----------------------------------------------------------------
(a) Upon the execution and delivery of this Agreement by the Company
and the holders of more than 50% of the Registrable Securities (as that term is
defined in the Prior Rights Agreement and not as defined in Section 2 below),
Section 2 of the Prior Rights Agreement shall be terminated and shall be of no
further force and effect. Each holder of Registrable Securities (as that term
is defined in the Prior Rights Agreement) who has not executed and delivered
this Agreement (including without limitation Comdisco, Inc. and MMC/GATX
Partnership No. 1) shall be entitled to all rights of a Holder hereunder as if
such holder of Registrable Securities had executed and delivered this Agreement,
and the only registration rights of the Prior Holders (and any other holders of
such Registrable Securities) shall be as set forth in this Agreement.
(b) Upon the execution and delivery of this Agreement by the Company
and holders of more than 50% of the outstanding Preferred Shares held by the
Prior Holders having rights under Section 3 of the Prior Rights Agreement and
more than 50% of the Company's stock held by the Common Shareholders, all rights
under Section 3 of the Prior Rights Agreement of all of the Common Shareholders
and all of the Prior Holders (and all other persons, if any, having rights under
Section 3 of the Prior Rights Agreement), including (i) the right to buy shares
of Series F Preferred Stock issuable under the Series F Agreement (or the
securities issuable upon conversion thereof), and (ii) any right to acquire a
warrant issued to Imperial Bank in connection with its establishment of a
secured line of credit for the Company (or the Imperial Warrant Shares or the
securities issuable upon conversion thereof), shall be waived and terminated and
shall be of no further force and effect. Each Prior Holder who has not executed
and delivered this Agreement shall be entitled to all rights of a Prior Holder
hereunder as if such person had executed this Agreement and the only right of
first refusal of the Prior Holders and the Common Shareholders shall be as set
forth in this Agreement.
(c) Upon the execution and delivery of this Agreement by the Company
and holders of more than 50% of the outstanding Series A Preferred Stock,
2
<PAGE>
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock of the Company and the holders of more than 50% of the
Company's stock held by the Common Shareholders, the terms of Section 4 of the
Prior Rights Agreement shall be terminated and superseded in their entirety by
Section 4 of this Agreement.
2. Registration Rights.
-------------------
2.1 Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following respective meanings:
(a) "Commission" shall mean the Securities and Exchange
----------
Commission or any other federal agency at the time administering the Securities
Act.
(b) "Exchange Act" shall mean the Securities Exchange Act of
------------
1934, as amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
(c) "Holder" shall mean any holder of Registrable Securities
------
which have not been sold to the public.
(d) "Initiating Holders" shall mean any Holder or Holders who in
------------------
the aggregate are Holders of not less than 35% of the aggregate of the
Registrable Securities.
(e) "Securities Act" shall mean the Securities Act of 1933, as
--------------
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
(f) "Registrable Securities" means (i) any shares of common
----------------------
stock of the Company issued or issuable upon conversion of the Preferred Shares,
(ii) shares of common stock of the Company issuable upon exercise of warrants
dated July 31, 1989 and June 8, 1988 issued to Comdisco, Inc. (the "Comdisco
Warrant Shares"), (iii) shares of common stock of the Company issuable upon
conversion of the shares of Series D Preferred Stock and Series E Preferred
Stock issuable upon exercise of warrants dated December 29, 1993 and December
27, 1994 issued to MMC/GATX Partnership No. 1 (the "MMC/GATX Warrant Shares"),
(iv) for purposes of all of Section 2 of this Agreement other than subsection
2.3 ("The Company Registration"), shares of common stock of the Company issuable
upon conversion of a total of 132,120 shares of Series E Preferred Stock
issuable upon exercise of warrants dated March 11, 1994 issued to Brean Murray,
Foster Securities, Inc. and related persons (the "BMFSI Warrant Shares"), (v)
for purposes of all of Section 2 of this Agreement other than subsection 2.2
("Requested Registrations") and subsection 2.4 ("Form S-3"), shares of common
stock of the Company issuable upon
3
<PAGE>
conversion of the shares of Series E Preferred Stock or Series F Preferred Stock
issuable upon exercise of a warrant dated February 27, 1995 issued to Imperial
Bank (the "Imperial Warrant Shares"), and (vi) any shares of common stock of the
Company issued as (or issuable upon the exercise or conversion of any warrant,
right or other security which is issued as) a dividend or other distribution
with respect to or in replacement of the Preferred Shares, the Comdisco Warrant
Shares, the MMC/GATX Warrant Shares, the BMFSI Warrant Shares (subject to the
limitations set forth above), the Imperial Warrant Shares (subject to the
limitations set forth above), or common stock issued upon conversion of the
Preferred Shares.
(g) The terms "register", "registered" and "registration" refer
-------- ---------- ------------
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
(h) "Registration Expenses" shall mean all expenses incurred or
---------------------
assumed by the Company in complying with Section 2 hereof, including, without
limitation, all registration, qualification and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, reasonable fees
and disbursements of one special counsel for the Holders for each such
registration, blue sky fees and expenses and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company and excluding the fees of counsel other than one special counsel for the
Holders).
(i) "Selling Expenses" shall mean all underwriting discounts and
----------------
selling commissions applicable to the sale of the Registrable Securities and all
fees and expenses of legal counsel for a Holder, other than the special counsel
referred to in section 2.1(h) above.
2.2 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive
------------------------
from the Initiating Holders a written request that the Company effect any
registration with respect to at least 25% of the Registrable Securities
(provided that all securities to be included in the offering, including all
shares included by the Company, shall have an aggregate proposed offering price
to the public of at least $5,000,000) the Company will:
(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its diligent best efforts
to effect all such registrations, qualifications, or compliances (including,
without
4
<PAGE>
limitation, the execution of an undertaking to file post-effective amendments,
appropriate qualification under applicable blue sky or other state securities
laws and appropriate compliance with applicable requirements or regulations) as
may be so requested and as would permit or facilitate the sale and distribution
of all or such portion of such Registrable Securities as are specified in such
request, together with all or such portion of the Registrable Securities of any
Holder or Holders joining in such request as are specified in a written request
received by the Company within fifteen (15) business days after such written
notice from the Company is given; provided that the Company shall not be
obligated to take any action to effect any such registration, qualification or
compliance pursuant to this subsection 2.2:
(A) Prior to six (6) months after the effective date of the
Company's first registered offering to the general public of its securities for
its own account;
(B) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(C) After the Company has effected two (2) such
registrations pursuant to this subsection 2.2, which have been declared or
ordered effective and the securities offered pursuant to such registrations have
been sold; or
(D) Within one (1) year of the effective date of a prior
registration effected pursuant to this subsection 2.2 or within six (6) months
of the effective date of a prior registration effected pursuant to subsection
2.3 or 2.4.
Subject to the foregoing clauses the Company shall file a registration
statement as soon as practicable after receipt of the request or requests of the
Initiating Holders but in any event within ninety (90) days of receipt of such
request; provided, however, that if the Company shall furnish to such Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company it would be seriously
detrimental to the Company and its shareholders for such registration statement
to be filed on or before the date filing would be required and it is therefore
essential to defer the filing of such registration statement, the Company shall
have the right to defer such filing for a single additional period of not more
than one hundred eighty (180) days after receipt of the request of the
Initiating Holders.
(b) Underwriting. If the Initiating Holders intend to distribute the
------------
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this
5
<PAGE>
subsection 2.2 and the Company shall include such information in the written
notice referred to in subsection 2.2(a)(i). In such event, the Company shall
select a nationally-recognized underwriter or underwriters (the "Underwriter"),
reasonably acceptable to a majority in interest of the Initiating Holders, with
regard to the underwriting of such requested registration. The right of any
Holder to registration pursuant to subsection 2.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. The
Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the Underwriter. Notwithstanding any other provision of this
subsection 2.2, if the Underwriter advises the Initiating Holders in writing
that marketing factors require a limitation of the number of shares to be
underwritten, the Initiating Holders shall so advise all Holders, and the number
of shares of Registrable Securities that may be included in the registration and
underwriting shall be allocated among all Holders thereof in proportion, as
nearly as practicable, as the respective amounts of Registrable Securities held
by such Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the Underwriter's
marketing limitation shall be included in such registration.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the Underwriter and the Initiating Holders. The Registrable
Securities and/or other securities so withdrawn shall also be withdrawn from
registration; provided, however, that, if by the withdrawal of such Registrable
Securities a greater number of Registrable Securities held by other Holders may
be included in such registration (up to the maximum of any limitation imposed by
the Underwriter), then the Company shall offer to all Holders who have included
Registrable Securities in the registration the right to include additional
Registrable Securities in the same proportion used in determining the
underwriter limitation in this subsection 2.2.
If the Underwriter has not limited the number of Registrable Securities to
be underwritten, the Company may, and employees and other holders of the
Company's Common Stock may, include securities for their own accounts (with such
shareholders who have rights to "piggyback" on the registration being given
first priority to include their shares) in such registration if the Underwriter
so agrees and if the number of Registrable Securities which would otherwise have
been included in such registration and underwriting will not thereby be limited.
However, nothing herein shall be interpreted as granting any registration rights
to any person who is not a party to this Agreement or expressly granted such
rights, even though not a party to this Agreement in Section 2.
6
<PAGE>
2.3 The Company Registration.
------------------------
(a) If at any time or from time to time, the Company shall
determine to register any of its securities, other than (i) a registration
relating solely to employee benefit plans on Form S-1, S-8 or similar forms
which may be promulgated in the future, or (ii) a registration on Form S-4 or
similar forms which may be promulgated in the future relating solely to a
Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof;
and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within thirty (30) days after receipt of such written notice
from the Company, by any Holder or Holders, except as set forth in subsection
2.3(b).
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an the Company shall so
advise the Holders as a part of the written notice given pursuant to subsection
2.3(a)(i). In such event the right of any Holder to registration pursuant to
this subsection 2.3 shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Registrable Securities in
the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other shareholders, if any, distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the Underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this subsection 2.3, after the first sale
by the Company of its securities to the public in a firmly underwritten public
offering (from which offering any or all shares of Registrable Securities and
other shareholders' securities may be excluded by the Underwriter if the
Underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten), if the Underwriter determines that marketing
factors require a limitation of the number of shares to be underwritten, the
Underwriter may limit the amount of securities to be included in the
registration and underwriting by the Company's shareholders; provided, however,
the number of shares to be included in such registration and underwriting by the
Holders and other shareholders possessing registration rights shall not be
reduced to less than 20% of the aggregate securities included therein without
the prior written consent of all of such shareholders requesting inclusion of
their shares therein. The number of shares that may be included in the
registration and underwriting shall be allocated first among the Holders in
proportion to the number of Registrable Securities then held by each, and
thereafter among all other shareholders in proportion, as nearly as
7
<PAGE>
practicable, to the respective amounts of securities entitled to inclusion in
such registration held by such shareholders at the time of filing of the
registration statement. If any such shareholder disapproves of the terms of any
such underwriting, he may elect to withdraw therefrom by written notice to the
Company and the Underwriter. Any Registrable Securities excluded or withdrawn
from such underwriting shall be excluded from such registration.
2.4 Form S-3. After the Company has qualified for the use of Form S-3
--------
or a successor form, Holders of Registrable Securities shall have, in addition
to the rights set forth in subsection 2.2 above, the right to request an
unlimited number of registrations on Form S-3 (such requests shall be made by
the Initiating Holders, shall be in writing and shall state the number of shares
of Registrable Securities to be disposed of and the intended method of
disposition of shares by such Holders), subject only to the following:
(1) The Company shall not be required to effect a registration
pursuant to this subsection 2.4 within one (1) year of the effective date of a
prior registration effected pursuant to subsections 2.2, 2.3 or 2.4.
(2) The Company shall not be required to effect a registration
pursuant to this subsection 2.4 unless the Holder or Holders requesting
registration propose to dispose of shares of Registrable Securities having an
aggregate price to the public (before deduction of underwriting discounts and
expenses of sale) of at least $1,000,000.
The Company shall give written notice to all Holders of Registrable
Securities of the receipt of a request for registration pursuant to this
subsection 2.4 and shall provide a reasonable opportunity for other Holders to
participate in the registration and in any event at least fifteen (15) days
after receipt of such notice by such Holders, provided that if the registration
is for an underwritten offering, the terms of subsection 2.2(b) shall apply to
all participants in such offering. Subject to the foregoing, the Company will
use its best efforts to effect promptly the registration of all shares of
Registrable Securities on Form S-3 to the extent requested by the Holder or
Holders thereof for purposes of disposition.
2.5 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to
subsections 2.2 or 2.3 or with respect to the first two registrations under
subsection 2.4 shall be borne by the Company; provided, however, that the
Registration Expenses for any registration proceeding begun pursuant to
subsection 2.2 or 2.4 and subsequently withdrawn by the Holders registering
shares therein, unless such withdrawal results from a material adverse change in
the Company which is not within the control of such Holders, shall be borne by
such Holders, unless the Holders holding a majority of the Registrable
Securities agree to
8
<PAGE>
forfeit their right to one demand registration pursuant to subsection 2.2 or
2.4, respectively. All Registration Expenses incurred in connection with any
registration, qualification or compliance pursuant to subsection 2.4 after two
registrations have been effected pursuant to subsection 2.4 shall be borne by
the Holders pro rata on the basis of the number of Registrable Securities
included by each in the registration. Unless otherwise stated, all other
Registration Expenses and all Selling Expenses relating to securities registered
by the Holders shall be borne by the Holders of such securities pro rata on the
basis of the number of Registrable Securities so registered.
2.6 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will, upon request, inform each Holder as to the status of each such
registration, qualification and compliance. At its expense the Company will:
(a) Keep such registration, and any qualification or compliance
under state securities laws which the Company determines to obtain, effective
for a period of one hundred eighty (180) days or until the Holder or Holders
have completed the distribution described in the registration statement relating
thereto, whichever first occurs;
(b) Furnish such number of prospectuses and other documents
incident thereto as a Holder from time to time may reasonably request;
(c) Supply to each Holder who is named in the prospectus and who
is or will be the beneficial owner of five percent (5%) or more of any class of
the Company's voting securities as of the effective date of the registration
statement, drafts of the registration statement for its review and each such
Holder shall have the right to approve the portions of the registration
statement which relate, either directly or indirectly, to such Holder, prior to
filing, provided that such approval is not to be unreasonably withheld;
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions; and
(e) Notify each Holder of Registrable Securities covered by such
registration statement, when a prospectus relating thereto is required to be
delivered under the Securities Act, at any time that the Company becomes aware
of the happening of any event as a result of which the prospectus included in
such registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to be stated therein
or necessary to
9
<PAGE>
make the statements therein not misleading in the light of the circumstances
then existing.
2.7 Delay of Registration. No Holder shall have any right to take any
---------------------
action to restrain, enjoin or otherwise delay any registration pursuant to
subsection 2.3 hereof as a result of any controversy that may arise with respect
to the interpretation or implementation of this Agreement.
2.8 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its
officers, directors, employees, partners, legal counsel and accountants, and
each person controlling such Holder within the meaning of Section 15 of the
Securities Act, with respect to which any registration, qualification or
compliance has been effected pursuant to this Agreement, and each underwriter,
if any, and each person who controls any underwriter within the meaning of
Section 15 of the Securities Act, against all expenses, claims, losses, damages
and liabilities (or action in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
other document, or any amendment or supplement thereof, incident to any such
registration, qualification or compliance, or based on 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 the
Company of any rule or regulation promulgated under the Securities Act, Exchange
Act or state securities laws applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each such Holder, each of its
officers, directors, employees, partners, legal counsel and accountants, and
each person controlling such Holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, 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
omission made in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by or on behalf of such
Holder or underwriter and stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors, officers, employees, partners, legal counsel and accountants,
each underwriter, if any, of the Company's securities covered by such a
registration statement, each person who
10
<PAGE>
controls the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers, directors,
employees, partners, legal counsel and accountants, and each person controlling
such Holder within the meaning of Section 15 of the Securities Act, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement of a material fact contained in any such
registration statement, prospectus, offering circular or other document, or any
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Holders, such directors, officers, employees, partners, legal
counsel, accountants, persons, underwriters or control persons for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent that such untrue statement or 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 an instrument duly executed by or on behalf of such Holder and stated
to be specifically for use therein. Notwithstanding the foregoing, in no event
shall a Holder be liable for any such claims, losses, damages, or liabilities in
excess of the proceeds, net of underwriting discounts and commissions, received
by such Holder in the offering, except in the event of intentional fraud by such
Holder.
(c) Each party entitled to indemnification under this subsection
2.8 (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, provided
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this
Agreement, unless such failure is prejudicial to the Indemnifying Party in
defending such claim or litigation. The Indemnified party shall permit the
Indemnifying Party to assume the defense of any such claim or any litigation
resulting therefrom, provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be approved by the
Indemnified Party (whose approval shall not unreasonably be withheld), and the
Indemnified Party may participate in such defense at such party's expense
provided that if the named parties to a proceeding include both the Indemnified
Party and the Indemnifying Party and representation of both parties would be
inappropriate due to actual different interests between them, then the
Indemnified Party may retain its own counsel (who is reasonably satisfactory to
the Indemnifying Party) at the Indemnifying Party's expense, but, despite the
foregoing, an Indemnifying Party will have no obligation in any proceeding or
related proceedings to pay for more than one additional counsel for all
Indemnified Parties. 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 or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified
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<PAGE>
Party of a release from all liability in respect to such claim or litigation.
Subject to the foregoing, the Indemnifying Party shall promptly advance all
expenses incurred by the Indemnified party in connection with the investigation
and defense of any claim as to which indemnity may be sought pursuant to this
Agreement after written request therefor (but no earlier than incurred) by the
Indemnified Party to the Indemnifying Party. The Indemnified Party shall repay
such amounts advanced if and to the extent that it is ultimately determined that
the Indemnified Party is not entitled to indemnification or contribution under
this Agreement.
(d) If the indemnification provided for in this subsection 2.8
is held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party thereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined 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.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall be controlling.
2.9 Lockup Agreement. In consideration for the Company agreeing to
----------------
its obligations under this Section 2, each Holder of one percent (1%) or more of
the Company's voting securities agrees in connection with the initial
registration of the Company's securities, upon the request of the Company or the
Underwriter, not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any Registrable Securities (other than
those included in the registration) without the prior written consent of the
Company or Underwriter, as the case may be, for a period of 120 days after the
effective date of such registration; provided, however, that such Holder shall
have no obligation to enter into the agreement described herein unless all
executive officers, directors and other 1% shareholders of the Company enter
into similar agreements.
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2.10 Information by Holder. As a condition to the inclusion of their
---------------------
Registrable Securities, the Holder or Holders of Registrable Securities included
in any registration shall furnish to the Company such information regarding such
Holder or Holders and the distribution proposed by such Holder or Holders as the
Company may reasonably request in writing and as shall be required in connection
with any registration, qualification or compliance referred to in subsections
2.2, 2.3 or 2.4 of this Agreement.
2.11 Rule 144 Reporting. With a view to making available to the
------------------
Holders the benefits of certain rules and regulations of the Commission which at
any time permit the sale of the Registrable Securities to the public without
registration, the Company agrees to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the effective date of the first registration statement under the
Securities Act filed by the Company for an offering of its securities to the
general public;
(b) Use its best efforts to then file with the Commission 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);
(c) So long as a Holder owns any unregistered Registrable
Securities, furnish to such Holder upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time after 90 days after 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 the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
of the Company as such Holder may reasonably request in availing itself of any
rule or regulation of the Commission allowing a Purchaser to sell any such
securities without registration.
2.12 Transfer of Registration Rights. Subject to any limitations on
-------------------------------
transfer of stock set forth in any written agreement between any of the Holders
and the Company, the rights to cause the Company to register their Registrable
Securities granted to the Holders by the Company under subsections 2.2, 2.3 and
2.4 may be assigned by a Holder (i) to an affiliate of the Holder (including any
Partner of a Holder) or (ii) to a transferee or assignee of at least 50,000
shares, as adjusted for any stock split, stock dividend or other
recapitalization, of the Holder's Registrable Securities; provided, that the
Company is given written notice by the Holder at the time of or within a
reasonable time after said transfer, stating the name and address
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<PAGE>
of said transferee or assignee and identifying the securities with respect to
which such registration rights are being assigned.
2.13 Termination of Registration Rights. The obligations of the
----------------------------------
Company pursuant to this Section 2 shall terminate ten years after the effective
date of the Company's first registered offering to the general public of its
securities.
2.14 Limitations on Subsequent Registration Rights. The Company may
---------------------------------------------
extend registration rights under this Agreement to future issuees of Equity
Securities (as hereinafter defined) which are exempt from the right of first
refusal set forth in Section 3 below by virtue of subsections 3.5(b) or (c)
below. The issuees of such Equity Securities may become parties to this
Agreement by execution of this Agreement or an addendum to this Agreement, as
required by the Company, without the consent of the Holders. Other than such
grants of registration rights, from and after the date of this Agreement, the
Company shall not, without the prior written consent of the Holders of a
majority of the outstanding Registrable Securities, enter into any agreement
with any holder or prospective holder of any securities of the Company which
would allow such holder or prospective holder (a) to include such securities in
any registration filed under Section 2.2 or 2.3 hereof, unless under the terms
of such agreement, such holder or prospective holder may include such securities
in any such registration only to the extent that the inclusion of his securities
will not reduce the amount of the Registrable Securities of the Holders which is
included or (b) to make a demand registration which could result in such
registration statement being declared effective prior to the date set forth in
subsection 2.2(a)(ii)(A). The Holders understand that the Company may grant
"piggyback" registration rights to officers, directors, employees and
consultants who purchase at least 100,000 shares of the Company's stock. Such
rights shall be subordinate to the rights granted herein and shall not result in
a reduction of the amount of Registrable Securities of the Holders that may be
included in a registration under this Agreement.
2.15 Amendment. Any modification, amendment, or waiver of this
---------
Section 2 or any provision hereof shall be in writing and executed by Holders
(as defined in subsection 2.1 hereof) of not less than a majority of the
Registrable Securities; provided, however, that no such modification, amendment
or waiver shall reduce the aforesaid percentage of Registrable Securities
without the consent of all of the Holders of the Registrable Securities.
3. Right of First Refusal.
----------------------
3.1 Subsequent Issuances, Right to Purchase. If, at any time prior to
---------------------------------------
the expiration of the period set forth in Section 3.7 below, the Company should
desire to issue any Equity Securities (as hereinafter defined), it shall give
each Purchaser, Prior Holder, Common Shareholder and Additional Shareholder (as
14
<PAGE>
defined below), who then owns at least 250,000 shares of the Company's common
stock (including all securities issued or issuable upon conversion of the
Preferred Shares or exchange of the Preferred Shares and as adjusted for stock
dividends, stock splits, recapitalizations and the like), the first right to
purchase the Purchaser's or such Prior Holder's, Common Shareholder's and
Additional Shareholder's pro rata share (or any part thereof) of all of such
Equity Securities on the same terms as the Company is willing to sell such
Equity Securities to any other person. Each of the Purchaser's or each Prior
Holder's, Common Shareholder's and Additional Shareholder's pro rata share of
the Equity Securities shall be equal to that percentage determined by dividing
(i) all shares of common stock of the Company owned by the Purchaser or such
Prior Holder, Common Shareholder and Additional Shareholder on the date of the
Company's written notification referred to in Section 3.2 below (including all
securities issued or issuable upon conversion of any shares of preferred stock
of the Company held by such person or issuable to such person upon exercise of
warrants held by such person and as adjusted for stock splits, stock dividends,
recapitalization and the like) by (ii) the "Fully Diluted" common stock of the
Company. For purposes of the prior sentence, the Fully Diluted common stock of
the Company shall include all outstanding common stock of the Company as
adjusted for stock dividends, stock splits, recapitalizations and the like, and
shall include all shares of common stock of the Company ultimately issuable upon
exercise, exchange and conversion of all outstanding securities of the Company
directly or indirectly exercisable or exchangeable or convertible into shares of
the Company's common stock (including, without limitation, all outstanding
options, warrants and shares of preferred stock). For purposes of this Section
3, the term "Additional Shareholder" shall mean any shareholder who then owns at
least 250,000 shares of the Company's common stock (including all securities
issuable upon conversion of the Company's preferred stock and as adjusted for
stock dividends, stock splits, recapitalizations and the like) and to whom the
Company has granted the right of first refusal set forth in this Section 3.
3.2 Notice. Prior to any sale or issuance by the Company of any
------
Equity Securities, the Company shall notify each of the Purchaser and each Prior
Holder, Common Shareholder and Additional Shareholder who qualifies under
Section 3.1 above in writing, of its intention to sell and issue such
securities, setting forth the terms under which it proposes to make such sale,
including the number of shares and the price therefor. Within twenty (20) days
after delivery of such notice, each of the Purchasers and each Prior Holder,
Common Shareholder and Additional Shareholder shall notify the Company whether
he or it will purchase his or its pro rata share (or any part thereof) of the
Equity Securities so offered.
3.3 Company's Right to Sell. If, within twenty (20) days after
-----------------------
delivery of aforesaid notice, the Purchasers, Prior Holders, Common Shareholders
and Additional Shareholders do not notify the Company that they desire, or
notify the Company that they do not desire, to purchase all of their pro rata
portion of the
15
<PAGE>
Equity Securities described in such notice upon the terms and conditions set
forth in such notice, the Company may, during a period of sixty (60) days
following the end of such twenty (20) day period, sell and issue such securities
as to which the Purchasers, Prior Holders, Common Shareholders and Additional
Shareholders do not indicate a desire to purchase to another person upon the
same terms and conditions as those set forth in the notice to the Purchasers,
the Prior Holders, Common Shareholders and Additional Shareholders. In the event
the Company has not sold the Equity Securities within said sixty (60) day
period, the Company shall not thereafter issue or sell any Equity Securities
without first offering such securities to the Purchasers, Prior Holders, Common
Shareholders and Additional Shareholders who qualify under Section 3.1 above in
the manner provided above.
3.4 Payment. If a Purchaser, Prior Holder, Common Shareholder or
-------
Additional Shareholder gives the Company notice that he or it desires to
purchase any of the Equity Securities offered by the Company, payment for the
Equity Securities shall be by check or wire transfer against delivery of the
securities at the closing for the sale of such Equity Securities.
3.5 Exceptions. The right of first refusal contained in this Section
----------
3 shall not apply to (a) the issuance by the Company of Equity Securities to
directors, officers, employees or consultants of the Company pursuant to any
employee stock option or stock purchase plan or agreement approved by the
Company's Board of Directors or the Compensation Committee thereof, (b) the
issuance by the Company of up to 500,000 shares of an existing or newly created
series of Preferred Stock having a purchase price per share greater than or
equal to $1.25 (appropriately adjusted for stock splits, stock dividends,
recapitalizations and the like) (c) the issuance by the Company of Equity
Securities in a transaction not covered under clause (a) or (b) above pursuant
to equipment leasing arrangements or other arrangements to acquire equipment or
other capital assets for use in the Company's operations approved by the
Company's Board of Directors, (d) the issuance of Equity Securities or any
Common shares upon conversion of any Preferred Shares, (e) the issuance by the
Company of Equity Securities for any consideration other than cash, cancellation
of indebtedness or services, (f) the issuance of Equity Securities in a public
offering registered under the Securities Act or in connection with a merger or
acquisition, (g) Equity Securities issued in connection with any stock split,
stock dividend or recapitalization or (h) the issuance of any shares upon
exercise of any outstanding warrants of the Company listed in Section 3.4 of the
Series F Agreement.
3.6 Termination Upon Decrease in Shares Held. The right of first
----------------------------------------
refusal contained in this Section 3 shall terminate as to a Purchaser or a Prior
Holder, Common Shareholder or Additional Shareholder when he or it, together
with his or its affiliates, ceases to own at least 250,000 shares of common
stock (calculated as provided in the first sentence of Section 3.1).
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3.7 Termination Upon Public Offering. The right of first refusal
--------------------------------
contained in this Section 3 shall terminate upon the closing of the issuance of
Equity Securities with an aggregate offering price of at least Five Million
Dollars ($5,000,000) in an underwritten public offering registered under the
Securities Act.
3.8 Definition of Equity Securities. The term "Equity Securities"
-------------------------------
mean (i) common stock, preferred stock, rights, options or warrants to purchase
common stock or preferred stock; or (ii) any security convertible into or
exchangeable for common stock or preferred stock.
3.9 Waivers and Amendments. With the written consent of the Company,
----------------------
the record or beneficial holders of a majority of the outstanding Preferred
Shares held by persons having rights under this Section 3 and the record or
beneficial owners of at least a majority of the Company's stock then owned by
the Common Shareholders and Additional Shareholders having rights under this
Section 3 (including in both cases any Common Stock or any and all securities
obtained upon conversion of the Preferred Shares or exchange of the Preferred
Shares or Common Stock and as adjusted for stock dividends, stock splits,
recapitalizations and the like), any provision of this Section 3 may be waived
(either generally or in a particular instance, either retroactively or
prospectively and either for a specified period of time or indefinitely), or
amended. Any waiver or amendment to which such consents are obtained will be
binding upon all holders having rights under this Section 3. Upon the
effectuation of each such waiver or amendment, the Company shall promptly give
written notice thereof to the record holders of the Preferred Shares and the
Common Shareholders and Additional Shareholders who have not previously received
notice thereof or consented thereto in writing. In addition, each holder, as to
such holder only, may consent in writing to any such waiver or amendment, which
will be binding upon such holder. No amendment or waiver to this Section 3 will
be effective unless agreed to in writing by the party against whom enforcement
is sought or, in the case of any holder, by such holder or holders of more than
the minimum amounts of shares described above in this Section 3.9.
3.10 Aggregation of Stock. All Preferred Shares and Common shares
--------------------
held or by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Section 3.
4. Voting Agreement.
----------------
4.1 Agreement. The Common Shareholders, the Preferred Shareholders
---------
and the Purchasers will use their best efforts to cause the Company's Board of
Directors to consist of seven directors. Each of the Common Shareholders, the
Preferred Shareholders (other than MagneTek, Inc. ("MagneTek")) and the
Purchasers agrees to vote his or its shares of the Company's stock to elect six
persons to the Board of Directors, four of whom shall be nominated by the
Preferred
17
<PAGE>
Shareholders owning a majority of the outstanding Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock taken together (including Common Stock issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock), and two
of whom shall be nominated by Common Shareholders owning a majority of the
Company's stock held by the Common Shareholders. The seventh authorized director
will be (i) elected by the holders of the Company's Series D Preferred Stock
pursuant to the Company's Articles of Incorporation or (ii) nominated pursuant
to Section 4.2 (a) below if the conditions to the effectiveness of Section 4.2
(a) pertain.
4.2 Alternate Voting Agreements.
---------------------------
(a) In the event of a conversion of all of the Preferred Shares
to Common Stock of the Company other than in consequence of the closing of the
issuance of equity securities with an aggregate offering price of at least Five
Million Dollars ($5,000,000) in an underwritten public offering registered under
the Securities Act, then for so long as MagneTek is a Qualified Purchaser within
the meaning of Section 6.1 of the Series D Preferred Stock Purchase Agreement
dated February 19, 1993 ("the Series D Agreement") the second sentence of
Section 4.1 above shall be deemed amended to read in full as follows:
MagneTek and each of the other Preferred Shareholders, Common
Shareholders, and Purchasers agree to vote his or its shares of the Company's
stock to elect seven persons to the Board of Directors, five of whom shall be
nominated by the Preferred Shareholders and Purchasers owning a majority of the
outstanding Common Stock issued upon conversion of the Series A Preferred Stock,
the Series B Preferred Stock, the Series C Preferred Stock, the Series D
Preferred Stock, the Series E Preferred Stock, and the Series F Preferred Stock,
and two of whom shall be nominated by Common Shareholders owning a majority of
the Company's stock held by the Common Shareholders.
(b) In the event that neither the provisions of Section 4.1 nor
Section 4.2 (a) are in effect and the holders of the Series D Preferred Stock,
voting separately a series, are not entitled to elect at least one director of
the Company pursuant to the provisions of the Company's Articles of
Incorporation, as amended, then, for so long as MagneTek is a Qualified
Purchaser within the meaning of Section 6.1 of the Series D Agreement, neither
the Company with any of the other Preferred Shareholders or the Purchasers nor
any of the other Preferred Shareholders or Purchasers with any of the other
Preferred Shareholders will enter into an agreement respecting the voting of the
Preferred Shareholders' or Purchasers' shares of the Company's Stock with
respect to the size of the Company's Board of Directors or the election or
nomination of persons to serve on the Company's Board of Directors without the
prior written consent of MagneTek. Despite the provisions of Section 4.4
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<PAGE>
below, the provisions of this Section 4.2 (b) cannot be waived, amended or
terminated without the prior written consent of MagneTek.
4.3 Termination of Agreement. The provisions of Sections 4.1 and 4.2
------------------------
(a) shall terminate upon termination of the right of first refusal pursuant to
Section 3.7.
4.4 Waivers and Amendments. With the written consent of the Company
----------------------
and the record or beneficial holders of a majority of the outstanding shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock,
and the record or beneficial owners of a majority of the Company's stock then
owned by the Common Shareholders (including in each case any Common Stock or any
and all securities obtained upon conversion of the Preferred Shares or exchange
of the Preferred Shares or Common Stock and as adjusted for stock dividends,
stock splits, recapitalization and the like), subject to the provisions of
Section 4.2 (b), any provision of this Section 4 may be waived (either generally
or in a particular instance, either retroactively or prospectively and either
for a specified period of time or indefinitely), or amended. Any waiver or
amendment to which such consents are obtained will be binding upon all holders
having rights under this Section 4. Upon the effectuation of each such waiver or
amendment, the Company shall promptly give written notice thereof to the record
holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock, and the Common Shareholders who have not previously received
notice thereof or consented thereto in writing. In addition, each holder, as to
such holder only, may consent in writing to any such waiver or amendment, which
will be binding upon such holder. No amendment or waiver to this Section 4 will
be effective unless agreed to in writing by the party against whom enforcement
is sought or, in the case of any holder, by such holder or, subject, in the case
of MagneTek, to Section 4.2(b) above, holders of more than the minimum amounts
of shares described above in this Section 4.4.
4.5 Common Shareholders. Notwithstanding any other provision of this
-------------------
Agreement, pursuant to Section 2.1.4 of an agreement dated as of April __, 1994
between Klas Eklund and the Company, Dr. Eklund will not be a "Common
Shareholder" for any purpose of Section 4 of this Agreement.
5. Governing Law. This Agreement shall be governed in all respects by the
-------------
laws of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within
California.
6. Successors and Assigns. Except as otherwise expressly provided herein,
----------------------
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
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7. Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement between the parties with regard to the subject
matter hereof and supersedes any and all prior agreements or understandings,
including, without limitation, the Prior Rights Agreement and any term sheets or
other summaries of proposed terms delivered to any party hereto.
8. Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be either mailed by air mail,
certified mail or registered mail, postage prepaid, or personally delivered by
courier, in each case addressed (a) if to a Purchaser, a Holder, Common
Shareholder, or Prior Holder, as the case may be, at such person's address set
forth in the records of the Company or at such other address as such person
shall have furnished to the Company in writing, or (b) if to the Company: Power
Integrations, Inc., 411 Clyde Avenue, Mountain View, California 94040,
Attention: President, or at such other address as the Company shall have
furnished to the parties in writing. If a Purchaser, a Holder, Common
Shareholder or Prior Holder has provided a facsimile transmission number to the
Company, the Company will also deliver any notice given to such person by
facsimile transmission to the facsimile transmission number provided by such
person.
9. Severability. If any provision of this Agreement, or the application
------------
thereof, is for any reason and to any extent determined by a court of competent
jurisdiction to be invalid or unenforceable, the remainder of this Agreement and
the application of such provision to other persons or circumstances will be
interpreted so as best to reasonably effect the intent of the parties hereto.
The parties agree to use their best efforts to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
which will achieve, to the extent greatest possible, the economic, business and
other purposes of the void or unenforceable provision.
10. Titles and Subtitles. The titles of the sections and subsections of
--------------------
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
11. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument. If any signatory executes a signature page to
this Agreement as a previous shareholder rather than as a new investor, or as a
new investor rather than as a previous shareholder, or in only one such
capacity when both are applicable, the signatory will be deemed for all purposes
to have executed and delivered a signature page to this Agreement in all
capacities applicable to such signatory.
20
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12. Effectiveness of Agreement. This Agreement, even if executed and
--------------------------
delivered by all of the parties hereto, shall be of no force and effect unless
the First Closing (as defined in the Series F Agreement) has occurred. No
person executing and delivering this Agreement as a Purchaser in connection with
any Closing (as defined in the Series F Agreement) shall have any rights
hereunder unless such person has purchased shares of the Company's Series F
Preferred Stock at such Closing.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed themselves or by their respective representatives thereunto duly
authorized as of the day and year first above written.
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AMENDMENT NUMBER 1 TO
FIFTH AMENDED AND RESTATED RIGHTS AGREEMENT
THIS AMENDMENT NUMBER 1 (the "Amendment") is dated as of August 22, 1995,
to the Fifth Amended and Restated Rights Agreement dated as of April 27, 1995
(the "Rights Agreement") by and among Power Integrations, Inc., a California
corporation (the "Company"), and the undersigned holders of Common Stock of the
Company (the "Common Shareholders"), the undersigned holders of Preferred Stock
of the Company (the "Preferred Shareholders") and the undersigned holders of
Series F Preferred Stock of the Company (the "Series F Holders"). Unless
specifically designated otherwise, capitalized terms used herein shall have the
same meanings given them in the Rights Agreement.
RECITALS
A. The Company, the Common Shareholders, the Preferred Shareholders and
the Series F Holders are parties to the Rights Agreement pursuant to which the
Company has granted the Common Shareholders, the Preferred Shareholders and the
Series F Holders certain registration rights and a right of first refusal, and
the Common Shareholders, the Preferred Shareholders and the Series F Holders
have agreed to vote their shares of the Company with respect to the authorized
directors of the Company and the election of certain designees to the Company's
Board of Directors.
B. The Company, the Common Shareholders, the Preferred Shareholders and
the Series F Holders wish to amend the Rights Agreement in order to provide that
the Common Shareholders, the Preferred Shareholders and the Series F Holders
will use their best efforts to cause the Company's Board of Directors to consist
of six (6) directors.
AGREEMENT
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto agree to amend certain
provisions of the Rights Agreement as set forth below:
1. Section 4.1 of the Rights Agreement shall be amended and restated
to read in full as follows:
"4.1 Agreement. The Common Shareholders, the Preferred Shareholders and the
---------
Series F Holders will use their best efforts to cause the Company's Board of
Directors to consist of six directors. Each of the Common Shareholders, the
Preferred Shareholders (other than MagneTek, Inc. ("MagneTek")) and the Series F
Holders agrees to vote his or its shares of the Company's stock to elect five
persons to the Board of Directors, three
1
<PAGE>
of whom shall be nominated by the Preferred Shareholders owning a majority of
the outstanding Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock taken
together (including Common Stock issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock), and two of whom shall be
nominated by Common Shareholders owning a majority of the Company's stock held
by the Common Shareholders. The sixth authorized director will be (i) elected by
the holders of the Company's Series D Preferred Stock pursuant to the Company's
Articles of Incorporation or (ii) nominated pursuant to Section 4.2 (a) below if
the conditions to the effectiveness of Section 4.2 (a) pertain."
2. This Amendment may be executed in multiple counterparts, each of
which when so executed shall be deemed an original, and all counterparts shall
constitute but one and the same instrument.
3. Except as amended hereby, the Rights Agreements remains in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
and year first above written.
POWER INTEGRATIONS, INC.
By:____________________________________
(Please print or type)
Title:_________________________________
(Please print or type)
Signature:_____________________________
2
<PAGE>
EXHIBIT 4.2
POWER INTEGRATIONS, INC.
INVESTOR'S RIGHTS AGREEMENT
_______________
May 22, 1996
_______________
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Registration Rights..................................................... 1
1.1 Definitions..................................................... 1
1.2 Company Registration............................................ 2
1.3 Obligations of the Company...................................... 2
1.4 Furnish Information............................................. 4
1.5 Expenses of Company Registration................................ 4
1.6 Underwriting Requirements....................................... 4
1.7 Delay of Registration........................................... 5
1.8 Indemnification................................................. 5
1.9 Reports Under Securities Exchange Act of 1934................... 7
1.10 Assignment of Registration Rights............................... 7
1.11 Termination of Registration Rights.............................. 8
1.12 Lockup Agreement................................................ 8
2. Covenants of the Company................................................ 8
2.1 Delivery of Financial Statements................................ 8
2.2 Inspection...................................................... 9
2.3 Termination of Certain Covenants................................ 9
3. Miscellaneous........................................................... 9
3.1 Successors and Assigns.......................................... 9
3.2 Governing Law................................................... 10
3.3 Counterparts.................................................... 10
3.4 Titles and Subtitles............................................ 10
3.5 Notices......................................................... 10
3.6 Expenses........................................................ 10
3.7 Amendments and Waivers.......................................... 10
3.8 Severability.................................................... 10
3.9 Entire Agreement................................................ 10
</TABLE>
i
<PAGE>
INVESTOR'S RIGHTS AGREEMENT
---------------------------
THIS INVESTOR'S RIGHTS AGREEMENT is made as of May 22, 1996, by and
between Power Integrations, Inc., a California corporation (the "Company"), and
Hambrecht & Quist Transition Capital, LLC (the "Investor").
RECITALS
--------
WHEREAS, the Company and the Investor are parties to the Warrant
Purchase Agreement dated May 22, 1996 (the "Warrant Agreement");
WHEREAS, the Company has agreed to grant Investor "piggyback"
registration rights and certain other investor rights.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Registration Rights. The Company covenants and agrees as
-------------------
follows:
1.1 Definitions. For purposes of this Section 1:
-----------
(a) The term "Act" means the Securities Act of 1933, as
amended.
(b) The term "Common Stock" means the Common Stock of the
Company or other equity securities issuable upon exercise of the Warrant.
(c) The term "Form S-3" means such form under the Act as in
effect on the date hereof or any registration form under the Act subsequently
adopted by the SEC which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 1.10 hereof.
(e) The term "1934 Act" shall mean the Securities Exchange Act
of 1934, as amended.
(f) The terms register", "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Act, and the declaration or
ordering of effectiveness of such registration statement or document.
(g) The term "Registrable Securities" means (i) the Common
Stock issuable or issued upon exercise of the Warrant and (ii) any Common Stock
of the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in
1
<PAGE>
replacement of the shares referenced in (i) above, excluding in all cases,
however, any Registrable Securities sold by a person in a transaction in which
his rights under this Section 1 are not assigned.
(h) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities.
(i) The term "SEC" shall mean the Securities and Exchange
Commission.
(j) The term "Warrant" shall mean the Warrant to Purchase
Common Stock dated May 22, 1996 issued by the Company to the Holder.
1.2. Company Registration. If (but without any obligation to do so)
--------------------
the Company proposes to register (including for this purpose a registration
effected by the Company for stockholders other than the Holders) any of its
stock or other securities under the Act in connection with the public offering
of such securities solely for cash (other than a registration relating solely to
the sale of securities to participants in a Company stock plan or a registration
on any form which does not include substantially the same information as would
be require to be included in a registration statement covering the sale of the
Registrable Securities, the Company shall, at such time, promptly give each
Holder written notice of such registration. Upon the written request of each
Holder given within twenty (20) days after mailing of such notice by the Company
in accordance with Section 3.5, the Company shall, subject to the provisions of
Section 1.6, cause to be registered under the Act all of the Registrable
Securities that each Holder has requested to be registered.
1.3. Obligations of the Company. Whenever required under this
--------------------------
Section 1 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registration Securities registered thereunder, keep
such registration statement effective for a period of up to one hundred twenty
(120) days or until the distribution contemplated in the Registration Statement
has been completed; provided, however, that (i) such 120-day period shall be
extended for a period of time equal to the period the Holder refrains from
selling any securities included in such registration at the request of an
underwriter of Common Stock (or other securities) of the Company; and (ii) in
the case of any registration of Registrable Securities on Form S-3 which are
intended to be offered on a continuous or delayed basis, such 120-day period
shall be extended, if necessary, to keep the registration statement effective
until all such Registrable Securities are sold, provided that Rule 415, or any
successor rule under the Act, permits an offering on a
2
<PAGE>
continuous or delayed basis, and provided further that applicable rules under
the Act governing the obligation to file a post-effective amendment permit, in
lieu of filing a post-effective amendment which (I) includes any prospectus
required by Section 10(a)(3) of the Act or (II) reflects facts or events
representing a material or fundamental change in the information set forth in
the registration statement, the incorporation by reference of information
required to be included in (I) and (II) above to be contained in periodic
reports filed pursuant to Section 13 or 15(d) of the 1934 Act in the
registration statement.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and quality the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders;
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Act.
(e) In the event of any underwritten public offering, enter into
an perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participates in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
3
<PAGE>
1.4. Furnish Information.
-------------------
(a) It shall be a condition precedent to the obligations of
the Company to take any action pursuant to this Section 1 with respect to the
Registrable Securities of any selling Holder that such Holder shall furnish to
the Company such information regarding itself, the Registrable Securities held
by it, and the intended method of disposition of such securities as shall be
required to effect the registration of such Holder's Registrable Securities.
1.5. Expenses of Company Registration. The Company shall bear and
--------------------------------
pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.2 for each Holder (which right may be assigned as
provided in Section 1.10), including (without limitation) all registration,
filing, and qualification fees, printers and accounting fees relating or
apportionable thereto and the fees and disbursements of counsel for the
Company in its capacity as counsel to the selling Holders hereunder; provided
that if Company counsel does not make itself available for this purpose, the
Company will pay the reasonable fees and disbursements of one counsel for the
selling Holders selected by them, but excluding underwriting discounts and
commissions relating to Registrable Securities.
1.6. Underwriting Requirements. In connection with any offering
-------------------------
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.2 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not,
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by stockholders to be
included in such offering exceeds the amount of securities sold other than by
the Company that the underwriters determine in their sole discretion is
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of such securities, including
Registrable Securities, which the underwriters determine in their sole
discretion will not jeopardize the success of the offering (the securities so
included to be apportioned (i) first, pro rata among the selling stockholders
who have exercised demand registration rights to require the Company to effect
such offering according to the total amount of securities for which they have
exercised such registration rights owned by each such selling stockholder and
(ii) second, pro rata among the other selling stockholders (including the
Holders) according to the total amount of the securities entitled to be included
therein owned by each such selling stockholder, or in such other proportions as
shall mutually be agreed by such selling stockholders; but in no event shall the
total amount of securities of the selling stockholders included in the offering
be reduced below twenty percent (20%) of the total amount of securities included
in such offering, unless such offering is the initial public offering of the
Company's securities, in which case the selling stockholders may be excluded if
the underwriters make the determination described above and no other
stockholder's securities are included. For purposes of the preceding
parenthetical concerning apportionment, for any selling stockholder which is a
holder of Registrable Securities and which is a partnership or corporation, the
partners, retired
4
<PAGE>
partners and shareholders of such holder, or the estates and family members of
any such partners and retired partners and any trusts for the benefit of any of
the foregoing persons shall be deemed to be a single "selling stockholder" shall
be based upon the aggregate amount of shares carrying registration rights owned
by all entitles and individuals included in such "selling stockholder", as
defined in this sentence.
1.7. Delay of Registration. No Holder shall have any right to
---------------------
obtain or seek an injunction restraining or otherwise delaying and such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.
1.8. Indemnification. In the event any Registrable Securities are
---------------
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the company will indemnify
and hold harmless each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Act or the 1934 Act against any losses, claims, damages, or
liabilities (join or several) to which they may become subject under the Act, or
the 1934 Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations
(collectively a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the 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 (iii) any violation or alleged
violation by the Company of the Act, the 1934 Act, any state securities law or
any rule or regulation promulgated under the Act, or the 1934 Act or any state
securities law; and the Company will pay to each such Holder, underwriter or
controlling person, as incurred, any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage, liability, or action; provided, however, that the indemnity agreement
contained in this subsection 1.8(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by any such Holder, underwriter or controlling person.
(b) to the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, any other
Holder selling securities in such registration statement and any controlling
person of any such underwriter or other Holder, against any losses, claims,
damages, or liabilities (joint or several) to which any of the foregoing persons
may become subject, under the Act, or the 1934 Act or other federal or state
law, insofar as such losses, claims, damages, or
5
<PAGE>
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration;
and each such Holder will pay, as incurred, any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to this
subsection 1.8(b), in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this subsection 1.8(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not unreasonably withheld; provided, that, in no event shall any indemnity under
this subsection 1.8(b) exceed the gross proceeds from the offering received by
such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.8, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.8.
(d) If the indemnification provided for in this Section 1.8 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage,or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined 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.
6
<PAGE>
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and the Holders under this
Section 1.8 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
1.9. Report Under Securities Exchange Act of 1934. With a view to
--------------------------------------------
making available to the Holders the benefits of Rule 144 promulgated under the
Act and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration or
pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
(c) furnish to any Holder so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144
(at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act and the 1934 Act (at any
time after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
1.10. Assignment of Registration Rights. The rights to cause the
--------------------------------
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities who, after such assignment or transfer, holds at
least 100,000 shares of Registrable Securities (subject to appropriate
adjustment for stock splits, stock dividends, combinations and other
recapitalization), provided: (a) the Company is, within a reasonable time after
such transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; (b) such transferee or assignee agrees
in writing to be bound by and subject to the terms and conditions of this
Agreement, including without limitation the provisions of Section 1.11 below;
and (c) such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by
7
<PAGE>
the transferee or assignee is restricted under the Act. For the purposes of
determining the number of shares of Registrable Securities held by a transferee
or assignee, the holding of transferees and assignees of a partnership
(including spouses and ancestors, lineal descendants and siblings of such
partners or spouses who acquire Registrable Securities by gift, will or
intestate succession) shall be aggregated together and with the partnership;
provided that all assignees and transferees who would not qualify individually
for assignment or registration rights shall have a single attorney-in-fact for
the purpose of exercising any rights, receiving notices or taking any action
under this Section 1.
1.11. Termination of Registration Rights.
----------------------------------
(a) No Holder shall be entitled to exercise any right
provided for in this Section 1 after five(5) years following the consummation of
the sale of securities pursuant to a registration statement filed by the Company
under the Act in connection with the initial firm commitment underwritten
offering of its securities to the general public.
In addition, the right of any Holder to request inclusion in
any registration pursuant to Section 1.2 shall terminate on the closing of the
first Company-initiated registered public offering of Common Stock of the
COmpany if all shares of Registrable Securities held or entitled to be held upon
conversion by such Holder may immediately be sold under Rule 144 during any
90-day period, or on such date after the closing of the first Company-initiated
registered public offering of Common Stock of the Company as all shares of
Registrable Securities held or entitled to be held upon conversion by such
Holder may immediately be sold under Rule 144 during any 90-day period.
1.12. Lockup Agreement. In consideration for the Company agreeing to
----------------
its obligations under this Section 1.12, each Holder of one percent (1%) or more
of the Company's voting securities agrees in connection with the initial
registration of the Company's securities, upon the request of the Company or the
Underwriter, not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any Registrable Securities (other than
those included in the registration) without the prior written consent of the
Company or Underwriter, as the case may be, for a period of 120 days after the
effective date of such registration; provided, however, that such Holder shall
have no obligation to enter into the agreement described herein unless all
executive officers, directors and other one percent (1%) shareholders of the
Company enter into similar agreements.
2. Covenants of the Company.
------------------------
2.1. Delivery of Financial Statements. The Company shall deliver to
--------------------------------
each Investor:
(a) as soon as practicable, but in any event within ninety (90)
days after the end of each fiscal year of the Company, an income statement for
such fiscal year, a balance sheet of the Company and statement of shareholder's
equity as of the end of such year, and a statement of changes in financial
position for such year, such year-end financial reports to
8
<PAGE>
be in reasonable detail, prepared in accordance with generally accepted
accounting principles ("GAAP"), and audited and certified by independent public
accountants of nationally recognized standing selected by the Company;
(b) as soon as practicable, but in any event within forty-five
(45) days after the end of each of the first three (3) quarters of each fiscal
year of the Company, an unaudited profit or loss statement, a statement of
changes in financial position for such fiscal quarter and an unaudited balance
sheet as of the end of such fiscal quarter;
(c) within thirty (30) days of the end of each month, an
unaudited income statement and schedule as to the sources and application of
funds and balance sheet for and as of the end of such month, in reasonable
detail; and
(d) with respect to the financial statements called for in
subsections (b) and (c) of this Section 1.1, an instrument executed by the Chief
Financial Officer or President of the Company and certifying that such
financials were prepared in accordance with GAAP consistently applied with prior
practice for earlier periods (with the exception of footnotes that may be
required by GAAP) and fairly present the financial condition of the Company and
its results of operation for the period specified, subject to year-end audit
adjustment.
2.2. Inspection. The Company shall permit each Investor, at such
----------
Investor's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs, finances
and accounts with its officers, an at such reasonable times and intervals as may
be requested by the Investor; provided, however, that the Company shall not be
obligated pursuant to this Section 1.2 to provide access to any information
which it reasonably considers to be a trade secret or similar confidential
information.
2.3. Termination of Certain Covenants. The covenants set forth in
---------------------------------
Sections 1.1, 1.2 and 1.3 shall terminate as to Investors and be of no further
force or effect upon the first sale of securities pursuant to a registration
statement filed by the Company under the Act in connection with the firm
commitment underwritten offering of its securities to the general public (an
"IPO") is consummated or when the Company first becomes subject to the periodic
reporting requirements of Section 12(g) or 15(d) of the 1934 Act, whichever
event shall first occur.
3. Miscellaneous.
-------------
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. 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.
9
<PAGE>
3.2. Governing Law. This Agreement shall be governed by and
-------------
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
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.
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.
3.5. Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
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.
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 holder of
the Note. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon the holder of the Note, each future holder of the Note,
and the Company.
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 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.
3.9. Entire Agreement. 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
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
POWER INTEGRATIONS, INC.
By: /s/ Robert G. Staples
--------------------------------
Name: ROBERT G. STAPLES
------------------------------
Title: VP FINANCE
-----------------------------
Address: 477 N. MATHILDA AVE.
-----------------------------------
SUNNYVALE CA 94086
-----------------------------------
HAMBRECHT & QUIST TRANSITION
GROUP, LLC
By:________________________________
Name:______________________________
Title:_____________________________
Address: One Bush Street
San Francisco, CA 94104
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
POWER INTEGRATIONS, INC.
By:________________________________
Name:______________________________
Title:_____________________________
Address: ___________________________________
___________________________________
HAMBRECHT & QUIST TRANSITION
GROUP, LLC
By: /s/ Patrick J. Allen
--------------------------------
Name: Patrick J. Allen
------------------------------
Title: CFO
-----------------------------
Address: One Bush Street
San Francisco, CA 94104
11
<PAGE>
EXHIBIT 10.1
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of __________, 1997, is made by and
between Power Integrations, Inc., a Delaware corporation (the "Company"), and
__________________(the "Indemnitee").
RECITALS
--------
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors, officers or agents of corporations
unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of such
directors, officers and other agents.
B. The statutes and judicial decisions regarding the duties of directors
and officers are often difficult to apply, ambiguous, or conflicting, and
therefore fail to provide such directors, officers and agents with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take.
C. Plaintiffs often seek damages in such large amounts and the costs of
litigation may be so enormous (whether or not the case is meritorious), that the
defense and/or settlement of such litigation is often beyond the personal
resources of directors, officers and other agents.
D. The Company believes that it is unfair for its directors, officers and
agents and the directors, officers and agents of its subsidiaries to assume the
risk of huge judgments and other expenses which may occur in cases in which the
director, officer or agent received no personal profit and in cases where the
director, officer or agent was not culpable.
E. The Company recognizes that the issues in controversy in litigation
against a director, officer or agent of a corporation such as the Company or its
subsidiaries are often related to the knowledge, motives and intent of such
director, officer or agent, that he is usually the only witness with knowledge
of the essential facts and exculpating circumstances regarding such matters, and
that the long period of time which usually elapses before the trial or other
disposition of such litigation often extends beyond the time that the director,
officer or agent can reasonably recall such matters; and may extend beyond the
normal time for retirement for such director, officer or agent with the result
that he, after retirement or in the event of his death, his spouse, heirs,
executors or administrators, may be faced with limited ability and undue
hardship in maintaining an adequate defense, which may discourage such a
director, officer or agent from serving in that position.
F. Based upon their experience as business managers, the Board of
Directors of the Company (the "Board") has concluded that, to retain and attract
talented and experienced individuals to serve as directors, officers and agents
of the Company and its subsidiaries and to
1
<PAGE>
encourage such individuals to take the business risks necessary for the success
of the Company and its subsidiaries, it is necessary for the Company to
contractually indemnify its directors, officers and agents and the directors,
officers and agents of its subsidiaries, and to assume for itself maximum
liability for expenses and damages in connection with claims against such
directors, officers and agents in connection with their service to the Company
and its subsidiaries, and has further concluded that the failure to provide such
contractual indemnification could result in great harm to the Company and its
subsidiaries and the Company's stockholders.
G. Section 145 of the General Corporation Law of Delaware, under which
the Company is organized ("Section 145"), empowers the Company to indemnify its
directors, officers, employees and agents by agreement and to indemnify persons
who serve, at the request of the Company, as the directors, officers, employees
or agents of other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive.
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director, officer or agent of the Company and/or one or
more subsidiaries of the Company free from undue concern for claims for damages
arising out of or related to such services to the Company and/or one or more
subsidiaries of the Company.
I. Indemnitee is willing to serve, or to continue to serve, the Company
and/or one or more subsidiaries of the Company, provided that he is furnished
the indemnity provided for herein.
AGREEMENT
---------
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Definitions.
-----------
(a) Agent. For the purposes of this Agreement, "agent" of the
-----
Company means any person who is or was a director, officer, employee or other
agent of the Company or a subsidiary of the Company; or is or was serving at the
request of, for the convenience of, or to represent the interests of the Company
or a subsidiary of the Company as a director, officer, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company, or was a director, officer, employee or agent of
another enterprise at the request of, for the convenience of, or to represent
the interests of such predecessor corporation.
(b) Expenses. For purposes of this Agreement, "expenses" include all
--------
direct and indirect costs of any type or nature whatsoever (including, without
limitation, all attorneys' fees and related disbursements, other out-of-pocket
costs and reasonable compensation for time spent by the Indemnitee for which he
is not otherwise compensated by the Company or any third
2
<PAGE>
party) actually and reasonably incurred by the Indemnitee in connection with
either the investigation, defense or appeal of a proceeding or establishing or
enforcing a right to indemnification under this Agreement or Section 145 or
otherwise; provided, however, that "expenses" shall not include any judgments,
fines, ERISA excise taxes or penalties, or amounts paid in settlement of a
proceeding.
(c) Proceeding. For the purposes of this Agreement, "proceeding"
----------
means any threatened, pending, or completed action, suit or other proceeding,
whether civil, criminal, administrative, or investigative.
(d) Subsidiary. For purposes of this Agreement, "subsidiary" means
----------
any corporation of which more than 50% of the outstanding voting securities is
owned directly or indirectly by the Company, by the Company and one or more
other subsidiaries, or by one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to
------------------
serve as agent of the Company, at its will (or under separate agreement, if such
agreement exists), in the capacity Indemnitee currently serves as an agent of
the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the Bylaws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing; provided, however, that nothing contained in this Agreement is intended
to create any right to continued employment by Indemnitee.
3. Liability Insurance.
-------------------
(a) Maintenance of D&O Insurance. The Company hereby covenants and
----------------------------
agrees that, so long as the Indemnitee shall continue to serve as an agent of
the Company and thereafter so long as the Indemnitee shall be subject to any
possible proceeding by reason of the fact that the Indemnitee was an agent of
the Company, the Company, subject to Section 3(c), shall promptly obtain and
maintain in full force and effect directors' and officers' liability insurance
("D&O Insurance") in reasonable amounts from established and reputable insurers.
(b) Rights and Benefits. In all policies of D&O Insurance, the
-------------------
Indemnitee shall be named as an insured in such a manner as to provide the
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if the Indemnitee is not a director
or officer but is a key employee.
(c) Limitation on Required Maintenance of D&O Insurance.
---------------------------------------------------
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain D&O Insurance if the Company determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or the Indemnitee is covered by similar insurance maintained by a
subsidiary of the Company.
3
<PAGE>
4. Mandatory Indemnification. Subject to Section 9 below, the Company
-------------------------
shall indemnify the Indemnitee as follows:
(a) Successful Defense. To the extent the Indemnitee has been
------------------
successful on the merits or otherwise in defense of any proceeding (including,
without limitation, an action by or in the right of the Company) to which the
Indemnitee was a party by reason of the fact that he is or was an Agent of the
Company at any time, against all expenses of any type whatsoever actually and
reasonably incurred by him in connection with the investigation, defense or
appeal of such proceeding.
(b) Third Party Actions. If the Indemnitee is a person who was or is
-------------------
a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that he is or
was an agent of the Company, or by reason of anything done or not done by him in
any such capacity, the Company shall indemnify the Indemnitee against any and
all expenses and liabilities of any type whatsoever (including, but not limited
to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in
settlement) actually and reasonably incurred by him in connection with the
investigation, defense, settlement or appeal of such proceeding, provided the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and its stockholders, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
(c) Derivative Actions. If the Indemnitee is a person who was or is
------------------
a party or is threatened to be made a party to any proceeding by reason of the
fact that he is or was an agent of the Company, or by reason of anything done or
not done by him in any such capacity, the Company shall indemnify the Indemnitee
against any amounts paid in settlement of any such proceeding and all expenses
actually and reasonably incurred by him in connection with the investigation,
defense, settlement, or appeal of such proceeding, provided the Indemnitee acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company and its stockholders. The Company shall
indemnify the Indemnitee against judgments, fines, and ERISA excise taxes and
penalties to the same extent and subject to the same conditions as described in
the immediately preceding sentence. Notwithstanding the foregoing, no
indemnification under this subsection 4(c) shall be made in respect to any
claim, issue or matter as to which such person shall have been finally adjudged
to be liable to the Company by a court of competent jurisdiction unless and only
to the extent that the court in which such proceeding was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such amounts which the court shall deem proper.
(d) Actions where Indemnitee is Deceased. If the Indemnitee is a
------------------------------------
person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is or was an agent of the Company, or
by reason of anything done or not done by him in any such capacity, and if prior
to, during the pendency of after completion of such proceeding Indemnitee
becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors
and administrators against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in
4
<PAGE>
settlement) actually and reasonably incurred to the extent Indemnitee would have
been entitled to indemnification pursuant to Sections 4(a), 4(b), or 4(c) above
were Indemnitee still alive.
(e) Notwithstanding the foregoing, the Company shall not be obligated
to indemnify the Indemnitee for expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, ERISA excise taxes and
penalties, and amounts paid in settlement) for which payment is actually made to
Indemnitee under a valid and collectible insurance policy of D&O Insurance, or
under a valid and enforceable indemnity clause, by-law or agreement.
5. Partial Indemnification. If the Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts
paid in settlement) incurred by him in the investigation, defense, settlement or
appeal of a proceeding, but not entitled, however, to indemnification for all of
the total amount hereof, the Company shall nevertheless indemnify the Indemnitee
for such total amount except as to the portion hereof to which the Indemnitee is
not entitled.
6. Mandatory Advancement of Expenses. Subject to Section 8(a) below, the
---------------------------------
Company shall advance all expenses incurred by the Indemnitee in connection with
the investigation, defense, settlement or appeal of any proceeding to which the
Indemnitee is a party or is threatened to be made a party by reason of the fact
that the Indemnitee is or was an agent of the Company. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall be determined ultimately that the Indemnitee is not entitled to be
indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to the Indemnitee within twenty (20) days
following delivery of a written request therefor by the Indemnitee to the
Company.
7. Notice and Other Indemnification Procedures.
-------------------------------------------
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
(b) If, at the time of the receipt of a notice of the commencement of
a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in
effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
(c) In the event the Company shall be obligated to pay the expenses
of any proceeding against the Indemnitee, the Company, if appropriate, shall be
entitled to assume the defense of such proceeding, with counsel approved by the
Indemnitee, upon the delivery to the Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
5
<PAGE>
will not be liable to the Indemnitee under this Agreement for any fees of
counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (i) the Indemnitee shall have the right to employ his
counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the
employment of counsel by the Indemnitee has been previously authorized by the
Company, (B) the Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and the Indemnitee in the conduct of
any such defense; or (C) the Company shall not, in fact, have employed counsel
to assume the defense of such proceeding, the fees and expenses of Indemnitee's
counsel shall be at the expense of the Company.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to the Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by the Indemnitee and not by way of defense, unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board, (iii) such indemnification is provided by the Company,
in its sole discretion, pursuant to the powers vested in the Company under the
General Corporation Law of Delaware or (iv) the proceeding is brought to
establish or enforce a right to indemnification under this Agreement or any
other statute or law or otherwise as required under Section 145.
(b) Lack of Good Faith. To indemnify the Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by the
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) Unauthorized Settlements. To indemnify the Indemnitee under this
------------------------
Agreement for any amounts paid in settlement of a proceeding unless the Company
consents to such settlement, which consent shall not be unreasonably withheld.
9. Non-exclusivity. The provisions for indemnification and advancement
---------------
of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's Certificate of Incorporation or Bylaws, the vote of the Company's
stockholders or disinterested directors, other agreements, or otherwise, both as
to action in his official capacity and to action in another capacity while
occupying his position as an agent of the Company, and the Indemnitee's rights
hereunder shall continue after the Indemnitee has ceased acting as an agent of
the Company and shall inure to the benefit of the heirs, executors and
administrators of the Indemnitee.
10. Enforcement. Any right to indemnification or advances granted by this
-----------
Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee 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. Indemnitee, in such
enforcement action, if successful in whole or in part, shall be entitled to be
paid also the expense of prosecuting his claim. It shall be a defense to any
action for which a claim for indemnification
6
<PAGE>
is made under this Agreement (other than an action brought to enforce a claim
for expenses pursuant to Section 6 hereof, provided that the required
undertaking has been tendered to the Company) that Indemnitee is not entitled to
indemnification because of the limitations set forth in Sections 4 and 8 hereof.
Neither the failure of the Corporation (including its Board of Directors or its
stockholders) to have made a determination prior to the commencement of such
enforcement action that indemnification of Indemnitee is proper in the
circumstances, nor an actual determination by the Company (including its Board
of Directors or its stockholders) that such indemnification is improper, shall
be a defense to the action or create a presumption that Indemnitee is not
entitled to indemnification under this Agreement or otherwise.
11. Subrogation. In the event of payment under this Agreement, the
-----------
Company 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 Company
effectively to bring suit to enforce such rights.
12. Survival of Rights.
------------------
(a) All agreements and obligations of the Company contained herein
shall continue during the period Indemnitee is an agent of the Company 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, arbitrational, administrative or investigative, by reason of the fact
that Indemnitee was serving in the capacity referred to herein.
(b) The Company shall require any successor to the Company (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place.
13. Interpretation of Agreement. It is understood that the parties hereto
---------------------------
intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent permitted by law
including those circumstances in which indemnification would otherwise be
discretionary.
14. Severability. If any provision or provisions of this Agreement shall
------------
be held to be invalid, illegal or unenforceable for any reason whatsoever, (i)
the validity, legality and enforceability of the remaining provisions of the
Agreement (including without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 13 hereof.
7
<PAGE>
15. Modification and Waiver. No supplement, modification or amendment of
-----------------------
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
16. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
17. Governing Law. This Agreement shall be governed exclusively by and
-------------
construed according to the laws of the State of Delaware as applied to contracts
between Delaware residents entered into and to be performed entirely within
Delaware.
18. Consent to Jurisdiction. The Company and the 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.
8
<PAGE>
The parties hereto have entered into this Indemnity Agreement effective as
of the date first above written.
THE COMPANY:
POWER INTEGRATIONS, INC.
By______________________________________
Its_____________________________________
Address: 477 N. Mathilda Avenue
Sunnyvale, California 94086
INDEMNITEE:
________________________________________
[NAME]
Address: ________________________________________
________________________________________
9
<PAGE>
EXHIBIT 10.2
POWER INTEGRATIONS, INC.
1988 STOCK OPTION PLAN
(As Amended Effective April 24, 1996)
1. Purpose. The Power Integrations, Inc. 1988 Stock Option Plan (the
-------
"PLAN") is established to create additional incentive for key employees,
directors and consultants of Power Integrations, Inc. and any successor
corporation thereto (collectively referred to as the "COMPANY"), and any present
or future parent and/or subsidiary corporations of such corporation (all of whom
along with the Company being individually referred to as a "PARTICIPATING
COMPANY" and collectively referred to as the "PARTICIPATING COMPANY GROUP"), to
promote the financial success and progress of the Participating Company Group.
For purposes of the Plan, a parent corporation and a subsidiary corporation
shall be as defined in sections 424(e) and 424(f) of the Internal Revenue Code
of 1986, as amended (the "CODE").
2. Administration. The Plan shall be administered by the Board of
--------------
Directors of the Company (the "BOARD") and/or by a duly appointed committee of
the Board having such powers as shall be specified by the Board. Any subsequent
references herein to the Board shall also mean the committee if such committee
has been appointed and, unless the powers of the committee have been
specifically limited, the committee shall have all of the powers of the Board
granted herein, including, without limitation, the power to terminate or amend
the Plan at any time, subject to the terms of the Plan and any applicable
limitations imposed by law. All questions of interpretation of the Plan or of
any options granted under the Plan (an "OPTION") shall be determined by the
Board, and such determinations shall be final and binding upon all persons
having an interest in the Plan and/or any Option. Options may be either
incentive stock options as defined in section 422 of the Code ("INCENTIVE STOCK
OPTIONS") or nonqualified stock options. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, or election which is the responsibility of or which
is allocated to the Company herein, provided the officer has apparent authority
with respect to such matter, right, obligation, or election.
3. Eligibility. The Options may be granted only to employees (including
-----------
officers) and directors of the Participating Company Group or to individuals who
are rendering services as consultants to the Participating Company Group. For
purposes of the foregoing sentence, "employees" shall include prospective
employees to whom Options are granted in connection with written offers of
employment with the Participating Company Group, and "consultants" shall include
prospective consultants to whom Options are granted in connection with written
offers of engagement with the Participating Company Group. The Board shall, in
the Board's sole discretion, determine which persons shall be granted Options
(an "OPTIONEE"). A director of the Company shall be eligible to be granted only
a nonqualified stock option unless the director is also an employee of the
Participating Company Group. An individual who is rendering services as a
consultant shall be eligible to be granted only a nonqualified stock option. An
Optionee may, if otherwise eligible, be granted additional Options.
4. Shares Subject to Option. Options shall be options for the purchase
------------------------
of the authorized but unissued common stock of the Company (the "STOCK"),
subject to adjustment as
<PAGE>
provided in paragraph 10 below. The maximum number of shares of Stock which may
be issued under the Plan shall be fourteen million four hundred two thousand
(14,402,000) shares. In the event that any outstanding Option for any reason
expires or is terminated or canceled and/or shares of Stock subject to
repurchase are repurchased by the Company, the shares allocable to the
unexercised portion of such Option, or such repurchased shares, may again be
subjected to an Option.
5. Time for Granting Options. All Options shall be granted, if at all,
-------------------------
within ten (10) years from the earlier of the date the Plan is adopted by the
Board or the date the Plan is duly approved by the shareholders of the Company.
6. Terms, Conditions and Form of Options. Subject to the provisions of
-------------------------------------
the Plan, the Board shall determine for each Option (which need not be
identical) the number of shares of Stock for which the Option shall be granted,
the option price of the Option, the timing and terms of exercisability and/or
vesting of the Option, the time of expiration of the option, the effect of the
Optionee's termination of employment or service with the Participating Company
Group, whether the Option is to be treated as an Incentive Stock Option or as a
nonqualified stock option and all other terms and conditions of the Option not
inconsistent with the Plan. Options granted pursuant to the Plan shall be
evidenced by written agreements specifying the number of shares of Stock covered
thereby, in such form as the Board shall from time to time establish, and shall
comply with and be subject to the following terms and conditions:
(a) Option Price. The option price for each Option shall be
------------
established in the sole discretion of the Board; provided, however, that (i) the
option price per share for an Incentive Stock Option shall be not less than the
fair market value, as determined by the Board, of a share of Stock on the date
of the granting of the Option, (ii) the option price per share for a
nonqualified stock option shall not be less than eighty-five percent (85%) of
the fair market value, as determined by the Board, of a share of Stock on the
date of the granting of the Option and (iii) no Option granted to an Optionee
who at the time the Option is granted owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of section 422(b)(6) of the Code (a
"TEN PERCENT OWNER OPTIONEE") shall have an option price per share less than one
hundred ten percent (110%) of the fair market value of a share of Stock on the
date the Option is granted. Notwithstanding the foregoing, an Option (whether
an Incentive Stock Option or a nonqualified stock option) may be granted with an
exercise price lower than the minimum exercise price set forth above if such
Option is granted pursuant to an assumption or substitution for another option
in a manner qualifying with the provisions of section 424(a) of the Code.
(b) Right to Exercise Options. The Board shall have the power to set,
-------------------------
including by amendment of an Option, the time or times within which each Option
shall be exercisable or the event or events upon the occurrence of which all or
a portion of each Option shall be exercisable and the term of each Option;
provided, however, that (i) no Option shall be exercisable after the expiration
of ten (10) years after the date such Option is granted, (ii) no Incentive Stock
Option granted to a Ten Percent Owner Optionee shall be exercisable after the
expiration of five (5) years after the date such Option is granted, and (iii) no
Option granted to a prospective employee or prospective consultant may become
exercisable prior to the date on
<PAGE>
which such person commences employment or service with a Participating Company.
Subject to paragraphs 6(c) and 11, an Option shall become exercisable at a rate
of no less than 20% for each full year which occurs after the date of grant of
the Option, unless the grant of the Option and issuance of Common Stock upon the
exercise of the Option may occur in compliance with the California Corporate
Securities Law of 1968, as amended, without the need to qualify such securities
under the California Corporate Securities Law of 1968, as amended.
(c) Termination of Employment or Service. If the Optionee's
------------------------------------
employment or service with the Participating Company Group terminates for any
reason except death or disability, the Option, to the extent unexercised and
exercisable by the Optionee on the date on which the Optionee's employment or
service terminated, may be exercised by the Optionee within thirty (30) days (or
such longer period of time as determined by the Board, in its sole discretion)
after the date on which the Optionee's employment or service terminates, but in
any event no later than the date on which the Option expires. If the Optionee's
employment or service with the Participating Company Group is terminated because
of the death of the Optionee or disability of the Optionee, the Option may be
exercised by the Optionee (or the Optionee's legal representative) at any time
prior to the expiration of six (6) months (or such longer period of time as
determined by the Board, in its sole discretion) from the date the Optionee's
employment or service terminated, but in any event no later than the date on
which the option expires. The Optionee's employment or service shall be deemed
to have terminated on account of death if the Optionee dies within one (1) month
(or such longer period of time as determined by the Board, in its sole
discretion) after the Optionee's termination of employment or service.
(d) Payment of Option Price. Payment of the option price for the
-----------------------
number of shares of Stock being purchased pursuant to any Option shall be made
(i) in cash, by check, or cash equivalent, (ii) by tender to the Company of
shares of the Company's stock owned by the Optionee having a value, as
determined by the Board (but without regard to any restrictions on
transferability applicable to such stock by reason of federal or state
securities laws or agreements with an underwriter for the Company), not less
than the option price, (iii) if specifically permitted by the Board and set
forth in the Optionee's agreement, by the Optionee's promissory note, (iv) by
the assignment of the proceeds of a sale of some or all of the shares being
acquired upon the exercise of an Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System), or (v) by
any combination thereof. The Board may at any time or from time to time, by
adoption of or by amendment to the standard forms of stock option agreement
described in paragraph 7 below, or by other means, grant Options which do not
permit all of the foregoing forms of consideration to be used in payment of the
option price and/or which otherwise restrict one (1) or more forms of
consideration. Notwithstanding the foregoing, an Option may not be exercised by
tender to the Company of shares of the Company's stock to the extent such tender
of stock would constitute a violation of the provisions of any law, regulation
and/or agreement restricting the redemption of the Company's stock.
Furthermore, no promissory note shall be permitted if an exercise using a
promissory note would be a violation of any law. Any permitted promissory note
shall be due and payable not more than five (5) years after the Option is
exercised, and interest shall be payable at least annually and be at least equal
to the minimum interest rate necessary to avoid imputed interest pursuant to all
applicable sections of the Code. The Board shall have the authority to permit
or require the Optionee to secure any
<PAGE>
promissory note used to exercise an Option with the shares of Stock acquired on
exercise of the Option and/or with other collateral acceptable to the Company.
(x) Unless otherwise provided by the Board, an Option may not be
exercised by tender to the Company of shares of the Company's stock unless such
shares of the Company's stock either have been owned by the Optionee for more
than six (6) months or were not acquired, directly or indirectly, from the
Company.
(y) Unless otherwise provided by the Board, in the event the
Company at any time is subject to the regulations promulgated by the Board of
Governors of the Federal Reserve System or any other governmental entity
affecting the extension of credit in connection with the Company's securities,
any promissory note shall comply with such applicable regulations, and the
Optionee shall pay the unpaid principal and accrued interest, if any, to the
extent necessary to comply with such applicable regulations.
(z) The Company reserves, at any and all times, the right, in
the Company's sole and absolute discretion, to establish, decline to approve
and/or terminate any program and/or procedures for the exercise of Options by
means of an assignment of the proceeds of a sale of some or all of the shares of
Stock to be acquired upon such exercise.
7. Standard Form of Stock Option Agreement.
---------------------------------------
(a) Incentive Stock Options. Unless otherwise provided for by
-----------------------
the Board at the time an Option is granted, an Option designated by the Board as
an "Incentive Stock Option" shall comply with and be subject to the terms and
conditions set forth in the appropriate form of incentive stock option agreement
attached hereto as Exhibit A, Exhibit B or Exhibit C.
(b) Nonqualified Stock Options. Unless otherwise provided for by
--------------------------
the Board at the time an Option is granted, an Option designated by the Board as
a "Nonqualified Stock Option" shall comply with and be subject to the terms and
conditions set forth in the appropriate form of nonqualified stock option
agreement attached hereto as Exhibit D, Exhibit E or Exhibit F.
(c) Standard Term for Options. Unless otherwise provided for by
-------------------------
the Board in the grant of an Option, any Option granted hereunder shall be
exercisable for a term of ten (10) years.
8. Authority to Vary Terms. The Board shall have the authority from time
-----------------------
to time to vary the terms of any of the standard forms of stock option agreement
described in paragraph 7 above either in connection with the grant or amendment
of an individual Option or in connection with the authorization of a new
standard form or forms; provided, however, that the terms and conditions of such
revised or amended standard form or forms of stock option agreement shall be in
accordance with the terms of the Plan. Such authority shall include, but not by
way of limitation, the authority to grant Options which are not immediately
exercisable.
9. Fair Market Value Limitation. To the extent that the aggregate fair
----------------------------
market value (determined at the time the Option is granted) of stock with
respect to which Incentive Stock
<PAGE>
Options are exercisable by an Optionee for the first time during any calendar
year (under all stock option plans of the Participating Company Group, including
the Plan) exceeds One Hundred Thousand Dollars ($100,000), the portion of such
options which exceeds such amount shall be treated as nonqualified stock
options. This paragraph 9 shall be applied by taking Incentive Stock Options
into account in the order in which they were granted. If the Code is amended to
provide for a different limitation from that set forth in this paragraph 9, such
different limitation shall be deemed incorporated herein effective as of the
date and with respect to such Options as required or permitted by such amendment
to the Code. If an Option is treated as an Incentive Stock Option in part and as
a nonqualified stock option in part by reason of the limitation set forth in
this paragraph 9, the Optionee may designate which portion of such Option the
Optionee is exercising and may request that separate certificates representing
each such portion be issued upon the exercise of the Option. In the absence of
such designation, the Optionee shall be deemed to have exercised the Incentive
Stock Option portion of the Option first.
10. Effect of Change in Stock Subject to Plan. Appropriate adjustments
-----------------------------------------
shall be made in the number and class of shares of Stock subject to the Plan and
to any outstanding Options and in the option price of any outstanding Options in
the event of a stock dividend, stock split, reverse stock split,
recapitalization combination, reclassification, or like change in the capital
structure of the Company.
11. Transfer of Control. A "TRANSFER OF CONTROL" shall be deemed to have
-------------------
occurred in the event any of the following occurs with respect to the Control
Company. For purposes of applying this paragraph 11, the "CONTROL COMPANY"
shall mean the Participating Company whose stock is subject to the Option.
(a) the direct or indirect sale or exchange by the shareholders
of the Control Company of all or substantially all of the voting stock of the
Control Company where the shareholders of the Control Company before such sale
or exchange do not retain, directly or indirectly, at least a majority of the
beneficial interest in the voting stock of the Control Company.
(b) a merger or consolidation in which the shareholders of the
Control Company before such merger or consolidation do not retain, directly or
indirectly, at least a majority of the beneficial interest in the voting stock
of the Control Company or the successor thereto; or
(c) the sale, exchange, or transfer (including, without
limitation, pursuant to a liquidation or dissolution) of all or substantially
all of the Control Company's assets (other than a sale, exchange, or transfer to
one (1) or more corporations where the shareholders of the Control Company
before such sale, exchange, or transfer retain, directly or indirectly, at least
a majority of the beneficial interest in the voting stock of the corporation(s)
to which the assets were transferred).
In the event of a Transfer of Control, the Board, in its sole discretion,
may arrange with the surviving, continuing, successor, or purchasing corporation
or parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"),
for the Acquiring Corporation to either assume the Company's rights and
obligations under outstanding Options or substitute substantially
<PAGE>
equivalent options for the Acquiring Corporation's stock for such outstanding
Options. The Company shall provide each Optionee holding an outstanding Option
with at least ten (10) days advance written notice of the pending Transfer of
Control prior to the consummation thereof. With respect to outstanding Options
granted effective by the Board prior to January 4, 1992, in the event the
Acquiring Corporation elects not to assume or substitute for such outstanding
Options in connection with a merger described in (b) above or a sale of assets
described in (c) above, the Board shall provide that any unexercisable and/or
unvested portion of the outstanding Options shall be immediately exercisable and
vested as of a date prior to the Transfer of Control, as the Board so
determines. The exercise and/or vesting of any Option that was permissible
solely by reason of this paragraph 11 shall be conditioned upon the consummation
of the Transfer of Control. Any Options which are neither assumed by the
Acquiring Corporation nor exercised as of the date of the Transfer of Control
shall terminate effective as of the date of the Transfer of Control.
Notwithstanding the foregoing, shares acquired upon exercise of an Option prior
to the Transfer of Control and any consideration received pursuant to the
Transfer of Control with respect to such shares shall continue to be subject to
all applicable provisions of the option agreement evidencing such Option except
as otherwise provided in such option agreement. If the corporation the stock of
which is subject to the outstanding Options immediately prior to a Transfer of
Control described in paragraph 11(a) is the surviving or continuing corporation,
the outstanding Options shall be deemed to have been assumed by the Acquiring
Corporation for purposes of this paragraph 11.
12. Provision of Information. At least annually, copies of the Company's
------------------------
balance sheet and income statement for the just completed fiscal year shall be
made available to each Optionee and purchaser of shares of Stock upon the
exercise of an Option. The Company shall not be required to provide such
information to persons whose duties in connection with the Company assure them
access to equivalent information.
13. Options Nontransferable. During the lifetime of the Optionee, the
-----------------------
Option shall be exercisable only by the Optionee. No Option shall be assignable
or transferable by the Optionee, except by will or by the laws of descent and
distribution.
14. Transfer of Company's Rights. In the event any Participating Company
----------------------------
assigns, other than by operation of law, to a third person, other than another
Participating Company, any of the Participating Company's rights to repurchase
any shares of Stock acquired on the exercise of an Option, the assignee shall
pay to the assigning Participating Company the value of such right as determined
by the Company in the Company's sole discretion. Such consideration shall be
paid in cash. In the event such repurchase right is exercisable at the time of
such assignment, the value of such right shall be not less than the fair market
value of the shares of Stock which may be repurchased under such right (as
determined by the Company) minus the repurchase price of such shares. The
requirements of this paragraph 14 regarding the minimum consideration to be
received by the assigning Participating Company shall not inure to the benefit
of the Optionee whose shares of Stock are being repurchased. Failure of a
Participating Company to comply with the provisions of this paragraph 14 shall
not constitute a defense or otherwise prevent the exercise of the repurchase
right by the assignee of such right.
<PAGE>
15. Termination or Amendment of Plan. The Board, including any duly
--------------------------------
appointed committee of the Board, may terminate or amend the Plan at any time;
provided, however, that without the approval of the Company's shareholders,
there shall be (a) no increase in the total number of shares of Stock covered by
the Plan (except by operation of the provisions of paragraph 10 above), (b) no
change in the class of persons eligible to receive Incentive Stock Options and
(c) no expansion in the class of persons eligible to receive nonqualified stock
options. In any event, no amendment may adversely affect any then outstanding
Option or any unexercised portion thereof, without the consent of the Optionee,
unless such amendment is required to enable an Option designated as an Incentive
Stock Option to qualify as an Incentive Stock Option.
16. Registration Rights. Unless otherwise specifically provided for by
-------------------
the Board at the time an Option is granted, an Optionee receiving an Option to
purchase one hundred thousand (100,000) or more shares of Stock shall be
entitled to the registration rights substantially as set forth in Exhibit G
attached hereto and incorporated herein by reference. The Board shall have the
authority, in its sole discretion, to grant Options for less than one hundred
thousand (100,000) shares of Stock which also shall be entitled to the
registration rights substantially as set forth in Exhibit G attached hereto and
incorporated herein by reference.
17. Shareholder Approval. The Plan or any increase in the maximum number
--------------------
of shares of Stock issuable thereunder as provided in paragraph 4 (the "MAXIMUM
SHARES") shall be approved by the shareholders of the Company within twelve (12)
months of the date of adoption thereof by the Board. Options granted prior to
shareholder approval of the Plan or in excess of the Maximum Shares previously
approved by the shareholders shall become exercisable no earlier than the date
of shareholder approval of the Plan or such increase in the Maximum Shares, as
the case may be.
<PAGE>
EXHIBIT G
---------
PIGGYBACK REGISTRATION RIGHTS
1. The terms "register", "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing a filing a registration statement in
compliance with the Securities Act of 1933, as amended (the "Securities Act"),
and the declaration or ordering of the effectiveness of such registration
statement.
2. If the Company shall determine to register any of its securities
either for its own account or the account of a shareholder(s) exercising demand
registration rights, other than a registration relating solely to employee
benefit plans, or a registration relating solely to a transaction within the
scope of Rule 145 promulgated under the Securities Act, or a registration 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 the Stock, the Company will promptly
give to the Optionee written notice thereof and include in such registration
(and any related qualification under blue sky laws), and in any underwriting
involved therein, the number of Vested Shares (as defined in the Optionee's
stock option agreement) specified in a written request made by the Optionee
within fifteen (15) days after receipt of such written notice from the Company,
except as set forth in Section 3 below.
3. If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the right of any Optionee
to registration shall be conditioned upon the Optionee's participating in such
underwriting and the inclusion of such Optionee's Stock in the underwriting
pursuant to an underwriting agreement in customary form with the underwriter or
underwriters selected by the Company. Notwithstanding any other provision of
these registration rights, if the underwriter reasonably determines that
marketing factors require a limitation on the number of shares to be
underwritten, the underwriter may exclude some or all of the Stock, as follows:
with respect to shareholders exercising demand registration rights or exercising
piggyback rights superior, as to inclusion of shares in a registration, to those
of the Optionee (for example, the rights under the Fifth Amended and Restated
Registration Rights Agreement dated April 27, 1995, between the Company and the
holders of the Company's Preferred Stock, amendments to those rights that may
occur from time to time, and similar rights that may be granted in the future),
the number of shares that may be included by the Optionee shall be cut back
entirely before any limitation on the number of shares that may be included by
such shareholders. With respect to shareholders exercising other registration
rights (that is, rights on a parity with the Optionee's rights), the number of
shares that may be included in the registration and underwriting will be
allocated in proportion, as nearly as practicable, to the respective amounts of
securities of the Company owned by each.
4. All expenses of the registration shall be borne by the Company, except
underwriting discounts and selling commissions applicable to the sale of any
Stock and any other securities of the Company being sold in the same
registration by other shareholders, which shall be borne by the Optionee and
such other shareholders pro rata on the basis of the number of their shares
registered.
<PAGE>
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY INTEREST
THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMMISSIONER OR CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT
AS PERMITTED IN THE COMMISSIONER'S RULES.
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.
NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
POWER INTEGRATIONS, INC.
IMMEDIATELY EXERCISABLE
NONQUALIFIED STOCK OPTION AGREEMENT
Power Integrations, Inc. granted to the individual named below an option to
purchase certain shares of common stock of the Company, in the manner and
subject to the provisions of this Option Agreement.
1. Definitions:
-----------
(a) "OPTIONEE" shall mean __________________________________________.
(b) "DATE OF OPTION GRANT" shall mean ______________________________.
(c) "NUMBER OF OPTION SHARES" Shall mean ___________________________
shares of common stock of the Company as adjusted from time to time pursuant to
paragraph 9 below.
(d) "EXERCISE PRICE" shall mean $________ per share as adjusted from
time to time pursuant to paragraph 9 below.
(e) "INITIAL EXERCISE DATE" shall be the Date of Option Grant.
(f) "INITIAL VESTING DATE" shall be ________________________________.
1
<PAGE>
(g) Determination of "VESTED PERCENTAGE":
Vested Percentage
-----------------
Prior to Initial Vesting Date 0%
On Initial Vesting Date, 12.50%
provided the Optionee's
employment or service with
a Participating Company is
continuous from the Date of
Option Grant until the Initial
Vesting Date
Plus
----
For each full month 2.0833%
of the Optionee's continuous
employment or service with a
Participating Company from the
Initial Vesting Date
In no event shall the Vested
Percentage exceed 100%
(h) "OPTION TERM DATE" shall mean the date ten (10) years after the
Date of Option Grant.
(i) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(j) "COMPANY" shall mean Power Integrations, Inc., a California
corporation, and any successor corporation thereto.
(k) "PARTICIPATING COMPANY" shall mean (i) the Company and (ii) any
present or future parent and/or subsidiary corporation of the Company while
such corporation is a parent or subsidiary of the Company. For purposes of this
Option Agreement, a parent corporation and a subsidiary corporation shall be as
defined in sections 424(e) and 424(f) of the Code.
(l) "PARTICIPATING COMPANY GROUP" shall mean at any point in time all
corporations collectively which are then a Participating Company.
(m) "PLAN" shall mean the Power Integrations, Inc. 1988 Stock Option
Plan.
2
<PAGE>
2. Status of the Option. This Option is intended to be a nonqualified
--------------------
stock option and shall not be treated as an incentive stock option as described
in section 422 of the Code.
3. Administration. All questions of interpretation concerning this Option
--------------
Agreement shall be determined by the Board of Directors of the Company (the
"BOARD") and/or by a duly appointed committee of the Board having such powers as
shall be specified by the Board. Any subsequent references herein to the Board
shall also mean the committee if such committee has been appointed. All
determinations by the Board shall be final and binding upon all persons having
an interest in the Option. Any officer of a Participating Company shall have the
authority to act on behalf of the Company with respect to any matter, right,
obligation, or election which is the responsibility of or which is allocated to
the Company herein, provided the officer has apparent authority with respect to
such matter, right, obligation, or election.
4. Exercise of the Option.
----------------------
(a) Right to Exercise. The Option shall be immediately exercisable in
-----------------
its entirety on and after the Initial Exercise Date subject to the Optionee's
agreement that any shares purchased upon exercise are subject to the Company's
repurchase rights set forth in paragraph 11 and paragraph 12 below.
(b) Method of Exercise. The Option shall be exercisable by written
------------------
notice to the Company which shall state the election to exercise the Option, the
number of shares for which the Option is being exercised and such other
representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. Such written notice shall be signed by the Optionee and shall
be delivered in person or by certified or registered mail, return receipt
requested, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in paragraph 6 below, accompanied by (i) full payment of
the Exercise Price for the number of shares being purchased and (ii) an executed
copy, if required herein, of the then current form of joint escrow instructions
referenced below.
(c) Form of Payment of Exercise Price. Payment of the Exercise Price
---------------------------------
shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the
Company of shares of the Company's common stock owned by the Optionee having a
value not less than the aggregate Exercise Price, which either have been owned
by the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company, (iii) by Immediate Sales Proceeds, as defined
below, or (iv) by any combination of the foregoing. Notwithstanding the
foregoing, the Option may not be exercised by tender to the Company of shares
of the Company's common stock to the extent such tender of stock would
constitute a violation of the provisions of any law, regulation and/or agreement
restricting the redemption of the Company's common stock. "Immediate Sales
Proceeds" shall mean the assignment in form acceptable to the Company of the
proceeds of a sale of some or all of the shares acquired upon the exercise of
the Option pursuant to a program and/or procedure approved by the Company. The
Company
3
<PAGE>
reserves, at any and all times, the right, in the Company's sole and absolute
discretion, to decline to approve any such program and/or procedure.
(d) Withholding. At the time the Option is exercised in whole
-----------
or in part, or at any time thereafter as requested by the Company, the Optionee
shall make adequate provision for foreign, federal and state tax withholding
obligations of the Company, if any, which arise in connection with the Option,
including, without limitation, obligations arising upon (i) the exercise, in
whole or in part, of the Option, (ii) the transfer, in whole or in part, of any
shares acquired on exercise of the Option, (iii) the operation of any law or
regulation providing for the imputation of interest, or (iv) the lapsing of any
restriction with respect to any shares acquired on exercise of the Option.
(e) Certificate Registration. The certificate or certificates
------------------------
for the shares as to which the Option shall be exercised shall be registered in
the name of the Optionee, or, if applicable, the heirs of the Optionee.
(f) Restrictions on Grant of the Option and Issuance of Shares.
----------------------------------------------------------
The grant of the Option and the issuance of the shares upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal or state law with respect to such securities. The Option may not be
exercised if the issuance of shares upon such exercise would constitute a
violation of any applicable federal or state securities laws or other law or
regulations. IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. Section 260.141.11
of the Rules of the Commissioner of Corporations of the State of California is
set forth in paragraph 15 herein. In addition, the Option may not be exercised
unless (i) a registration statement under the Securities Act of 1933, as amended
(the "SECURITIES ACT"), shall at the time of exercise of the Option be in effect
with respect to the shares issuable upon exercise of the Option or (ii) in the
opinion of legal counsel to the Company, the shares issuable upon exercise of
the Option may be issued in accordance with the terms of an applicable exemption
from the registration requirements of the Securities Act. THE OPTIONEE IS
CAUTIONED THAT THE OPTION MAY NOT BE EXERCISABLE UNLESS THE FOREGOING CONDITIONS
ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION
WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. As a condition to the exercise
of the Option, the Company may require the Optionee to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation and to make any representation or warranty with
respect thereto as may be requested by the Company.
(g) Fractional Shares. The Company shall not be required to
-----------------
issue fractional shares upon the exercise of the Option.
4
<PAGE>
5. Non-Transferability of the Option. The Option may be exercised during
---------------------------------
the lifetime of the Optionee only by the Optionee and may not be assigned or
transferred in any manner except by will or by the laws of descent and
distribution.
6. Termination of the Option. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Term Date as defined
above, (b) the last date for exercising the Option following termination of
employment or service as described in paragraph 7 below, or (c) a Transfer of
Control to the extent provided in paragraph 8 below.
7. Termination of Employment or Service.
------------------------------------
(a) Termination of the Option. If the Optionee's employment or
-------------------------
service with the Participating Company Group terminates for any reason except
death or disability, the Option, to the extent unexercised and exercisable by
the Optionee on the date on which the Optionee ceased to be an employee, may be
exercised by the Optionee within one (1) month after the date on which the
Optionee's employment or service terminates, but in any event no later than the
Option Term Date. If the Optionee's employment or service with the Participating
Company Group is terminated because of the death or the Optionee or disability
of the Optionee, the Option may be exercised by the Optionee (or the Optionee's
legal representative) at any time prior to the expiration of six (6) months from
the date the Optionee's employment or service terminated, but in any event no
later than the Option Term Date. The Optionee's employment or service shall be
deemed to have terminated on account of death if the Optionee dies within one
(1) month after the Optionee's termination of employment or service.
Notwithstanding the provisions of this paragraph 7(a), the Option may not be
exercised after the Optionee's termination of employment or service to the
extent that the shares acquired on exercise of the Option would be subject to
the Unvested Share Repurchase Option as provided in paragraph 11 below.
(b) Termination of Employment or Service Defined. For purposes of
--------------------------------------------
this paragraph 7, the Optionee's employment or service shall be deemed to have
terminated either upon an actual termination of employment or service or upon
the Optionee's employer ceasing to be a Participating Company. An Optionee's
employment or service shall not be deemed to have terminated merely because of a
change in the capacity in which the Optionee renders service to the
Participating Company Group or a change in the Participating Company for which
the Optionee renders such service, provided that there is no interruption or
termination of the Optionee's service.
(c) Extension if Exercise Prevented by Law. Notwithstanding the
---------------------------------------
foregoing, if the exercise of the Option within the applicable time periods set
forth in paragraph 7(a) is prevented by the provisions of paragraph 4(f), the
Option shall remain exercisable until three (3) months after the date the
Optionee is notified by the Company that the Option is exercisable, but in any
event no later than the Option Term Date.
5
<PAGE>
(d) Extension if Optionee Subject to Section 16(b). Notwithstanding
----------------------------------------------
the foregoing, if a sale within the applicable time periods set forth in
paragraph 7(a) of shares acquired upon the exercise of the Option would subject
the Optionee to suit under Section 16(b) of the Securities Exchange Act of 1934,
as amended (the "EXCHANGE ACT"), the Option shall remain exercisable until the
earliest to occur of (i) the tenth (10th) day following the date on which a sale
of such shares by the Optionee would no longer be subject to such suit, (ii) the
one hundred and ninetieth (190th) day after the Optionee's termination of
employment or service, or (iii) the Option Term Date.
(e) Leave of Absence. For purposes hereof, the Optionee's employment
----------------
with the Participating Company Group shall not be deemed to terminate if the
Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event of a
leave in excess of ninety (90) days, the Optionee's employment shall be deemed
to terminate on the ninety-first (91st) day of the leave unless the Optionee's
right to reemployment with the Participating Company Group remains guaranteed by
statute or contract. Notwithstanding the foregoing, however, a leave of absence
shall be treated as employment for purposes of determining the Optionee's Vested
Percentage if and only if the leave of absence is designated by the Company as
(or required by law to be) a leave for which vesting credit is given.
8. Ownership Change and Transfer of Control. For purposes hereof, the
----------------------------------------
"CONTROL COMPANY" shall mean the Participating Company whose stock is subject to
the Option. An "OWNERSHIP CHANGE" shall be deemed to have occurred in the event
any of the following occurs with respect to the Control Company:
(a) the direct or indirect sale or exchange by the shareholders of
the Control Company of all or substantially all of the voting stock of the
Control Company;
(b) a merger or consolidation in which the Control Company is a
party; or
(c) the sale, exchange, or transfer (including, without limitation,
pursuant to a liquidation or dissolution) of all or substantially all of the
Control Company's assets (other than a sale, exchange, or transfer to one (1) or
more corporations where the shareholders of the Control Company before such
sale, exchange, or transfer retain, directly or indirectly, at least a majority
of the beneficial interest in the voting stock of the corporation(s) to which
the assets were transferred).
A "TRANSFER OF CONTROL" shall mean an Ownership Change described clauses
(a) or (b) above in which the shareholders of the Control Company before such
Ownership Change do not retain, directly or indirectly, at least a majority of
the beneficial interest in the voting stock of the Control Company or the
successor thereto, or an Ownership Change described in clause (c) above.
In the event of a Transfer of Control, the Board, in its sole discretion,
may arrange with the surviving, continuing, successor, or purchasing corporation
or parent
6
<PAGE>
corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), for the
Acquiring Corporation to assume the Company's rights and obligations under the
Option or substitute a substantially equivalent option for the Acquiring
Corporation's stock for the Option. The Company shall provide the Optionee with
at least ten (10) days advance written notice of the pending Transfer of Control
prior to the consummation thereof. The Option shall terminate effective as of
the date of the Transfer of Control to the extent that the Option is neither
assumed by the Acquiring Corporation nor exercised as of the date of the
Transfer of Control. Notwithstanding the foregoing, shares acquired upon
exercise of the Option prior to the Transfer of Control and any consideration
received pursuant to the Transfer of Control with respect to such shares shall
continue to be subject to all applicable provisions of this Option Agreement
except as otherwise provided herein. If the Control Corporation is the surviving
or continuing corporation in an Ownership Change described in paragraph 8(a),
the Option shall be deemed to have been assumed by the Acquiring Corporation for
purposes of this Option Agreement.
9. Effect of Change in Stock Subject to the Option. Appropriate
-----------------------------------------------
adjustments shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, recapitalization combination, reclassification, or like
change in the capital structure of the Company. In the event a majority of the
shares which are of the same class as the shares that are subject to the Option
are exchanged for, converted into, or otherwise become (whether or not pursuant
to an Ownership Change) shares of another corporation (the "NEW SHARES"), the
Company may unilaterally amend the Option to provide that the Option is
exercisable for New Shares. In the event of any such amendment, the number of
shares and the exercise price shall be adjusted in a fair and equitable manner,
as determined by the Board, in its sole discretion.
10. Rights as a Shareholder or Employee. The Optionee shall have no
-----------------------------------
rights as a shareholder with respect to any shares covered by the Option until
the date of the issuance of a certificate or certificates for the shares for
which the Option has been exercised (as evidenced by an appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends or distributions or other rights for
which the record date is prior to the date such certificate or certificates are
issued, except as provided in paragraph 9 above. Nothing in the Option shall
confer upon the Optionee any right to continue in the employ of a Participating
Company or interfere in any way with any right of the Participating Company
Group to terminate the Optionee's employment or service at any time.
11. Unvested Share Repurchase Option.
--------------------------------
(a) Unvested Share Repurchase Option. In the event the Optionee's
--------------------------------
employment or service with the Participating Company Group is terminated for any
reason, with or without cause, or, except as provided in paragraph 11(g) below,
if the Optionee, the Optionee's legal representative or other holder of shares
acquired upon exercise of the Option attempts to sell, exchange, transfer,
pledge, or otherwise dispose of (other than pursuant to an Ownership Change) any
shares acquired upon exercise of
7
<PAGE>
the Option which exceed the Optionee's Vested Shares as defined in paragraph
11(b) below (the "UNVESTED SHARES"), the Company shall have the right to
repurchase the Unvested Shares under the terms and subject to the conditions set
forth in this paragraph 11 (the "UNVESTED SHARE REPURCHASE OPTION").
(b) Vested Shares and Unvested Shares Defined. The total Number of
-----------------------------------------
Option Shares multiplied by the Vested Percentage as set forth in paragraph 1
above are Vested Shares. For purposes of this paragraph 11, the Unvested Shares
are the number of shares acquired upon exercise of the Option in excess of the
Vested Shares.
(c) Exercise of Unvested Share Repurchase Option. The Company may
--------------------------------------------
exercise the Unvested Share Repurchase Option by written notice to the Optionee
within sixty (60) days after (i) such termination of employment or service (or
exercise of the Option, if later) or (ii) the Company has received notice of the
attempted disposition. If the Company fails to give notice within such sixty
(60) day period, the Unvested Share Repurchase Option shall terminate unless the
Company and the Optionee have extended the time for the exercise of the Unvested
Share Repurchase Option. The Unvested Share Repurchase Option must be exercised,
if at all, for all of the Unvested Shares, except as the Company and the
Optionee otherwise agree.
(d) Payment for Shares and Return of Shares. Payment by the Company
---------------------------------------
to the Optionee shall be made in cash within thirty (30) days after the date of
the personal delivery or mailing of the written notice of exercise of the
Unvested Share Repurchase Option. For purposes of the foregoing, cancellation of
any indebtedness of the Optionee to any Participating Company shall be treated
as payment to the Optionee in cash to the extent of the unpaid principal and any
accrued interest canceled. The purchase price per share being repurchased by the
Company shall be an amount equal to the Optionee's original cost per share, as
adjusted pursuant to paragraph 9 above (the "REPURCHASE PRICE"). The shares
being repurchased shall be delivered to the Company by the Optionee at the same
time as the delivery of the purchase price to the Optionee.
(e) Assignment of Unvested Share Repurchase Option. The Company
----------------------------------------------
shall have the right to assign the Unvested Share Repurchase Option at any time,
whether or not such option is then exercisable, to one (1) or more persons as
may be selected by the Company.
(f) Ownership Change. In the event of an Ownership Change, any and
----------------
all new, substituted or additional securities or other property to which the
Optionee is entitled by reason of the Optionee's ownership of Unvested Shares
shall be immediately subject to the Unvested Share Repurchase Option and
included in the terms "Stock" and "Unvested Shares" for all purposes of the
Unvested Share Repurchase Option with the same force and effect as the Unvested
Shares immediately prior to the Ownership Change. While the aggregate Repurchase
Price shall remain the same after such Ownership Change, the Repurchase Price
per Unvested Share upon exercise of the Unvested Share Repurchase Option
following such Ownership Change shall be adjusted as appropriate. For purposes
of determining the Vested Percentage following an Ownership Change, credited
employment or service shall include all employment or
8
<PAGE>
service with any corporation which is a Participating Company at the time the
employment or service is rendered, whether or not such corporation is a
Participating Company both before and after the event constituting the Ownership
Change.
(g) Transfers Not Subject to the Unvested Share Repurchase Option.
--------------------------------------------------------------
The Unvested Share Repurchase Option shall not apply to a transfer of Unvested
Shares to the Optionee's ancestors, descendants, or spouse or to a custodian or
trustee solely for the benefit of the Optionee or the Optionee's ancestors,
descendants, or spouse; provided, however, that such transferee shall agree in
writing (in a form satisfactory to the Company) to receive and hold such shares
subject to all the terms and conditions of this Option Agreement, including this
paragraph 11 providing for an Unvested Share Repurchase Option. Any such
transferee shall thereafter be included within the meaning of the term
"Optionee".
12. Right of First Refusal.
----------------------
(a) Right of First Refusal. Except as provided in paragraph 12(g)
----------------------
below, in the event the Optionee, the Optionee's legal representative or other
holder of shares acquired upon exercise of the Option proposes to sell,
exchange, transfer, pledge, or otherwise dispose of any Vested Shares (the
"TRANSFER SHARES") to any person or entity, including, without limitation, any
shareholder of the Participating Company Group, the Company shall have the right
to repurchase the Transfer Shares under the terms and subject to the conditions
set forth in this paragraph 12 (the "RIGHT OF FIRST REFUSAL").
(b) Notice of Proposed Transfer. Prior to any proposed transfer of
---------------------------
the Transfer Shares, the Optionee shall give written notice (the "TRANSFER
NOTICE") to the Company describing fully the proposed transfer, including the
number of Transfer Shares, the name and address of the proposed transferee
(the"PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed
transfer price. In the event of a bona fide gift or involuntary transfer, the
proposed transfer price shall be deemed to be the fair market value of the
Transfer Shares as determined by the Company in good faith. In the event the
Optionee purposes to transfer any Transfer Shares to more than one (1) Proposed
Transferee, the Optionee shall provide a separate Transfer Notice for the
proposed transfer to each Proposed Transferee. The Transfer Notice shall be
signed by both the Optionee and the Proposed Transferee and must constitute a
binding commitment of the Optionee and the Proposed Transferee for the transfer
of the Transfer Shares to the Proposed Transferee subject only to the Right of
First Refusal.
(c) Bona Fide Transfer. Within ten (10) days after receipt of the
------------------
Transfer Notice, the Company shall determine the bona fide nature of the
proposed voluntary transfer and give the Optionee written notice of the
Company's determination. If the proposed transfer is deemed not to be bona fide,
the Optionee shall be responsible for providing additional information to the
Company to show the bona fide nature of the proposed transfer, and the Optionee
shall have no right to transfer the Transfer Shares without first complying with
the procedures described in this paragraph 12. The Company shall have the right
to demand further assurances from the Optionee and the Proposed Transferee (in a
form satisfactory to the Company) that the Transfer Notice
9
<PAGE>
fully and accurately sets forth all of the terms and conditions of the proposed
transfer, including, without limitation, assurance that the Transfer Notice
fully and accurately sets forth the consideration actually paid for the Transfer
Shares and all transactions, directly or indirectly, between the parties which
may have affected the price the Proposed transferee was willing to pay for the
Transfer shares.
(d) Exercise of the Right of First Refusal. In the event the proposed
--------------------------------------
transfer is deemed to be bona fide, the Company shall have the right to purchase
all, but not less than all, of the Transfer Shares (except as the Company and
the Optionee otherwise agree) at the purchase price and on the terms set forth
in the Transfer Notice by delivery to the Optionee of a notice of exercise of
the Right of First Refusal within thirty (30) days after the date the Transfer
Notice is delivered to the Company or ten (10) days after the Company has
approved the proposed transfer as bona fide, whichever is later. The Company's
exercise or failure to exercise the Right of First Refusal with respect to any
proposed transfer described in a Transfer Notice shall not affect the Company's
ability to exercise the Right of First Refusal with respect to any proposed
transfer described in any other Transfer Notice, whether or not such other
Transfer Notice is issued by the Optionee or issued by a person other than the
Optionee with respect to a proposed transfer to the same Proposed Transferee. If
the Company exercises the Right of First Refusal, the Company and the Optionee
shall thereupon consummate the sale of the Transfer Shares to the Company on the
terms set forth in the Transfer Notice within sixty (60) days after the date the
Transfer Notice is delivered to the Company or the Company has approved the
proposed transfer as bona fide, whichever is later (unless a longer period is
offered by Proposed Transferee); provided, however, that in the event the
Transfer Notice provides for the payment for the Transfer Shares other than in
cash, the Company shall have the option of paying for the Transfer Shares by the
present value cash equivalent of the consideration described in the Transfer
Notice as reasonably determined by the Company. For purposes of the forgoing,
cancellation of any indebtedness of the Optionee to any Participating Company
shall be treated as payment to the Optionee in cash to the extent of the unpaid
principal and any accrued interest canceled.
(e) Failure to Exercise Right of First Refusal. If the company fails
------------------------------------------
to exercise the Right of First Refusal in full (or to such lesser extent as the
Company and the Optionee otherwise agree) within the period specified in
paragraph 12(d) above, the Optionee may conclude a transfer to the Proposed
Transferee of the Transfer Shares on the terms and condition described in the
Transfer Notice, provided such transfer occurs not later than one hundred
twenty (120) days following delivery to the Company of the Transfer Notice. The
Company shall have the right to demand further assurances from the Optionee and
the Proposed Transferee (in a form satisfactory to the Company) that the
transfer of the Transfer Shares was actually carried out on the terms and
conditions described in the Transfer Notice. No Transfer Shares shall be
tranferred on the books of the Company until the Company has received such
assurances, if so demanded, and has approved the proposed transfer as bona fide,
pursuant to paragraph 12(c) above. Any proposed transfer on terms and conditions
different from those described in the Transfer Notice, as well as any subsequent
proposed transfer by the Optionee, shall again
10
<PAGE>
be subject to the Right of First Refusal and shall require compliance by the
Optionee with the procedure described in this paragraph 12.
(f) Transferees of the Transfer Shares. All transferees of the
----------------------------------
Transfer Shares or any interest therein, other than the Company, shall be
required as a condition of such transfer to agree in writing (in a form
satisfactory to the Company) that such transferee shall receive and hold such
Transfer Shares or interests therein subject to all of the terms and conditions
of this Option Agreement, including this paragraph 12 providing for the Right of
First Refusal with respect to any subsequent transfer. Any sale or transfer of
any shares acquired upon exercise of the Option shall be void unless the
provisions of this paragraph 12 are met.
(g) Transfers Not Subject to the Right of First Refusal. The Right of
---------------------------------------------------
First Refusal shall not apply to the following:
(i) any transfer or exchange of the shares acquired pursuant to
the exercise of the Option if such transfer is in connection with an Ownership
Change; provided, that if the consideration received pursuant to such transfer
or exchange consists of stock of a Participating Company, such consideration
shall remain subject to the Right of First Refusal unless the provisions of
paragraph 12(i) below result in a termination of the Right of First Refusal; or
(ii) a transfer to the Optionee's ancestors, descendants, or
spouse or to a custodian or trustee solely for the benefit of the Optionee or
the Optionee's ancestors, descendants, or spouse; provided, however, that such
transferee shall agree in writing (in a form satisfactory to the Company) to
receive and hold the Transfer Shares subject to all the terms and conditions of
this Option Agreement, including this paragraph 12 providing for a Right of
First Refusal with respect to any subsequent transfer.
(h) Assignment of the Right of First Refusal. The Company shall have
----------------------------------------
the right to assign the Right of First Refusal at any time, whether or not the
Optionee has attempted a transfer, to one (1) or more persons as may be selected
by the Company.
(i) Early Termination of the Right of First Refusal. The other
-----------------------------------------------
provisions of this paragraph 12 notwithstanding, the Right of First Refusal
shall terminate, and be of no further force and effect upon (i) the occurrence
of a Transfer of Control, unless the Acquiring Corporation assumes the Company's
rights and obligations under the Option or substitutes a substantially
equivalent option for the Acquiring Corporation's stock for the Option, or (ii)
the existence of a public market for the class of shares subject to the Right of
First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (x) such stock is
listed on a national securities exchange (as that term is used in the Exchange
Act) or (y) such stock is traded on the over-the-counter market and prices
therefor are published daily on business days in a recognized financial journal.
11
<PAGE>
13. Escrow.
------
(a) Establishment of Escrow. To ensure that shares subject to the
-----------------------
Unvested Share Repurchase Option or the Right of First Refusal will be available
for repurchase, the Company may require the Optionee to deposit the certificate
or certificates evidencing the shares which the Optionee purchases upon exercise
of the Option with an escrow agent designated by the Company under the terms and
conditions of an escrow agreement approved by the Company. If the Company does
not require such deposit as a condition of exercise of the Option, the Company
reserves the right at any time to require the Optionee to so deposit the
certificate or certificates in escrow. The Company shall bear the expenses of
the escrow.
(b) Delivery of Shares to Optionee. As soon as practicable after the
------------------------------
expiration of the Unvested Share Repurchase Option and the Right of First
Refusal, the escrow agent shall deliver to the Optionee the shares no longer
subject to such restrictions.
(c) Notices and Payments. In the event the shares held in escrow are
--------------------
subject to the Company's exercise of the Unvested Share Repurchase Option or the
Right of First Refusal, the notices required to be given to the Optionee shall
be given to the escrow agent and any payment required to be given to the
Optionee shall be given to the escrow agent. Within thirty (30) days after
payment by the Company, the escrow agent shall deliver the shares which the
Company has purchased to the Company and shall deliver the payment received from
the Company to the Optionee.
14. Stock Dividends Subject to Option Agreement. If, from time to time,
-------------------------------------------
there is any stock dividend, stock split, or other change in the character or
amount of any of the outstanding stock of the corporation the stock of which is
subject to the provisions of this Option Agreement, then in such event any and
all new, substituted or additional securities to which the Optionee is entitled
by reason of the Optionee's ownership of the shares acquired upon exercise of
the Option shall be immediately subject to the Unvested Share Repurchase Option
and the Right of First Refusal with the same force and effect as the shares
subject to the Unvested Share Repurchase Option and the Right of First Refusal
immediately before such event.
15. Rules of the Commissioner of Corporations. The Optionee is hereby
-----------------------------------------
delivered a copy of Section 260.141.11 of the Rules of the Commissioner of
Corporations of the State of California, adopted pursuant to the California
Corporate Securities Act of 1968. References to the "Code" in the following text
are references to the California Corporations Code.
260.141.11. Restriction on Transfer.
(a) The issuer of any security upon which a restriction on transfer
has been imposed pursuant to Section 260.102.6, 260.141.10 or 260.534 shall
cause a copy of this section to be delivered to each issuee or transferee of
such security at the time the certificate evidencing the security is delivered
to the issuee or transferee.
12
<PAGE>
(b) It is unlawful for the holder of any such security to consummate
a sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102
of the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants, or spouse, or
any custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or custodian
for the account of the transferee or the transferee's ancestors, descendants, or
spouse;
(5) to holders of securities of the same class of the same
issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code
(either acting as such or as a finder) to a resident of a foreign state,
territory or country who is neither domiciled in this state to the knowledge of
the broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other
lien given by the purchaser to the seller upon a sale of the security for which
the Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Sections 25111, 25112,
25113, or 25121 of the Code, of the securities to be transferred, provided that
no order under Section 25140 or subdivision (a) of Section 25143 is in effect
with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111, 25112
or 25113 of the Code, provided that no order under Section 25140 or subdivision
(a) of Section 25143 is in effect with respect to such qualification;
13
<PAGE>
(13) between residents of foreign states, territories or
countries who are neither domiciled nor actually present in this state;
(14) to State Controller pursuant to the Unclaimed Property Law
or to the administrator of the unclaimed property law of another state;
(15) by the State Controller pursuant to the Unclaimed Property
Law or by the administrator of the unclaimed property law of another state if,
in either such case, person (i) discloses to potential purchasers at the sale
that transfer of the securities is restricted under this rule, (ii) delivers to
each purchaser a copy of this rule, and (iii) advises the Commissioner of the
name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does
not involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by subdivision
(f) of Section 25102; provided that any such transfer is on the condition that
any certificate evidencing the security issued to such transferee shall contain
the legend required by this section.
(c) The certificate representing all such securities subject to such
a restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend prominently stamped or printed
thereon in capital letters of not less than 10-point size as follows: "IT IS
UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY INTEREST
THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT
AS PERMITTED IN THE COMMISSIONER'S RULES."
16. Legends. The Company may at any time place legends referencing the
-------
Unvested Share Repurchase Option set forth in paragraph 11 above, the Right of
First Refusal set forth in paragraph 12 above, and any applicable federal or
state securities law restrictions on all certificates representing share of
stock subject to the provisions of this Option Agreement. The Optionee shall, at
the request of the Company, promptly present to the Company and any all
certificates representing shares acquired pursuant to the Option in the
possession of the Optionee in order to effectuate the provisions of this
paragraph. Unless otherwise specified by the Company, legends placed on such
certificates may include, but shall not be limited to, the following:
(a) "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR
14
<PAGE>
THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES
REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SUCH ACT."
(b) Any legend required to be placed thereon by the Commissioner of
Corporations of the State of California.
(c) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
UNVESTED SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
(d) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
17. Initial Public Offering. The Optionee hereby agrees that in the event
-----------------------
of an initial public offering of stock made by the Company under the Securities
Act, the Optionee shall not offer, sell, contract to sell, pledge, hypothecate,
grant any option to purchase or make any short sale of, or otherwise dispose of
any shares of stock of the Company or any rights to acquire stock of the Company
for such period of time as may be established by the underwriter for such
initial public offering; provided, however, that such period of time shall not
exceed one hundred eighty (180) days from the effective date of the registration
statement to be filed in connection with such initial public offering. The
foregoing limitation shall not apply to shares registered under the Securities
Act. The Optionee shall be subject to this paragraph 17 provided and only if
this officers and directors of the Company are also subject to similar
arrangements.
18. Binding Effect. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
19. Amendment or Termination. The Board may amend or terminate the Plan
------------------------
and/or the Option at any time; provided, however, that no such amendment or
termination may adversely affect the Option or any unexercised portion hereof
without the consent of the Optionee unless such termination or amendment is
necessary to comply with any applicable law or government regulation. No
amendment or addition to this Option Agreement shall be effective unless in
writing.
15
<PAGE>
20. Integrated Agreement. This Option Agreement constitutes the entire
--------------------
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group other than those as set forth
or provided for herein. To the extent contemplated herein, the provisions of
this Option Agreement shall survive any exercise of the Option and shall remain
in full force and effect.
21. Applicable Law. This Option Agreement shall be governed by the laws of
--------------
the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
POWER INTEGRATIONS, INC.
BY:_______________________________________
Robert G. Staples
Vice President,
Finance and Administration
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, including the Unvested Share Repurchase
Option set forth in paragraph 11 and the Right of First Refusal set forth in
paragraph 12, and hereby accepts the Option subject to all of the terms and
provisions thereof. The Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board upon any questions
arising under this Option Agreement.
The undersigned acknowledges receipt of a copy of the Plan and a copy of
Section 260.141.11 of the Rules of the Commissioner of Corporations of the State
of California regarding restriction on transfer.
OPTIONEE
Date:_______________________ ____________________________________________
16
<PAGE>
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY INTEREST
THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT
AS PERMITTED IN THE COMMISSIONER'S RULES.
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION
THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
1933.
POWER INTEGRATIONS, INC.
IMMEDIATELY EXERCISABLE
INCENTIVE STOCK OPTION AGREEMENT
Power Integrations, Inc. granted to the individual named below an
option to purchase certain shares of common stock of the Company, in the manner
and subject to the provisions of this Option Agreement.
1. Definitions:
-----------
(a) "Optionee" shall mean 1-.
(b) "Date of Option Grant" shall mean 2.
(c) "Number of Option Shares" shall mean 3 shares of common
stock of the Company as adjusted from time to time pursuant to paragraph 9
below.
(d) "Exercise Price" shall mean $4 per share as adjusted from
time to time pursuant to paragraph 9 below.
(e) "Initial Exercise Date" shall be the Date of Option Grant.
(f) "Initial Vesting Date" shall be 5.
1
<PAGE>
(g) Determination of "Vested Percentage":
Vested Percentage
-----------------
Prior to Initial Vesting Date 0%
On Initial Vesting Date,
provided the Optionee's employment 12%
or service with a Participating
Company is continuous from the
Date of Option Grant until
the Initial Vesting Date
Plus
----
For each full month 2%
of the Optionee's continuous
employment or service with
a Participating Company from
the Initial Vesting Date
In no event shall the Vested
Percentage exceed 100%.
(h) "Option Term Date" shall mean the date ten (10) years after the
Date of Option Grant .
(i) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(j) "Company" shall mean Power Integrations, Inc., a California
corporation, and any successor corporation thereto.
(k) "Participating Company" shall mean (i) the Company and (ii) any
present or future parent and/or subsidiary corporation of the Company while such
corporation is a parent or subsidiary of the Company. For purposes of this
Option Agreement, a parent corporation and a subsidiary corporation shall be as
defined in sections 424(e) and 424(f) of the Code.
(l) "Participating Company Group" shall mean at any point in time all
corporations collectively which are then a Participating Company.
(m) "Plan" shall mean the Power Integrations, Inc. 1988 Stock Option
Plan.
2. Status of the Option. This Option is intended to be an incentive stock
--------------------
option as described in section 422 of the Code, but the Company does not
represent or warrant that this Option qualifies as such. The Optionee should
consult with the Optionee's own tax advisors regarding the tax effects of this
Option and the requirements necessary to obtain favorable
2
<PAGE>
income tax treatment under section 422 of the Code, including, but not limited
to, holding period requirements.
3. Administration. All questions of interpretation concerning this Option
--------------
Agreement shall be determined by the Board of Directors of the Company (the
"Board") and/or by a duly appointed committee of the Board having such powers as
shall be specified by the Board. Any subsequent references herein to the Board
shall also mean the committee if such committee has been appointed. All
determinations by the Board shall be final and binding upon all persons having
an interest in the Option. Any officer of a Participating Company shall have the
authority to act on behalf of the Company with respect to any matter, right,
obligation, or election which is the responsibility of or which is allocated to
the Company herein, provided the officer has apparent authority with respect to
such matter, right, obligation, or election.
4. Exercise of the Option.
----------------------
(a) Right to Exercise. The Option shall be immediately exercisable in
-----------------
its entirety on and after Initial Exercise Date subject to the Optionee's
agreement that any shares purchased upon exercise are subject to the Company's
repurchase rights set forth in paragraph 11 and paragraph 12 below.
Notwithstanding the foregoing, except as provided in paragraph 16
below, the aggregate fair market value of the stock with respect to which the
Optionee may exercise the Option for the first time during any calendar year,
together with any other incentive stock options which are exercisable for the
first time during any such year, as determined in accordance with section 422(d)
of the Code, shall not exceed One Hundred Thousand Dollars ($100,000). Such
limitation on exercise described in section 422(d) of the Code shall be referred
to in this Option Agreement as the "$100,000 EXERCISE LIMITATION".
(b) Method of Exercise. The Option shall be exercisable by written
------------------
notice to the Company which shall state the election to exercise the Option, the
number of shares for which the Option is being exercised and such other
representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. Such written notice shall be signed by the Optionee and shall
be delivered in person or by certified or registered mail, return receipt
requested, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in paragraph 6 below, accompanied by (i) full payment of
the Exercise Price for the number of shares being purchased and (ii) an executed
copy, if required herein, of the then current form of joint escrow instructions
referenced below.
(c) Form of Payment of Exercise Price. Payment of the Exercise Price
---------------------------------
shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the
Company of shares of the Company's common stock owned by the Optionee having a
value not less than the aggregate Exercise Price, which either have been owned
by the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company, (iii) by Immediate Sales Proceeds, as defined
below, or (iv) by any combination of the foregoing.
3
<PAGE>
Nothwithstanding the foregoing, the Option may not be exercised by tender to the
Company of shares of the Company's common stock to the extent such tender of
stock would constitute a violation of the provisions of any law, regulation
and/or agreement restricting the redemption of the Company's common stock.
"Immediate Sales Proceeds" shall mean the assignment in form acceptable to the
Company of the proceeds of a sale of some or all of the shares acquired upon the
exercise of the Option pursuant to a program and/or procedure approved by the
Company. The Company reserves, at any and all times, the right, in the Company's
sole and absolute discretion, to decline to approve any such program and/or
procedure.
(d) Withholding. At the time the Option is exercised, in whole or in
-----------
part, or at any time thereafter as requested by the Company, the Optionee shall
make adequate provision for foreign, federal and state tax withholding
obligations of the Company, if any, which arise in connection with the Option,
including, without limitation, obligations arising upon (i) the exercise, in
whole or in part, of the Option, (ii) the transfer, in whole or in part, of any
shares acquired on exercise of the Option, (iii) the operation of any law or
regulation providing for the imputation of interest, or (iv) the lapsing of any
restriction with respect to any shares acquired on exercise of the Option.
(e) Certificate Registration. The certificate or certificates for the
------------------------
shares as to which the Option shall be exercised shall be registered in the name
of the Optionee, or, if applicable, the heirs of the Optionee.
(f) Restrictions on Grant of the Option and Issuance of Shares. The
-----------------------------------------------------------
grant of the Option and the issuance of the shares upon exercise of the Option
shall be subject to compliance with all applicable requirements of federal or
state law with respect to such securities. The Option may not be exercised if
the issuance of shares upon such exercise would constitute a violation of any
applicable federal or state securities laws or other law or regulations. IT IS
UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY INTEREST
THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT
AS PERMITTED IN THE COMMISSIONER'S RULES. Section 260.141.11 of the Rules of the
Commissioner of Corporations of the State of California is set forth in
paragraph 17 herein. In addition, the Option may not be exercised unless (i) a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), shall at the time of exercise of the Option be in effect with
respect to the shares issuable upon exercise of the Option or (ii) in the
opinion of legal counsel to the Company, the shares issuable upon exercise of
the Option may be issued in accordance with the terms of an applicable exemption
from the registration requirements of the Securities Act. THE OPTIONEE IS
CAUTIONED THAT THE OPTION MAY NOT BE EXERCISABLE UNLESS THE FOREGOING CONDITIONS
ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION
WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. As a condition to the exercise of
the Option, the Company may require the Optionee to satisfy any qualifications
that may be necessary or appropriate, to evidence compliance with applicable law
or regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
4
<PAGE>
(g) Fractional Shares. The Company shall not be required to issue
-----------------
fractional shares upon the exercise of the Option.
5. Non-Transferability of the Option. The Option may be exercised during
---------------------------------
the lifetime of the Optionee only by the Optionee and may not be assigned or
transferred in any manner except by will or by the laws of descent and
distribution.
6. Termination of the Option. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Term Date as defined
above, (b) the last date for exercising the Option following termination of
employment or service as described in paragraph 7 below, or (c) a Transfer of
Control to the extent provided in paragraph 8 below.
7. Termination of Employment or Service.
------------------------------------
(a) Termination of the Option. If the Optionee's employment or
-------------------------
service with the Participating Company Group terminates for any reason except
death or disability, the Option, to the extent unexercised and exercisable by
the Optionee on the date on which the Optionee ceased to be an employee, may be
exercised by the Optionee within one (1) month after the date on which the
Optionee's employment or service terminates, but in any event no later than the
Option Term Date. If the Optionee's employment or service with the Participating
Company Group is terminated because of the death of the Optionee or disability
of the Optionee, the Option may be exercised by the Optionee (or the Optionee's
legal representative) at any time prior to the expiration of six (6) months from
the date the Optionee's employment or service terminated, but in any event no
later than the Option Term Date. The Optionee's employment or service shall be
deemed to have terminated on account of death if the Optionee dies within one
(1) month after the Optionee's termination of employment or service.
Notwithstanding the provisions of this paragraph 7(a), the Option may not be
exercised after the Optionee's termination of employment or service to the
extent that the shares acquired on exercise of the Option would be subject to
the Unvested Share Repurchase Option as provided in paragraph 11 below.
(b) Termination of Employment or Service Defined. For purposes of
--------------------------------------------
this paragraph 7, the Optionee's employment or service shall be deemed to have
terminated either upon an actual termination of employment or service or upon
the Optionee's employer ceasing to be a Participation Company. An Optionee's
employment or service shall not be deemed to have terminated merely because of a
change in the capacity in which the Optionee render service to the Participating
Company Group or a change in the Participating Company for which the Optionee
renders such service, provided that there is no interruption or termination of
the Optionee's service. (NOTE: If the Option is exercised more than three (3)
months after the date on which the Optionee ceased to be an employee of the
Participating Company Group (other than by reason of death or a permanent and
total disability as defined in Section 22(e)(3) of the Code), the Option will be
treated as a nonqualified stock option and not as an Incentive Stock Option to
the extent required by section 422 of the Code.)
(c) Extension if Exercise Prevented by Law. Notwithstanding the
--------------------------------------
foregoing, if the exercise of the Option within the applicable time period set
forth in paragraph 7(a) is prevented by the provisions of paragraph 4(f), the
Option shall remain
5
<PAGE>
exercisable until three (3) months after the date the Optionee is notified by
the Company that the Option is exercisable, but in any event no later than the
Option Term Date. The Company makes no representation as to the tax consequences
of any such delayed exercise. The Optionee should consult with the Optionee's
own tax advisor as to the tax consequences to the Optionee of any such delayed
exercise.
(d) Extension if Optionee Subject to Section 16(b). Notwithstanding
----------------------------------------------
the foregoing, if a sale within the applicable time periods set forth in
paragraph 7(a) of shares acquired upon the exercise of the Option would subject
the Optionee to suit under Section 16(b) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the Option shall remain exercisable until the
earliest to occur of (i) the tenth (10th) day following the date on which a sale
of such shares by the Optionee would no longer be subject to such suit, (ii) the
one hundred and ninetieth (190th) day after the Optionee's termination of
employment or service, or (iii) the Option Term Date. The Company makes no
representation as to the tax consequences of any such delayed exercise. The
Optionee should consult with the Optionee's own tax advisors as to the tax
consequences to the Optionee of any such delayed exercise.
(e) Leave of Absence. For purposes hereof, the Optionee's employment
----------------
with the Participating Company Group shall not be deemed to terminate if the
Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event of a
leave in excess of ninety (90) days, the Optionee's employment shall be deemed
to terminate on the ninety-first (91st) day of the leave unless the Optionee's
right to reemployment with the Participating Company Group remains guaranteed by
statute or contract. Notwithstanding the foregoing, however, a leave of absence
shall be treated as employment for purposes of determining the Optionee's Vested
Percentage if and only if the leave of absence is designated by the Company as
(or required by law to be) a leave for which vesting credit is given.
8. Ownership Change and Transfer of Control. For purposes hereof, the
----------------------------------------
"Control Company" shall mean the Participating Company whose stock is subject to
the Option. An "Ownership Change" shall be deemed to have occurred in the event
any of the following occurs with respect to the Control Company:
(a) the direct or indirect sale or exchange by the shareholders of
the Control Company of all or substantially all of the voting stock of the
Control Company;
(b) a merger or consolidation in which the Control Company is a
party; or
(c) the sale, exchange, or transfer (including, without limitation,
pursuant to a liquidation or dissolution) of all or substantially all of the
Control Company's assets (other than a sale, exchange, or transfer to one (1) or
more corporations where the shareholders of the Control Company before such
sale, exchange, or transfer retain, directly or indirectly, at least a majority
of the beneficial interest in the voting stock of the corporation(s) to which
the assets were transferred).
6
<PAGE>
A "Transfer of Control" shall mean an Ownership Change described clauses
(a) or (b) above in which the shareholders of the Control Company before such
Ownership Change do not retain, directly or indirectly, at least a majority of
the beneficial interest in the voting stock of the Control Company or the
successor thereto, or an Ownership Change described in clause (c) above.
In the event of a Transfer of Control, the Board, in its sole discretion,
may arrange with the surviving, continuing, successor, or purchasing corporation
or parent corporation thereof, as the case may be (the "Acquiring Corporation"),
for the Acquiring Corporation to assume the Company's rights and obligations
under the Option or substitute a substantially equivalent option for the
Acquiring Corporation's stock for the Option. The Company shall provide the
Optionee with at least ten (10) days advance written notice of the pending
Transfer of Control prior to the consummation thereof. The Option shall
terminate effective as of the date of the Transfer of Control to the extent that
the Option is neither assumed by the Acquiring Corporation nor exercised as of
the date of the Transfer of Control. Notwithstanding the foregoing, shares
acquired upon exercise of the Option prior to the Transfer of Control and any
consideration received pursuant to the Transfer of Control with respect to such
shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein. If the Control Corporation is the
surviving or continuing corporation in an Ownership Change described in
paragraph 8(a), the Option shall be deemed to have been assumed by the Acquiring
Corporation for purposes of this Option Agreement.
9. Effect of Change in Stock Subject to the Option. Appropriate
-----------------------------------------------
adjustments shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, recapitalization combination, reclassification, or like
change in the capital structure of the Company. In the event a majority of the
shares which are of the same class as the shares that are subject to the Option
are exchanged for, converted into, or otherwise become (whether or not pursuant
to an Ownership Change) shares of another corporation (the "New Shares"), the
Company may unilaterally amend the Option to provide that the Option is
exercisable for New Shares. In the event of any such amendment, the number of
shares and the exercise price shall be adjusted in a fair and equitable manner,
as determined by the Board, in its sole discretion.
10. Rights as a Shareholder or Employee. The Optionee shall have no rights
-----------------------------------
as a shareholder with respect to any shares covered by the Option until the date
of the issuance of a certificate or certificates for the shares for which the
Option has been exercised (as evidenced by an appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends or distributions or other rights for
which the record date is prior to the date such certificate or certificates are
issued, except as provided in paragraph 9 above. Nothing in the Option shall
confer upon the Optionee any right to continue in the employ of a Participating
Company or interfere in any way with any right of the Participating Company
Group to terminate the Optionee's employment or service at any time.
7
<PAGE>
11. Unvested Share Repurchase Option.
--------------------------------
(a) Unvested Share Repurchase Option. In the event the Optionee's
--------------------------------
employment or service with the Participating Company Group is terminated for any
reason, with or without cause, or, except as provided in paragraph 11(g) below,
if the Optionee, the Optionee's legal representative or other holder of shares
acquired upon exercise of the Option attempts to sell, exchange, transfer,
pledge, or otherwise dispose of (other than pursuant to an Ownership Change)
any shares acquired upon exercise of the Option which exceed the Optionee's
Vested Shares as defined in paragraph 11(b) below (the "Unvested Shares"), the
Company shall have the right to repurchase the Unvested Shares under the terms
and subject to the conditions set forth in this paragraph 11 (the "Unvested
Share Repurchase Option").
(b) Vested Shares and Unvested Shares Defined. The total Number of
-----------------------------------------
Option Shares multiplied by the Vested Percentage as set forth in paragraph 1
above are Vested Shares. For purposes of this paragraph 11, the Unvested Shares
are the number of shares acquired upon exercise of the Option in excess of the
Vested Shares.
(c) Exercise of Unvested Share Repurchase Option. The Company may
--------------------------------------------
exercise the Unvested Share Repurchase Option by written notice to the Optionee
within sixty (60) days after (i) such termination of employment or service (or
exercise of the Option, if later) or (ii) the Company has received notice of the
attempted disposition. If the Company fails to give notice within such sixty
(60) day period, the Unvested Share Repurchase Option shall terminate unless the
Company and the Optionee have extended the time for the exercise of the Unvested
Share Repurchase Option. The Unvested Share Repurchase Option must be exercised,
if at all, for all of the Unvested Shares, except as the Company and the
Optionee otherwise agree.
(d) Payment for Shares and Return of Shares. Payment by the Company
---------------------------------------
to the Optionee shall be made in cash within thirty (30) days after the date of
the personal delivery or mailing of the written notice of exercise of the
Unvested Share Repurchase Option. For purposes of the foregoing, cancellation of
any indebtedness of the Optionee to any Participating Company shall be treated
as payment to the Optionee in cash to the extent of the unpaid principal and any
accrued interest canceled. The purchase price per share being repurchased by the
Company shall be an amount equal to the Optionee's original cost per share, as
adjusted pursuant to paragraph 9 above (the "REPURCHASE PRICE"). The shares
being repurchased shall be delivered to the Company by the Optionee at the same
time as the delivery of the purchase price to the Optionee.
(e) Assignment of Unvested Share Repurchase Option. The Company shall
----------------------------------------------
have the right to assign the Unvested Share Repurchase Option at any time,
whether or not such option is then exercisable, to one (1) or more persons as
may be selected by the Company.
(f) Ownership Change. In the event of an Ownership Change, any and
----------------
all new, substituted or additional securities or other property to which the
Optionee is entitled by reason of the Optionee's ownership of Unvested Shares
shall be immediately subject to the Unvested Share Repurchase Option and
included in the terms "Stock" and "Unvested Shares"
8
<PAGE>
for all purposes of the Unvested Share Repurchase Option with the same force and
effect as the Unvested Shares immediately prior to the Ownership Change. While
the aggregate Repurchase Price shall remain the same after such Ownership
Change, the Repurchase Price per Unvested Share upon exercise of the Unvested
Share Repurchase Option following such Ownership Change shall be adjusted as
appropriate. For purposes of determining the Vested Percentage following an
Ownership Change, credited employment or service shall include all employment or
service with any corporation which is a Participating Company at the time the
employment or service is rendered, whether or not such corporation is a
Participating Company both before and after the event constituting the Ownership
Change.
(g) Transfers Not Subject to the Unvested Share Repurchase Option.
-------------------------------------------------------------
The Unvested Share Repurchase Option shall not apply to a transfer of Unvested
Shares to the Optionee's ancestors, descendants, or spouse or to a custodian or
trustee solely for the benefit of the Optionee or the Optionee's ancestors,
descendants, or spouse; provided, however, that such transferee shall agree in
writing (in a form satisfactory to the Company) to receive and hold such shares
subject to all the terms and conditions of this Option Agreement, including this
paragraph 11 providing for an Unvested Share Repurchase Option. Any such
transferee shall thereafter be included within the meaning of the term
"Optionee".
12. Right of First Refusal.
----------------------
(a) Right of First Refusal. Except as provided in paragraph 12(g)
----------------------
below, in the event the Optionee, the Optionee's legal representative or
other holder of shares acquired upon exercise of the Option proposes to sell,
exchange, transfer, pledge, or otherwise dispose of any Vested Shares (the
"TRANSFER SHARES") to any person or entity, including, without limitation, any
shareholder of the Participating Company Group, the Company shall have the right
to repurchase the Transfer Shares under the terms and subject to the conditions
set forth in this paragraph 12 (the "RIGHT OF FIRST REFUSAL").
(b) Notice of Proposed Transfer. Prior to any proposed transfer of
---------------------------
the Transfer Shares, the Optionee shall give a written notice (the "Transfer
Notice") to the Company describing fully the proposed transfer, including the
number of Transfer Shares, the name and address of the proposed transferee (the
"Proposed Transferee") and, if the transfer is voluntary, the proposed transfer
price. In the event of a bona fide gift or involuntary transfer, the proposed
transfer price shall be deemed to be the fair market value of the Transfer
Shares as determined by the Company in good faith. In the event the Optionee
proposes to transfer any Transfer Shares to more than one (1) Proposed
Transferee, the Optionee shall provide a separate Transfer Notice for the
proposed transfer to each Proposed Transferee. The Transfer Notice shall be
signed by both the Optionee and the Proposed Transferee and must constitute a
binding commitment of the Optionee and the Proposed Transferee for the transfer
of the Transfer Shares to the Proposed Transferee subject only to the Right of
First Refusal.
(c) Bona Fide Transfer. Within ten (10) days after receipt of the
------------------
Transfer Notice, the Company shall determine the bona fide nature of the
proposed voluntary transfer and give the Optionee written notice of the
Company's determination. If the proposed transfer is deemed not to be bona fide,
the Optionee shall be responsible for providing
9
<PAGE>
additional information to the Company to show the bona fide nature of the
proposed transfer, and the Optionee shall have no right to transfer the Transfer
Shares without first complying with the procedures described in this paragraph
12. The Company shall have the right to demand further assurances from the
Optionee and the Proposed Transferee (in a form satisfactory to the Company)
that the Transfer Notice fully and accurately sets forth all of the terms and
conditions of the proposed transfer, including, without limitation, assurance
that the Transfer Notice fully and accurately sets forth the consideration
actually paid for the Transfer Shares and all transactions, directly or
indirectly, between the parties which may have affected the price the Proposed
Transferee was willing to pay for the Transfer Shares.
(d) Exercise of the Right of First Refusal. In the event the proposed
--------------------------------------
transfer is deemed to be bona fide, the Company shall have the right to purchase
all, but not less than all, of the Transfer Shares (except as the Company and
the Optionee otherwise agree) at the purchase price and on the terms set forth
in the Transfer Notice by delivery to the Optionee of a notice of exercise of
the Right of First Refusal within thirty (30) days after the date the Transfer
Notice is delivered to the Company or ten (10) days after the Company has
approved the proposed transfer as bona fide, whichever is later. The Company's
exercise or failure to exercise the Right of First Refusal with respect to any
proposed transfer described in a Transfer Notice shall not affect the Company's
ability to exercise the Right of First Refusal with respect to any proposed
transfer described in any other Transfer Notice, whether or not such other
Transfer Notice is issued by the Optionee or issued by a person other than the
Optionee with respect to a proposed transfer to the same Proposed Transferee. If
the Company exercises the Right of First Refusal, the Company and the Optionee
shall thereupon consummate the sale of the Transfer Shares to the Company on the
terms set forth in the Transfer Notice within sixty (60) days after the date the
Transfer Notice is delivered to the Company or the Company has approved the
proposed transfer as bona fide, whichever is later (unless a longer period is
offered by the Proposed Transferee); provided, however, that in the event the
Transfer Notice provides for the payment for the Transfer Shares other than in
cash, the Company shall have the option of paying for the Transfer Shares by the
present value cash equivalent of the consideration described in the Transfer
Notice as reasonably determined by the Company. For purposes of the forgoing,
cancellation of any indebtedness of the Optionee to any Participating Company
shall be treated as payment to the Optionee in cash to the extent of the unpaid
principal and any accrued interest canceled.
(e) Failure to Exercise Right of First Refusal. If the company fails
------------------------------------------
to exercise the Right of First Refusal in full (or to such lesser extent as the
Company and the Optionee otherwise agree) within the period specified in
paragraph 12(d) above, the Optionee may conclude a transfer to the Proposed
Transferee of the Transfer Shares on the terms and conditions described in the
Transfer Notice, provided such transfer occurs not later than one hundred
twenty (120) days following delivery to the Company of the Transfer Notice. The
Company shall have the right to demand further assurances from the Optionee and
the Proposed Transferee (in a form satisfactory to the Company) that the
transfer of the Transfer Shares was actually carried out on the terms and
conditions described in the Transfer Notice. No Transfer Shares shall be
transferred on the books of the Company until the Company has received such
assurances, if so demanded, and has approved the proposed transfer as bona fide,
pursuant to paragraph 12(c) above. Any proposed transfer on terms and conditions
different from those described in the Transfer Notice, as well as any subsequent
proposed
10
<PAGE>
transfer by the Optionee, shall again be subject to the Right of First Refusal
and shall require compliance by the Optionee with the procedure described in
this paragraph 12.
(f) Transferees of the Transfer Shares. All transferees of the
----------------------------------
Transfer Shares or any interest therein, other than the Company, shall be
required as a condition of such transfer to agree in writing (in a form
satisfactory to the Company) that such transferee shall receive and hold such
Transfer Shares or interests therein subject to all of the terms and conditions
of this Option Agreement, including this paragraph 12 providing for the Right of
First Refusal with respect to any subsequent transfer. Any sale or transfer of
any shares acquired upon exercise of the Option shall be void unless the
provisions of this paragraph 12 are met.
(g) Transfers Not Subject to the Right of First Refusal. The Right of
---------------------------------------------------
First Refusal shall not apply to the following:
(i) any transfer or exchange of the shares acquired pursuant to
the exercise of the Option if such transfer is in connection with an Ownership
Change; provided, that if the consideration received pursuant to such transfer
or exchange consists of stock of a Participating Company, such consideration
shall remain subject to the Right of First Refusal unless the provisions of
paragraph 12(i) below result in a termination of the Right of First Refusal; or
(ii) a transfer to the Optionee's ancestors, descendants, or
spouse or to a custodian or trustee solely for the benefit of the Optionee or
the Optionee's ancestors, descendants, or spouse; provided, however, that such
transferee shall agree in writing (in a form satisfactory to the Company) to
receive and hold the Transfer Shares subject to all the terms and conditions of
this Option Agreement, including this paragraph 12 providing for a Right of
First Refusal with respect to any subsequent transfer.
(h) Assignment of the Right of First Refusal. The Company shall have
----------------------------------------
the right to assign the Right of First Refusal at any time, whether or not the
Optionee has attempted a transfer, to one (1) or more persons as may be selected
by the Company.
(i) Early Termination of the Right of First Refusal. The other
-----------------------------------------------
provisions of this paragraph 12 notwithstanding, the Right of First Refusal
shall terminate, and be of no further force and effect upon (i) the occurrence
of a Transfer of Control, unless the Acquiring Corporation assumes the Company's
rights and obligations under the Option or substitutes a substantially
equivalent option for the Acquiring Corporation's stock for the Option, or (ii)
the existence of a public market for the class of shares subject to the Right of
First Refusal. A "public market" shall be deemed to exist if (x) such stock is
listed on a nation a securities exchange (as that term is used in the Exchange
Act) or (y) such stock is traded on the over-the-counter market and prices
therefor are published daily on business days in a recognized financial journal.
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13. Escrow
------
(a) Establishment of Escrow. To ensure that shares subject to the
-----------------------
Unvested Share Repurchase Option or the Right of First Refusal will be available
for repurchase, the Company may require the Optionee to deposit the certificate
or certificates evidencing the shares which the Optionee purchase upon exercise
of the Option with an escrow agent designated by the Company under the terms and
conditions of an escrow agreement approved by the Company. If the Company does
not require such deposit as a condition of exercise of the Option, the Company
reserves the right at any time to require the Optionee to so deposit the
certificate or certificates in escrow. The Company shall bear the expenses of
the escrow.
(b) Delivery of Shares to Optionee. As soon as practicable after the
------------------------------
expiration of the Unvested Share Repurchase Option and the Right of First
Refusal, the escrow agent shall deliver to the Optionee the shares no longer
subject to such restrictions.
(c) Notices and Payments. In the event the shares held in escrow are
--------------------
subject to the Company's exercise of the Unvested Share Repurchase Option or the
Right of First Refusal, the notices required to be given to the Optionee shall
be given to the escrow agent and any payment required to be given to the
Optionee shall be given to the escrow agent. Within thirty (30) days after
payment by the Company, the escrow agent shall deliver the shares which the
Company has purchased to the Company and shall deliver the payment received from
the Company to the Optionee.
14. Stock Dividends Subject to Option Agreement. If, from time to time
-------------------------------------------
there is any stock dividend, stock split, or other change in the character or
amount of any of the outstanding stock of the corporation the stock of which is
subject to the provisions of this Option Agreement, then in such event any and
all new, substituted or additional securities to which the Optionee is entitled
by reason of the Optionee's ownership of the shares acquired upon exercise of
the Option shall be immediately subject to the Unvested Share Repurchase Option
and the Right of First Refusal with the same force and effect as the shares
subject to the Unvested Share Repurchase Option and the Right of First Refusal
immediately before such event.
15. Notice of Sales Upon Disqualifying Disposition. The Optionee shall
----------------------------------------------
dispose of the shares acquire pursuant to the Option only in accordance with the
provisions of this Option Agreement. In addition, the Optionee shall promptly
notify the Chief Financial Officer of the Company if the Optionee disposes of
any shares acquired pursuant to the Option within one (1) year from the date the
Optionee exercises all or part of the Option or within two (2) years of the date
of grant of the Option. Until such time as the Optionee disposes of such shares
in a manner consistent with the provisions of this Option Agreement, the
Optionee shall hold all shares acquired pursuant to the Option in the optionee's
name (and not in the name of any nominee) for the one-year period immediately
after exercise of the Option and the two-year period immediately after grant of
the Option. At any time during the one-year or two-year periods set forth above,
the Company may place a legend or legends on any certificate or certificates
representing shares acquired pursuant to the Option requesting the transfer
agent for the Company's Stock to notify the Company of any such transfers. The
obligation of the Optionee to notify the Company of any such transfer shall
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continue notwithstanding that a legend has been placed on the certificate or
certificates pursuant to the preceding sentence.
16. Exception to $100,000 Exercise Limitation. Notwithstanding any other
-----------------------------------------
provision of this Option Agreement, if compliance with the $100,000 Exercise
Limitation as set forth in paragraph 4(a) will result in the exercisability of
any Vested Shares (as defined in paragraph 11(b)) being delayed more than thirty
(30) days beyond the date such shares become Vested Shares (the "VESTING DATE"),
the Option shall be deemed to be two (2) options. The first option shall be for
the maximum portion of the Number of Options Shares that can comply with the
$100,000 Exercise Limitation without causing the Option to be unexercisable in
the aggregate as to Vested Shares on the Vesting Date for such shares. The
second option, which shall not be treated as an Incentive Stock Option as
described in section 422(b) of the Code, shall be for the balance of the Number
of Option Shares; that is, those such shares which, on the respective Vesting
Date for such shares, would be unexercisable if included in the first option and
thereby made subject to the $100,000 Exercise Limitation. Shares treated as
subject to the second option shall be exercisable on the same terms and at the
same time as set forth in this Option Agreement, provided, however, that (a)
the second sentence of paragraph 4(a) shall not apply to the second option and
(b) each such share shall become a Vested Share on the Vesting Date such share
must first be allocated to the second option pursuant to the preceding
sentence. Unless the Optionee specifically elects to the contrary in the
Optionee's written notice of exercise, the first option shall be deemed to be
exercised first to the maximum possible extent and then the second option shall
be deemed to be exercised.
17. Rules of the Commissioner of Corporations. The Optionee is hereby
-----------------------------------------
delivered a copy of Section 260.141.11 of the Rules of the Commissioner of
Corporations of the State of California, adopted pursuant to the California
Corporate Securities Act of 1968. References to the "Code" in the following text
are references to the California Corporations Code.
260.141.11. Restriction on Transfer.
(a) The issuer of any security upon which a restriction on transfer
has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.543 shall
cause a copy of this section to be delivered to each issuer or transferee of
such security at the time the certificate evidencing the security is delivered
to the issue or transferee.
(b) It is unlawful for the holder of any such security to consummate
a sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
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(3) to any person described in Subdivision (i) of Section 25102
of the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants, or spouse, or
any custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or custodian
for the account of the transferee or the transferee's ancestors, descendants, or
spouse;
(5) to holders of securities of the same class of the same
issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code
(either acting as such or as a finder) to a resident of a foreign state,
territory or country who is neither domiciled in this state to the knowledge of
the broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other
lien given by the purchaser to the seller upon a sale of the security for which
the Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Sections 25111, 25112,
25113, or 25121 of the Code, of the securities to be transferred, provided that
no order under Section 25140 or subdivision (a) of Section 25143 is in effect
with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111, 25112
or 25113 of the Code, provided that no order under Section 25140 or subdivision
(a) of Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or
countries who are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property
Law or to the administrator of the unclaimed property law of another state;
(15) by the State Controller pursuant to the Unclaimed Property
Law or by the administrator of the unclaimed property law of another state if,
in either such case, such person (i) discloses to potential purchasers at the
sale that transfer of the securities is
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restricted under this rule, (ii) delivers to each purchaser a copy of this rule,
and (iii) advises the Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does
not involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by subdivision
(f) of Section 25102;
provided that any such transfer is on the condition that any certificate
evidencing the security issued to such transferee shall contain the legend
required by this section.
(c) The certificates representing all such securities subject to such
a restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend prominently stamped or printed
thereon in capital letters of not less than 10-point size reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
18. Legends. The Company may at any time place legends referencing the
-------
Unvested Share Repurchase Option set forth in paragraph 11 above, the Right of
First Refusal set forth in paragraph 12 above, and any applicable federal or
state securities law restrictions on all certificates representing shares of
stock subject to the provisions of this Option Agreement. The Optionee shall, at
the request of the Company, promptly present to the Company any and all
certificates representing shares acquired pursuant to the Option in the
possession of the Optionee in order to effectuate the provisions of this
paragraph. Unless otherwise specified by the Company, legends placed on such
certificates may include, but shall not be limited to, the following:
(a) "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO
THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
(b) Any legend required to be placed thereon by the Commissioner of
Corporations of the State of California.
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(C) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
UNVESTED SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
(d) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
(e) "THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION
AS DEFINED IN SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE
TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY SHALL NOTIFY THE CORPORATION
IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE REGISTERED HOLDER HEREOF MADE
ON OR BEFORE _____________. THE REGISTERED HOLDER SHALL HOLD ALL SHARES
PURCHASED UNDER THE OPTION IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME
OF ANY NOMINEE) PRIOR TO THIS DATE."
19. Initial Public Offering. The Optionee hereby agrees that in the event
-----------------------
of an initial public offering of stock made by the Company under the Securities
Act, the Optionee shall not offer, sell, contract to sell, pledge, hypothecate,
grant any option to purchase or make any short sale of, or otherwise dispose of
any shares of stock of the Company or any rights to acquire stock of the Company
for such period of time as may be established by the underwriter for such
initial public offering; provided, however, that such period of time shall not
exceed one hundred eighty (180) days from the effective date of the registration
statement to be filed in connection with such initial public offering. The
foregoing limitation shall not apply to shares registered under the Securities
Act. The Optionee shall be subject to this paragraph 19 provided and only if
this officers and directors of the Company are also subject to similar
arrangements.
20. Binding Effect. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
21. Amendment or Termination. The Board may amend or terminate the Plan
------------------------
and/or the Option at any time; provided, however, that no such amendment or
termination may adversely affect the Option or any unexercised portion hereof
without the consent of the Optionee unless such termination or amendment is
necessary to comply with any applicable law or government regulation or is
required to enable the Option to qualify as an Incentive
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<PAGE>
Stock Option. No amendment or addition to this Option Agreement shall be
effective unless in writing.
22. Integrated Agreement. This Option Agreement constitutes the entire
--------------------
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group other than those as set forth
or provided for herein. To the extent contemplated herein, the provisions of
this Option Agreement shall survive any exercise of the Option and shall remain
in full force and effect.
23. Applicable Law. This Option Agreement shall be governed by the laws of
--------------
the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
POWER INTEGRATIONS, INC.
By:_____________________________
Robert G. Staples
Vice President, Finance
and Administration
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<PAGE>
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, including the Unvested Share Repurchase
Option set forth in paragraph 11 and the Right of First Refusal set forth in
paragraph 12, and hereby accepts the Option subject to all of the terms and
provisions thereof. The Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board upon any questions
arising under this Option Agreement.
The undersigned acknowledges receipt of a copy of the Plan and a copy of
Section 260.141.11 of the Rules of the Commissioner of Corporations of the State
of California (set forth as paragraph 17 above) regarding restriction on
transfer.
OPTIONEE
Date:___________________________ _______________________________
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EXHIBIT 10.3
1997 STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The Power Integrations, Inc. 1997 Stock
Option Plan (the "PLAN") is hereby established effective as of June 3, 1997 (the
"EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the
interests of the Participating Company Group and its shareholders by providing
an incentive to attract, retain and reward persons performing services for the
Participating Company Group and by motivating such persons to contribute to the
growth and profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed. However, all Incentive
Stock Options shall be granted, if at all, within ten (10) years from the
Effective Date.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 DEFINITIONS. Whenever used herein, the following terms
shall have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"BOARD" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "COMPANY" means Power Integrations, Inc., a California
corporation, or any successor corporation thereto.
(e) "CONSULTANT" means any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.
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(f) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(g) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company group because
of the sickness or injury of the Optionee.
(h) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company and, with respect to any Incentive Stock
Option granted to such person, who is an employee for purposes of Section 422 of
the Code; provided, however, that neither service as a Director nor payment of a
director's fee shall be sufficient to constitute employment for purposes of the
Plan.
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(j) "FAIR MARKET VALUE" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
(i) If, on such date, there is a public market for the
Stock, the Fair Market Value of a share of Stock shall be the closing sale price
of a share of Stock (or the mean of the closing bid and asked prices of a share
of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, the Nasdaq Small-Cap Market or such other national or regional
securities exchange or market system constituting the primary market for the
Stock, as reported in the Wall Street Journal or such other source as the
-------------------
Company deems reliable. If the relevant date does not fall on a day on which the
Stock has traded on such securities exchange or market system, the date on which
the Fair Market Value shall be established shall be the last day on which the
Stock was so traded prior to the relevant date, or such other appropriate day as
shall be determined by the Board, in its sole discretion.
(ii) If, on such date, there is no public market for the
Stock, the Fair Market Value of a share of Stock shall be as determined by the
Board without regard to any restriction other than a restriction which, by its
terms, will never lapse.
(k) "INCENTIVE STOCK OPTION" means an Option intended to be (as
set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
(l) "INSIDER" means an officer or a Director of the Company or
any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
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(m) "NONSTATUTORY STOCK OPTION" means an Option not intended to
be (as set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
(n) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.
(o) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(p) "OPTIONEE" means a person who has been granted one or more
Options.
(q) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(r) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(s) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(t) "RULE 16b-3" means Rule 16b-3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.
(u) "SECTION 162(m)" means Section 162(m) of the Code, as
amended by the Revenue Reconciliation Act of 1993 (P.L. 103-66).
(v) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(w) "SERVICE" means an Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. The Optionee's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. Furthermore,
an Optionee's Service with the Participating Company Group shall not be deemed
to have terminated if the Optionee takes any military leave, sick leave, or
other bona fide leave of absence approved by the Company; provided, however,
that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day
of such leave the Optionee's Service shall be deemed to have terminated unless
the Optionee's right to return to Service with the Participating Company Group
is guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company or required by law, a leave of absence shall
not be treated as Service for purposes of determining vesting under the
Optionee's Option Agreement. The Optionee's Service
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<PAGE>
shall be deemed to have terminated either upon an actual termination of Service
or upon the corporation for which the Optionee performs Service ceasing to be a
Participating Company. Subject to the foregoing, the Company, in its sole
discretion, shall determine whether the Optionee's Service has terminated and
the effective date of such termination.
(x) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
(y) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(z) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the
time an Option is granted to the Optionee, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are
for convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
--------------
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be
administered by the Board. All questions of interpretation of the Plan or of any
Option shall be determined by the Board, and such determinations shall be final
and binding upon all persons having an interest in the Plan or such Option. Any
officer of a Participating Company shall have the authority to act on behalf of
the Company with respect to any matter, right, obligation, determination or
election which is the responsibility of or which is allocated to the Company
herein, provided the officer has apparent authority with respect to such matter,
right, obligation, determination or election.
3.2 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any,
of Rule 16b-3.
3.3 POWERS OF THE BOARD. In addition to any other powers set
forth in the Plan and subject to the provisions of the Plan, the Board shall
have the full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or
times at which, Options shall be granted and the number of shares of Stock to be
subject to each Option;
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<PAGE>
(b) to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock
or other property;
(d) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax withholding
obligation arising in connection with the Option or such shares, including by
the withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of Service with the
Participating Company Group on any of the foregoing, and (vii) all other terms,
conditions and restrictions applicable to the Option or such shares not
inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, cancel, renew, reprice or
otherwise adjust the exercise price of, or grant a new Option in substitution
for, any Option or to waive any restrictions or conditions applicable to any
Option or any shares acquired upon the exercise thereof;
(g) to accelerate, continue, extend or defer the
exercisability of any Option or the vesting of any shares acquired upon the
exercise thereof, including with respect to the period following an Optionee's
termination of Service with the Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and
(i) to correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Option Agreement and to make all
other determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
3.4 COMMITTEE COMPLYING WITH SECTION 162(m). If a
Participating Company is a "publicly held corporation" within the meaning of
Section 162(m), the Board may establish a Committee of "outside directors"
within the meaning of Section 162(m) to approve the grant of any Option which
might reasonably be anticipated to result in the payment of employee
5
<PAGE>
remuneration that would otherwise exceed the limit on employee remuneration
deductible for income tax purposes pursuant to Section 162(m).
4. SHARES SUBJECT TO PLAN.
----------------------
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment
as provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be the sum of (a) Six Hundred Ninety-Three
Thousand Three Hundred Eighty-Two (693,382) shares, and (b) the number of shares
of Stock, as of the Effective Date, subject to outstanding options granted
pursuant to the Company's 1988 Stock Option Plan (the "PRIOR PLAN"), which
amount is One Million Four Hundred Thirty-Eight Thousand Eight Hundred Forty-
Five (1,438,845) (the "PRIOR PLAN OPTIONS"), resulting in an aggregate total of
Two Million One Hundred Thirty-Two Thousand Two Hundred Twenty-Seven
(2,132,227), increased on the first day of each fiscal year of the Company
beginning on or after January 1, 1999 by a number of shares equal to five
percent (5%) of the number of shares of Stock issued and outstanding on the last
day of the preceding fiscal year (the "SHARE RESERVE"). The Share Reserve shall
consist of authorized but unissued or reacquired shares of Stock or any
combination thereof. Notwithstanding the foregoing, the Share Reserve,
determined at any time, shall be reduced by the number of shares remaining
subject to outstanding Prior Plan Options. In addition, except as adjusted
pursuant to Section 4.2, in no event shall more than Two Million One Hundred
Thirty-Two Thousand Two Hundred Twenty-Seven (2,132,227) shares of Stock be
cumulatively available for issuance pursuant to the exercise of Incentive Stock
Options (the "ISO SHARE ISSUANCE LIMIT"). If an outstanding Option for any
reason expires or is terminated or canceled or shares of Stock acquired, subject
to repurchase, upon the exercise of an Option are repurchased by the Company,
the shares of Stock allocable to the unexercised portion of such Option, or such
repurchased shares of Stock, shall again be available for issuance under the
Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event
of any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan, in the ISO Share Issuance Limit set forth in Section 4.1
and to any outstanding Options and in the exercise price per share of any
outstanding Options. If a majority of the shares which are of the same class as
the shares that are subject to outstanding Options are exchanged for, converted
into, or otherwise become (whether or not pursuant to an Ownership Change Event,
as defined in Section 8.1) shares of another corporation (the "NEW SHARES"), the
Board may unilaterally amend the outstanding Options to provide that such
Options are exercisable for New Shares. In the event of any such amendment, the
number of shares subject to, and the exercise price per share of, the
outstanding Options shall be adjusted in a fair and equitable manner as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded up or down to the nearest whole number, as determined by the
Board, and in no event may the exercise price of any Option be decreased to an
amount less than the par value, if any, of the stock subject to the Option. The
adjustments determined by the Board pursuant to this Section 4.2 shall be final,
binding and conclusive.
6
<PAGE>
5. ELIGIBILITY AND OPTION LIMITATIONS.
----------------------------------
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only
to Employees, Consultants, and Directors. For purposes of the foregoing
sentence, "EMPLOYEES," "CONSULTANTS" and "DIRECTORS" shall include prospective
Employees, prospective Consultants and prospective Directors to whom Options are
granted in connection with written offers of an employment or other service
relationship with the Participating Company Group. Eligible persons may be
granted more than one (1) Option.
5.2 OPTION GRANT RESTRICTIONS. Any person who is not an
Employee on the effective date of the grant of an Option to such person may be
granted only a Nonstatutory Stock Option. An Incentive Stock Option granted to a
prospective Employee upon the condition that such person become an Employee
shall be deemed granted effective on the date such person commences service with
a Participating Company, with an exercise price determined as of such date in
accordance with Section 6.1.
5.3 FAIR MARKET VALUE LIMITATION. To the extent that options
designated as Incentive Stock Options (granted under all stock option plans of
the Participating Company Group, including the Plan) become exercisable by an
Optionee for the first time during any calendar year for stock having a Fair
Market Value greater than One Hundred Thousand Dollars ($100,000), the portion
of such options which exceeds such amount shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5.3, options designated as Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of stock shall be determined as of the time the option
with respect to such stock is granted. If the Code is amended to provide for a
different limitation from that set forth in this Section 5.3, such different
limitation shall be deemed incorporated herein effective as of the date and with
respect to such Options as required or permitted by such amendment to the Code.
If an Option is treated as an Incentive Stock Option in part and as a
Nonstatutory Stock Option in part by reason of the limitation set forth in this
Section 5.3, the Optionee may designate which portion of such Option the
Optionee is exercising. In the absence of such designation, the Optionee shall
be deemed to have exercised the Incentive Stock Option portion of the Option
first. Separate certificates representing each such portion shall be issued upon
the exercise of the Option.
6. TERMS AND CONDITIONS OF OPTIONS.
-------------------------------
Options shall be evidenced by Option Agreements specifying the number
of shares of Stock covered thereby, in such form as the Board shall from time to
time establish. No Option or purported Option shall be a valid and binding
obligation of the Company unless evidenced by a fully executed Option Agreement.
Option Agreements may incorporate all or any of the terms of the Plan by
reference and shall comply with and be subject to the following terms and
conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall
be established in the sole discretion of the Board; provided, however, that (a)
the exercise price per share for an
7
<PAGE>
Incentive Stock Option shall be not less than the Fair Market Value of a share
of Stock on the effective date of grant of the Option, (b) the exercise price
per share for a Nonstatutory Stock Option shall be not less than eighty-five
percent (85%) of the Fair Market Value of a share of Stock on the effective date
of grant of the Option, and (c) no Incentive Stock Option granted to a Ten
Percent Owner Optionee shall have an exercise price per share less than one
hundred ten percent (110%) of the Fair Market Value of a share of Stock on the
effective date of grant of the Option. Notwithstanding the foregoing, an Option
(whether an Incentive Stock Option or a Nonstatutory Stock Option) may be
granted with an exercise price lower than the minimum exercise price set forth
above if such Option is granted pursuant to an assumption or substitution for
another option in a manner qualifying under the provisions of Section 424(a) of
the Code.
6.2 EXERCISE PERIOD. Options shall be exercisable at such time
or times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Incentive Stock Option shall be exercisable after the expiration of
ten (10) years after the effective date of grant of such Option, (b) no
Incentive Stock Option granted to a Ten Percent Owner Optionee shall be
exercisable after the expiration of five (5) years after the effective date of
grant of such Option, and (c) no Option granted to a prospective Employee,
prospective Consultant or prospective Director may become exercisable prior to
the date on which such person commences Service with a Participating Company.
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as
otherwise provided below, payment of the exercise price for the number of shares
of Stock being purchased pursuant to any Option shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of shares of Stock
owned by the Optionee having a Fair Market Value (as determined by the Company
without regard to any restrictions on transferability applicable to such stock
by reason of federal or state securities laws or agreements with an underwriter
for the Company) not less than the exercise price, (iii) by the assignment of
the proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
"CASHLESS EXERCISE"), (iv) by the Optionee's promissory note in a form approved
by the Company, (v) by such other consideration as may be approved by the Board
from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by adoption
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.
(b) TENDER OF STOCK. Notwithstanding the foregoing, an
Option may not be exercised by tender to the Company of shares of Stock to the
extent such tender of Stock would constitute a violation of the provisions of
any law, regulation or agreement restricting the
8
<PAGE>
redemption of the Company's stock. Unless otherwise provided by the Board, an
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at any and
all times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall
be permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject to
the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity affecting the extension of credit in
connection with the Company's securities, any promissory note shall comply with
such applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations.
6.4 TAX WITHHOLDING. The Company shall have the right, but not
the obligation, to deduct from the shares of Stock issuable upon the exercise of
an Option, or to accept from the Optionee the tender of, a number of whole
shares of Stock having a Fair Market Value, as determined by the Company, equal
to all or any part of the federal, state, local and foreign taxes, if any,
required by law to be withheld by the Participating Company Group with respect
to such Option or the shares acquired upon the exercise thereof. Alternatively
or in addition, in its sole discretion, the Company shall have the right to
require the Optionee, through payroll withholding, cash payment or otherwise,
including by means of a Cashless Exercise, to make adequate provision for any
such tax withholding obligations of the Participating Company Group arising in
connection with the Option or the shares acquired upon the exercise thereof. The
Company shall have no obligation to deliver shares of Stock or to release shares
of Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be
subject to a right of first refusal, one or more repurchase options, or other
conditions and restrictions as determined by the Board in its sole discretion at
the time the Option is granted. The Company shall have the right to assign at
any time any repurchase right it may have, whether or not such right is then
exercisable, to one or more persons as may be selected by the Company. Upon
request by the Company, each Optionee shall execute any agreement evidencing
such transfer restrictions prior to the receipt of shares of Stock hereunder and
shall promptly present to the Company any and all certificates representing
shares of Stock acquired hereunder for the placement on such certificates of
appropriate legends evidencing any such transfer restrictions.
9
<PAGE>
6.6 EFFECT OF TERMINATION OF SERVICE.
(a) OPTION EXERCISABILITY. Subject to earlier termination
of the Option as otherwise provided herein, an Option shall be exercisable after
an Optionee's termination of Service as follows:
(i) Disability. If the Optionee's Service with the
----------
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of six (6) months (or such longer or shorter period of time as
determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the date of
expiration of the Option's term as set forth in the Option Agreement evidencing
such Option (the "OPTION EXPIRATION DATE").
(ii) Death. If the Optionee's Service with the
-----
Participating Company Group is terminated because of the death of the Optionee,
the Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee's legal
representative or other person who acquired the right to exercise the Option by
reason of the Optionee's death at any time prior to the expiration of six (6)
months (or such longer or shorter period of time as determined by the Board, in
its sole discretion) after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date. The Optionee's
Service shall be deemed to have terminated on account of death if the Optionee
dies within three (3) months after the Optionee's termination of Service.
(iii) Other Termination of Service. If the
----------------------------
Optionee's Service with the Participating Company Group terminates for any
reason, except Disability or death, the Option, to the extent unexercised and
exercisable by the Optionee on the date on which the Optionee's Service
terminated, may be exercised by the Optionee within three (3) months (or such
longer or shorter period of time as determined by the Board, in its sole
discretion) after the date on which the Optionee's Service terminated, but in
any event no later than the Option Expiration Date.
(b) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of an Option within the applicable time periods set
forth in Section 6.6(a) is prevented by the provisions of Section 12 below, the
Option shall remain exercisable until three (3) months after the date the
Optionee is notified by the Company that the Option is exercisable, but in any
event no later than the Option Expiration Date.
(c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 6.6(a) of shares acquired upon the exercise of the Option would
subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option
shall remain exercisable until the earliest to occur of (i) the tenth
10
<PAGE>
(10th) day following the date on which a sale of such shares by the Optionee
would no longer be subject to such suit, (ii) the one hundred and ninetieth
(190th) day after the Optionee's termination of Service, or (iii) the Option
Expiration Date.
7. STANDARD FORMS OF OPTION AGREEMENT.
----------------------------------
7.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the
Board at the time the Option is granted, an Option designated as an "INCENTIVE
STOCK OPTION" shall comply with and be subject to the terms and conditions set
forth in the form of Immediately Exercisable Incentive Stock Option Agreement
adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
7.2 NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by
the Board at the time the Option is granted, an Option designated as a
"NONSTATUTORY STOCK OPTION" shall comply with and be subject to the terms and
conditions set forth in the form of Immediately Exercisable Nonstatutory Stock
Option Agreement adopted by the Board concurrently with its adoption of the Plan
and as amended from time to time.
7.3 STANDARD TERM OF OPTIONS. Except as otherwise provided in
Section 6.2 or by the Board in the grant of an Option, any Option granted
hereunder shall have a term of ten (10) years from the effective date of grant
of the Option.
7.4 AUTHORITY TO VARY TERMS. The Board shall have the
authority from time to time to vary the terms of any of the standard forms of
Option Agreement described in this Section 7 either in connection with the grant
or amendment of an individual Option or in connection with the authorization of
a new standard form or forms; provided, however, that the terms and conditions
of any such new, revised or amended standard form or forms of Option Agreement
shall be in accordance with the terms of the Plan. Such authority shall include,
but not by way of limitation, the authority to grant Options which are not
immediately exercisable.
8. CHANGE IN CONTROL.
-----------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in
a single or series of related transactions by the shareholders of the Company of
more than fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the
Company is a party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
11
<PAGE>
(iv) a liquidation or dissolution of the
Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership
Change Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the shareholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of a
Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. For purposes of this
Section 8.2, an Option shall be deemed assumed if, following the Change in
Control, the Option confers the right to purchase in accordance with its terms
and conditions, for each share of Stock subject to the Option immediately prior
to the Change in Control, the consideration (whether stock, cash or other
securities or property) to which a holder of a share of Stock on the effective
date of the Change in Control was entitled. Any Options which are neither
assumed or substituted for by the Acquiring Corporation in connection with the
Change in Control nor exercised as of the date of the Change in Control shall
terminate and cease to be outstanding effective as of the date of the Change in
Control. Notwithstanding the foregoing, shares acquired upon exercise of an
Option prior to the Change in Control and any consideration received pursuant to
the Change in Control with respect to such shares shall continue to be subject
to all applicable provisions of the Option Agreement evidencing such Option
except as otherwise provided in such Option Agreement. Furthermore,
notwithstanding the foregoing, if the corporation the stock of which is subject
to the outstanding Options immediately prior to an Ownership Change Event
described in Section 8.1(a)(i) constituting a Change in Control is the surviving
or continuing corporation and immediately after such Ownership Change Event less
than fifty percent (50%) of the total combined voting power of its voting stock
is held by another corporation or by other corporations that are members of an
affiliated group within the meaning of Section 1504(a) of the Code without
regard to the provisions of Section 1504(b) of the Code, the outstanding Options
shall not terminate unless the Board otherwise provides in its sole discretion.
12
<PAGE>
9. PROVISION OF INFORMATION.
------------------------
Each Optionee shall be given access to information concerning the
Company equivalent to that information generally made available to the Company's
common shareholders.
10. NONTRANSFERABILITY OF OPTIONS.
-----------------------------
During the lifetime of the Optionee, an Option shall be
exercisable only by the Optionee or the Optionee's guardian or legal
representative. No Option shall be assignable or transferable by the Optionee,
except by will or by the laws of descent and distribution.
11. COMPLIANCE WITH SECURITIES LAW.
------------------------------
The grant of Options and the issuance of shares of Stock upon
exercise of Options shall be subject to compliance with all applicable
requirements of federal, state or foreign law with respect to such securities.
Options may not be exercised if the issuance of shares of Stock upon exercise
would constitute a violation of any applicable federal, state or foreign
securities laws or other law or regulations or the requirements of any stock
exchange or market system upon which the Stock may then be listed. In addition,
no Option may be exercised unless (a) a registration statement under the
Securities Act shall at the time of exercise of the Option be in effect with
respect to the shares issuable upon exercise of the Option or (b) in the opinion
of legal counsel to the Company, the shares issuable upon exercise of the Option
may be issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares hereunder shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of any
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
12. INDEMNIFICATION.
---------------
In addition to such other rights of indemnification as they may
have as members of the Board or officers or employees of the Participating
Company Group, members of the Board and any officers or employees of the
Participating Company Group to whom authority to act for the Board or the
Company is delegated shall be indemnified by the Company against all reasonable
expenses, including attorneys' fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan, or
any right granted hereunder, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding, except in relation to matters as to which it
shall be adjudged in such action, suit or
13
<PAGE>
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.
13. TERMINATION OR AMENDMENT OF PLAN.
--------------------------------
The Board may terminate or amend the Plan at any time. However,
subject to changes in applicable law, regulations or rules that would permit
otherwise, without the approval of the Company's shareholders, there shall be
(a) no increase in the maximum aggregate number of shares of Stock that may be
issued under the Plan (except by operation of the provisions of Section 4.2),
(b) no change in the class of persons eligible to receive Incentive Stock
Options, and (c) no other amendment of the Plan that would require approval of
the Company's shareholders under any applicable law, regulation or rule. In any
event, no termination or amendment of the Plan may adversely affect any then
outstanding Option or any unexercised portion thereof, without the consent of
the Optionee, unless such termination or amendment is required to enable an
Option designated as an Incentive Stock Option to qualify as an Incentive Stock
Option or is necessary to comply with any applicable law, regulation or rule.
IN WITNESS WHEREOF, the undersigned Secretary of the Company
certifies that the foregoing is the Power Integrations, Inc. 1997 Stock Option
Plan as duly adopted on June 3, 1997 and amended through ____________, 1997.
-----------------------------------
Secretary
14
<PAGE>
POWER INTEGRATIONS, INC.
IMMEDIATELY EXERCISABLE
NONSTATUTORY STOCK OPTION AGREEMENT
THIS IMMEDIATELY EXERCISABLE NONSTATUTORY STOCK OPTION AGREEMENT (the "OPTION
AGREEMENT") is made and entered into as of , 19 ,
------------------------ ------
by and between Power Integrations, Inc. and
---------------------------------
(the "OPTIONEE").
The Company has granted to the Optionee pursuant to the Power Integrations,
Inc. 1997 Stock Option Plan (the "PLAN") an option to purchase certain shares of
Stock, upon the terms and conditions set forth in this Option Agreement (the
"OPTION"). The Option shall in all respects be subject to the terms and
conditions of the Plan.
1. DEFINITIONS AND CONSTRUCTION.
----------------------------
1.1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "DATE OF OPTION GRANT" means , 19 .
--------------------- ----
(b) "NUMBER OF OPTION SHARES" means shares of Stock, as
adjusted from time to time pursuant to Section 9.
(c) "EXERCISE PRICE" means $ per share of Stock, as
------
adjusted from time to time pursuant to Section 9.
(d) "INITIAL EXERCISE DATE" means the later of the Date of
Option Grant or the date the Optionee's Service commences.
(e) "INITIAL VESTING DATE" means the date occurring six (6)
months after (check one):
[ ] the Date of Option Grant.
[ ] ________________ , 19_________.
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(f) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
Vested Ratio
------------
Prior to Initial Vesting Date 0
On Initial Vesting Date, provided the 1/8
Optionee's Service has not terminated
prior to such date
Plus
- ----
For each full month of the Optionee's 1/48
continuous Service from the Initial
Vesting Date until the Vested Ratio
equals 1/1, an additional
(g) "OPTION EXPIRATION DATE" means the date ten (10) years after
the Date of Option Grant.
(h) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"BOARD" also means such Committee(s).
(i) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(j) "COMPANY" means Power Integrations, Inc., a California
corporation, or any successor corporation thereto.
(k) "CONSULTANT" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.
(l) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(m) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company group because
of the sickness or injury of the Optionee.
(n) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating
2
<PAGE>
Company; provided, however, that neither service as a Director nor payment of a
director's fee shall be sufficient to constitute employment for purposes of the
Option Agreement.
(o) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(p) "FAIR MARKET VALUE" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
(i) If, on such date, there is a public market for the
Stock, the Fair Market Value of a share of Stock shall be the closing sale price
of a share of Stock (or the mean of the closing bid and asked prices of a share
of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, the Nasdaq Small-Cap Market or such other national or regional
securities exchange or market system constituting the primary market for the
Stock, as reported in the Wall Street Journal or such other source as the
Company deems reliable. If the relevant date does not fall on a day on which the
Stock has traded on such securities exchange or market system, the date on which
the Fair Market Value shall be established shall be the last day on which the
Stock was so traded prior to the relevant date, or such other appropriate day as
shall be determined by the Board, in its sole discretion.
(ii) If, on such date, there is no public market for the
Stock, the Fair Market Value of a share of Stock shall be as determined by
the Board without regard to any restriction other than a restriction which,
by its terms, will never lapse.
(q) "INCENTIVE STOCK OPTION" means an Option intended to be (as
set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
(r) "INSIDER" means an officer or a Director of the Company or
any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(s) "NONSTATUTORY STOCK OPTION" means an Option not intended to
be (as set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
(t) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(u) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(v) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
3
<PAGE>
(w) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(x) "SERVICE" means the Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. The Optionee's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. Furthermore,
the Optionee's Service with the Participating Company Group shall not be deemed
to have terminated if the Optionee takes any military leave, sick leave, or
other bona fide leave of absence approved by the Company; provided, however,
that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day
of such leave the Optionee's Service shall be deemed to have terminated unless
the Optionee's right to return to Service with the Participating Company Group
is guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company or required by law, a leave of absence shall
not be treated as Service for purposes of determining the Optionee's Vested
Ratio. The Optionee's Service shall be deemed to have terminated either upon an
actual termination of Service or upon the corporation for which the Optionee
performs Service ceasing to be a Participating Company. Subject to the
foregoing, the Company, in its sole discretion, shall determine whether the
Optionee's Service has terminated and the effective date of such termination.
(NOTE: If the Option is exercised more than three (3) months after the date on
which the Optionee ceased to be an Employee (other than by reason of death or a
permanent and total disability as defined in Section 22(e)(3) of the Code), the
Option will be treated as a Nonstatutory Stock Option and not as an Incentive
Stock Option to the extent required by Section 422 of the Code.)
(y) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 9.
(z) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural and the plural shall include the
singular. Use of the term "or" is not intended to be exclusive, unless the
context clearly requires otherwise.
2. TAX CONSEQUENCES.
----------------
2.1 TAX STATUS OF OPTION. This Option is intended to be a
Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option
within the meaning of Section 422(b) of the Code.
2.2 ELECTION UNDER SECTION 83(B) OF THE CODE. If the Optionee exercises
this Option to purchase shares of Stock that are both nontransferable and
subject to a substantial risk
4
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of forfeiture, the Optionee understands that the Optionee should consult with
the Optionee's tax advisor regarding the advisability of filing with the
Internal Revenue Service an election under Section 83(b) of the Code, which must
be filed no later than thirty (30) days after the date on which the Optionee
exercises the Option. Shares acquired upon exercise of the Option are
nontransferable and subject to a substantial risk of forfeiture if, for example,
(a) they are unvested and are subject to a right of the Company to repurchase
such shares at the Optionee's original purchase price if the Optionee's Service
terminates, (b) the Optionee is an Insider and, under certain circumstances,
exercises the Option within six (6) months of the Date of Option Grant (if a
class of equity security of the Company is registered under Section 12 of the
Exchange Act), or (c) the Optionee is subject to a restriction on transfer to
comply with "Pooling-of-Interests Accounting" rules. Failure to file an election
under Section 83(b), if appropriate, may result in adverse tax consequences to
the Optionee. The Optionee acknowledges that the Optionee has been advised to
consult with a tax advisor prior to the exercise of the Option regarding the tax
consequences to the Optionee of the exercise of the Option. AN ELECTION UNDER
SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE DATE ON WHICH THE OPTIONEE
PURCHASES SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. THE OPTIONEE ACKNOWLEDGES
THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE OPTIONEE'S SOLE
RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE
TO FILE SUCH ELECTION ON HIS OR HER BEHALF.
3. ADMINISTRATION.
--------------
All questions of interpretation concerning this Option Agreement shall
be determined by the Board. All determinations by the Board shall be final and
binding upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
4. EXERCISE OF THE OPTION.
----------------------
4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable on and after the Initial Exercise Date and prior to
the termination of the Option (as provided in Section 6) in an amount not to
exceed the Number of Option Shares less the number of shares previously acquired
upon exercise of the Option, subject to the Optionee's agreement that any shares
purchased upon exercise are subject to the Company's repurchase right set forth
in Section 11.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed
5
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facsimile transmission, or by such other means as the Company may permit, to the
Chief Financial Officer of the Company, or other authorized representative of
the Participating Company Group, prior to the termination of the Option as set
forth in Section 6, accompanied by (i) full payment of the aggregate Exercise
Price for the number of shares of Stock being purchased and (ii) an executed
copy, if required herein, of the then current form of escrow agreement
referenced below. The Option shall be deemed to be exercised upon receipt by the
Company of such written notice, the aggregate Exercise Price, and, if required
by the Company, such executed agreement.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the aggregate Exercise Price, (iii)
by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any
combination of the foregoing.
(b) TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole or
in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising
upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in
whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or
(iv) the lapsing of any restriction with respect to any shares acquired upon
exercise of the Option.
6
<PAGE>
The Optionee is cautioned that the Option is not exercisable unless the tax
withholding obligations of the Participating Company Group are satisfied.
Accordingly, the Optionee may not be able to exercise the Option when desired
even though the Option is vested, and the Company shall have no obligation to
issue a certificate for such shares or release such shares from any escrow
provided for herein.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise
Price is paid by means of a Cashless Exercise, the certificate for the shares as
to which the Option is exercised shall be registered in the name of the
Optionee, or, if applicable, in the names of the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES.
The grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from
any regulatory body having jurisdiction the authority, if any, deemed by the
Company's legal counsel to be necessary to the lawful issuance and sale of any
shares subject to the Option shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of the
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION.
--------------------------------
The Option may be exercised during the lifetime of the Optionee only
by the Optionee or the Optionee's guardian or legal representative and may not
be assigned or transferred in any manner except by will or by the laws of
descent and distribution. Following the death of the Optionee, the Option, to
the extent provided in Section 7, may be exercised by the Optionee's legal
representative or by any person empowered to do so under the deceased Optionee's
will or under the then applicable laws of descent and distribution.
7
<PAGE>
6. TERMINATION OF THE OPTION.
-------------------------
The Option shall terminate and may no longer be exercised on the first
to occur of (a) the Option Expiration Date, (b) the last date for exercising the
Option following termination of the Optionee's Service as described in Section
7, or (c) a Change in Control to the extent provided in Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the expiration
of six (6) months after the date on which the Optionee's Service terminated, but
in any event no later than the Option Expiration Date.
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee's legal representative or
other person who acquired the right to exercise the Option by reason of the
Optionee's death at any time prior to the expiration of six (6) months after the
date on which the Optionee's Service terminated, but in any event no later than
the Option Expiration Date. The Optionee's Service shall be deemed to have
terminated on account of death if the Optionee dies within three (3) months
after the Optionee's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with
the Participating Company Group terminates for any reason, except Disability or
death, the Option, to the extent unexercised and exercisable by the Optionee on
the date on which the Optionee's Service terminated, may be exercised by the
Optionee within three (3) months (or such other longer period of time as
determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
7.2 ADDITIONAL LIMITATIONS ON OPTION EXERCISE. Notwithstanding the
provisions of Section 7.1, the Option may not be exercised after the Optionee's
termination of Service to the extent that the shares to be acquired upon
exercise of the Option would be subject to the Unvested Share Repurchase Option
as provided in Section 11.
7.3 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3)
months after the date the Optionee is notified by the Company that the Option is
exercisable, but in any event no later than the Option Expiration Date.
8
<PAGE>
7.4 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 7.1 of shares acquired upon the exercise of the Option would
subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option
shall remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
8. CHANGE IN CONTROL.
-----------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party; or
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF CHANGE IN CONTROL ON OPTION. In the event of a
Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation
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thereof, as the case may be (the "ACQUIRING CORPORATION"), may either assume the
Company's rights and obligations under the Option or substitute for the Option a
substantially equivalent option for the Acquiring Corporation's stock. For
purposes of this Section 8.2, the Option shall be deemed assumed if, following
the Change in Control, the Option confers the right to purchase in accordance
with its terms and conditions, for each share of Stock subject to the Option
immediately prior to the Change in Control, the consideration (whether stock,
cash or other securities or property) to which a holder of a share of Stock on
the effective date of the Change in Control was entitled. The Option shall
terminate and cease to be outstanding effective as of the date of the Change in
Control to the extent that the Option is neither assumed or substituted for by
the Acquiring Corporation in connection with the Change in Control nor exercised
as of the date of the Change in Control. Notwithstanding the foregoing, shares
acquired upon exercise of the Option prior to the Change in Control and any
consideration received pursuant to the Change in Control with respect to such
shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the Option
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Change in Control is the surviving or continuing corporation and
immediately after such Ownership Change Event less than fifty percent (50%) of
the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the Option shall not terminate unless
the Board otherwise provides in its sole discretion.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.
--------------------------------------------
In the event of any stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification, or similar change in the
capital structure of the Company, appropriate adjustments shall be made in the
number, Exercise Price and class of shares of stock subject to the Option. If a
majority of the shares which are of the same class as the shares that are
subject to the Option are exchanged for, converted into, or otherwise become
(whether or not pursuant to an Ownership Change Event) shares of another
corporation (the "New Shares"), the Board may unilaterally amend the Option to
provide that the Option is exercisable for New Shares. In the event of any such
amendment, the Number of Option Shares and the Exercise Price shall be adjusted
in a fair and equitable manner, as determined by the Board, in its sole
discretion. Notwithstanding the foregoing, any fractional share resulting from
an adjustment pursuant to this Section 9 shall be rounded up or down to the
nearest whole number, as determined by the Board, and in no event may the
Exercise Price be decreased to an amount less than the par value, if any, of the
stock subject to the Option. The adjustments determined by the Board pursuant to
this Section 9 shall be final, binding and conclusive.
10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT.
-----------------------------------------------
The Optionee shall have no rights as a shareholder with respect to any
shares covered by the Option until the date of the issuance of a certificate for
the shares for which the Option has been exercised (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company). No adjustment shall be made for dividends,
10
<PAGE>
distributions or other rights for which the record date is prior to the date
such certificate is issued, except as provided in Section 9. If the Optionee is
an Employee, the Optionee understands and acknowledges that, except as otherwise
provided in a separate, written employment agreement between a Participating
Company and the Optionee, the Optionee's employment is "at will" and is for no
specified term. Nothing in this Option Agreement shall confer upon the Optionee
any right to continue in the Service of a Participating Company or interfere in
any way with any right of the Participating Company Group to terminate the
Optionee's Service as an Employee or Consultant, as the case may be, at any
time.
11. UNVESTED SHARE REPURCHASE OPTION.
--------------------------------
11.1 GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the
Optionee's Service with the Participating Company Group is terminated for any
reason or no reason, with or without cause, or, if the Optionee, the Optionee's
legal representative, or other holder of shares acquired upon exercise of the
Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of
(other than pursuant to an Ownership Change Event) any shares acquired upon
exercise of the Option which exceed the Vested Shares as defined in Section 11.2
below (the "UNVESTED SHARES"), the Company shall have the right to repurchase
the Unvested Shares under the terms and subject to the conditions set forth in
this Section 11 (the "UNVESTED SHARE REPURCHASE OPTION").
11.2 VESTED SHARES AND UNVESTED SHARES DEFINED. The "VESTED SHARES"
shall mean, on any given date, a number of shares of Stock equal to the Number
of Option Shares multiplied by the Vested Ratio determined as of such date and
rounded down to the nearest whole share. On such given date, the "UNVESTED
SHARES" shall mean the number of shares of Stock acquired upon exercise of the
Option which exceed the Vested Shares determined as of such date.
11.3 EXERCISE OF UNVESTED SHARE REPURCHASE OPTION. The Company may
exercise the Unvested Share Repurchase Option by written notice to the Optionee
within sixty (60) days after (a) termination of the Optionee's Service (or
exercise of the Option, if later) or (b) the Company has received notice of the
attempted disposition of Unvested Shares. If the Company fails to give notice
within such sixty (60) day period, the Unvested Share Repurchase Option shall
terminate unless the Company and the Optionee have extended the time for the
exercise of the Unvested Share Repurchase Option. The Unvested Share Repurchase
Option must be exercised, if at all, for all of the Unvested Shares, except as
the Company and the Optionee otherwise agree.
11.4 PAYMENT FOR SHARES AND RETURN OF SHARES TO COMPANY. The purchase
price per share being repurchased by the Company shall be an amount equal to the
Optionee's original cost per share, as adjusted pursuant to Section 9 (the
"REPURCHASE PRICE"). The Company shall pay the aggregate Repurchase Price to the
Optionee in cash within thirty (30) days after the date of the written notice to
the Optionee of the Company's exercise of the Unvested Share Repurchase Option.
For purposes of the foregoing, cancellation of any indebtedness of the Optionee
to any Participating Company shall be treated as payment to the Optionee in cash
to the extent of the unpaid principal and any accrued interest canceled. The
shares being repurchased
11
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shall be delivered to the Company by the Optionee at the same time as the
delivery of the Repurchase Price to the Optionee.
11.5 ASSIGNMENT OF UNVESTED SHARE REPURCHASE OPTION. The Company
shall have the right to assign the Unvested Share Repurchase Option at any time,
whether or not such option is then exercisable, to one or more persons as may be
selected by the Company.
11.6 OWNERSHIP CHANGE EVENT. Upon the occurrence of an Ownership
Change Event, any and all new, substituted or additional securities or other
property to which the Optionee is entitled by reason of the Optionee's ownership
of Unvested Shares shall be immediately subject to the Unvested Share Repurchase
Option and included in the terms "STOCK" and "UNVESTED SHARES" for all purposes
of the Unvested Share Repurchase Option with the same force and effect as the
Unvested Shares immediately prior to the Ownership Change Event. While the
aggregate Repurchase Price shall remain the same after such Ownership Change
Event, the Repurchase Price per Unvested Share upon exercise of the Unvested
Share Repurchase Option following such Ownership Change Event shall be adjusted
as appropriate. For purposes of determining the Vested Ratio following an
Ownership Change Event, credited Service shall include all Service with any
corporation which is a Participating Company at the time the Service is
rendered, whether or not such corporation is a Participating Company both before
and after the Ownership Change Event.
12. ESCROW.
------
12.1 ESTABLISHMENT OF ESCROW. To ensure that shares subject to the
Unvested Share Repurchase Option will be available for repurchase, the Company
may require the Optionee to deposit the certificate evidencing the shares which
the Optionee purchases upon exercise of the Option with an agent designated by
the Company under the terms and conditions of escrow and security agreements
approved by the Company. If the Company does not require such deposit as a
condition of exercise of the Option, the Company reserves the right at any time
to require the Optionee to so deposit the certificate in escrow. Upon the
occurrence of an Ownership Change Event or a change, as described in Section 9,
in the character or amount of any of the outstanding stock of the corporation
the stock of which is subject to the provisions of this Option Agreement, any
and all new, substituted or additional securities or other property to which the
Optionee is entitled by reason of the Optionee's ownership of shares of Stock
acquired upon exercise of the Option that remain, following such Ownership
Change Event or change described in Section 9, subject to the Unvested Share
Repurchase Option or any security interest held by the Company shall be
immediately subject to the escrow to the same extent as such shares of Stock
immediately before such event. The Company shall bear the expenses of the
escrow.
12.2 DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after
the expiration of the Unvested Share Repurchase Option, but not more frequently
than twice each calendar year, the escrow agent shall deliver to the Optionee
the shares and any other property no longer subject to such restrictions.
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12.3 NOTICES AND PAYMENTS. In the event the shares and any other
property held in escrow are subject to the Company's exercise of the Unvested
Share Repurchase Option, the notices required to be given to the Optionee shall
be given to the escrow agent, and any payment required to be given to the
Optionee shall be given to the escrow agent. Within thirty (30) days after
payment by the Company, the escrow agent shall deliver the shares and any other
property which the Company has purchased to the Company and shall deliver the
payment received from the Company to the Optionee.
13. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT.
-----------------------------------------------
If, from time to time, there is any stock dividend, stock split or
other change, as described in Section 9, in the character or amount of any of
the outstanding stock of the corporation the stock of which is subject to the
provisions of this Option Agreement, then in such event any and all new,
substituted or additional securities to which the Optionee is entitled by reason
of the Optionee's ownership of the shares acquired upon exercise of the Option
shall be immediately subject to the Unvested Share Repurchase Option with the
same force and effect as the shares subject to the Unvested Share Repurchase
Option immediately before such event.
14. LEGENDS.
-------
The Company may at any time place legends referencing the Unvested
Share Repurchase Option and any applicable federal, state or foreign securities
law restrictions on all certificates representing shares of stock subject to the
provisions of this Option Agreement. The Optionee shall, at the request of the
Company, promptly present to the Company any and all certificates representing
shares acquired pursuant to the Option in the possession of the Optionee in
order to carry out the provisions of this Section.
15. RESTRICTIONS ON TRANSFER OF SHARES.
----------------------------------
No shares acquired upon exercise of the Option may be sold, exchanged,
transferred (including, without limitation, any transfer to a nominee or agent
of the Optionee), assigned, pledged, hypothecated or otherwise disposed of,
including by operation of law, in any manner which violates any of the
provisions of this Option Agreement and, except pursuant to an Ownership Change
Event, until the date on which such shares become Vested Shares, and any such
attempted disposition shall be void. The Company shall not be required (a) to
transfer on its books any shares which will have been transferred in violation
of any of the provisions set forth in this Option Agreement or (b) to treat as
owner of such shares or to accord the right to vote as such owner or to pay
dividends to any transferee to whom such shares will have been so transferred.
16. BINDING EFFECT.
--------------
Subject to the restrictions on transfer set forth herein, this Option
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective heirs, executors, administrators, successors and assigns.
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17. TERMINATION OR AMENDMENT.
------------------------
The Board may terminate or amend the Plan or the Option at any time;
provided, however, that except as provided in Section 8.2 in connection with a
Change in Control, no such termination or amendment may adversely affect the
Option or any unexercised portion hereof without the consent of the Optionee
unless such termination or amendment is necessary to comply with any applicable
law or government regulation or is required to enable the Option to qualify as
an Incentive Stock Option. No amendment or addition to this Option Agreement
shall be effective unless in writing.
18. INTEGRATED AGREEMENT.
--------------------
This Option Agreement constitutes the entire understanding and
agreement of the Optionee and the Participating Company Group with respect to
the subject matter contained herein and there are no agreements, understandings,
restrictions, representations, or warranties among the Optionee and the
Participating Company Group with respect to such subject matter other than those
as set forth or provided for herein. To the extent contemplated herein, the
provisions of this Option Agreement shall survive any exercise of the Option and
shall remain in full force and effect.
19. APPLICABLE LAW.
--------------
This Option Agreement shall be governed by the laws of the State of
California as such laws are applied to agreements between California residents
entered into and to be performed entirely within the State of California.
POWER INTEGRATIONS, INC.
By:
----------------------------------------
Robert G. Staples
Vice President, Finance and
Administration
Address: 477 North Mathilda Avenue
Sunnyvale, CA 94086
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The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, including the Unvested Share Repurchase
Option set forth in Section 11, and hereby accepts the Option subject to all of
the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement.
OPTIONEE
Date:
-------------------------- -----------------------------------------
Optionee Address:
-----------------------------------------
-----------------------------------------
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Optionee:
------------------------
Date:
----------------------------
IMMEDIATELY EXERCISABLE
NONSTATUTORY STOCK OPTION
EXERCISE NOTICE
[Registered Shares]
Power Integrations, Inc.
477 North Mathilda Avenue
Sunnyvale, CA 94086
Attention: Chief Financial Officer
Ladies and Gentlemen:
1. Exercise of Option. I was granted a nonstatutory stock option (the
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"OPTION") to purchase shares of the common stock of Power Integrations, Inc.
(the "COMPANY") on , 19 pursuant to the Company's 1997 Stock Option
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Plan (the "PLAN") and pursuant to the Immediately Exercisable Nonstatutory
Stock Option Agreement dated , 19 (the "OPTION AGREEMENT").
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I hereby elect to exercise the Option as to a total of shares
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of the common stock of the Company (the "SHARES"), of which
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are Vested Shares and are Unvested Shares as determined in
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accordance with the Option Agreement.
2. Payments. Enclosed herewith or arrangements have been made for full
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payment in the aggregate amount of $ (representing $ per
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share) for the Shares in the manner set forth in the Option Agreement. I
authorize payroll withholding and otherwise will make adequate provision for
foreign, federal and state tax withholding obligations of the Company, if any.
3. Binding Effect. I agree that the Shares are being acquired in
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accordance with and subject to the terms, provisions and conditions of the
Option Agreement, including the Unvested Share Repurchase Option set forth
therein, to all of which I hereby expressly assent. This Agreement shall inure
to the benefit of and be binding upon the my heirs, executors, administrators,
successors and assigns. If required, I agree to deposit the certificate or
certificates evidencing the Shares, along with a blank stock assignment separate
from certificate executed by me, with an escrow agent designated by the Company,
to be held by such escrow agent pursuant to the Company's standard Joint Escrow
Instructions, an executed copy of which I have delivered herewith.
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4. Election Under Section 83(b) of the Code. I understand and
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acknowledge that if I am exercising the Option to purchase Unvested Shares
(i.e., shares that remain subject to the Company's Unvested Share Repurchase
Option), that I should consult with my tax advisor regarding the advisability of
filing with the Internal Revenue Service an election under Section 83(b) of the
Code, which must be filed no later than thirty (30) days after the date on which
I exercise the Option.
I acknowledge that I have been advised to consult with a tax advisor prior
to the exercise of the Option regarding the tax consequences to me of exercising
the Option. AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER
THE DATE ON WHICH I PURCHASE SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. I
ACKNOWLEDGE THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS MY SOLE
RESPONSIBILITY, EVEN IF I REQUEST THE COMPANY OR ITS REPRESENTATIVES TO FILE
SUCH ELECTION ON MY BEHALF.
My address of record is:
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My Social Security Number is:
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I understand that I am purchasing the Shares pursuant to the terms of my
Option Agreement, which I have received and carefully read and understand.
Very truly yours,
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(Signature)
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(Optionee's Name Printed)
Receipt of the above is hereby acknowledged.
POWER INTEGRATIONS, INC.
By:
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Title:
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Dated:
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POWER INTEGRATIONS, INC.
IMMEDIATELY EXERCISABLE
INCENTIVE STOCK OPTION AGREEMENT
THIS IMMEDIATELY EXERCISABLE INCENTIVE STOCK OPTION AGREEMENT (the "OPTION
AGREEMENT") is made and entered into as of ,19 ,
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by and between Power Integrations, Inc. and
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(the "OPTIONEE").
The Company has granted to the Optionee pursuant to the Power Integrations,
Inc. 1997 Stock Option Plan (the "PLAN") an option to purchase certain shares of
Stock, upon the terms and conditions set forth in this Option Agreement (the
"OPTION"). The Option shall in all respects be subject to the terms and
conditions of the Plan.
1. DEFINITIONS AND CONSTRUCTION.
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1.1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "DATE OF OPTION GRANT" means , 19 .
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(b) "NUMBER OF OPTION SHARES" means shares of
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Stock, as adjusted from time to time pursuant to Section 9.
(c) "EXERCISE PRICE" means $ per share of Stock,
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as adjusted from time to time pursuant to Section 9.
(d) "INITIAL EXERCISE DATE" means the Date of Option Grant.
(e) "INITIAL VESTING DATE" means the date occurring six (6)
months after (check one):
[ ] the Date of Option Grant.
[ ] _______________ , 19______.
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(f) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
Vested Ratio
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Prior to Initial Vesting Date 0
On Initial Vesting Date, provided the 1/8
Optionee's Service has not terminated
prior to such date
Plus
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For each full month of the Optionee's 1/48
continuous Service from the Initial
Vesting Date until the Vested Ratio
equals 1/1, an additional
(g) "OPTION EXPIRATION DATE" means the date ten (10) years after
the Date of Option Grant.
(h) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"BOARD" also means such Committee(s).
(i) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(j) "COMPANY" means Power Integrations, Inc., a California
corporation, or any successor corporation thereto.
(k) "CONSULTANT" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.
(l) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(m) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company group because
of the sickness or injury of the Optionee.
(n) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Option Agreement.
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(o) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(p) "FAIR MARKET VALUE" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
(i) If, on such date, there is a public market for the
Stock, the Fair Market Value of a share of Stock shall be the closing sale price
of a share of Stock (or the mean of the closing bid and asked prices of a share
of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, the Nasdaq Small-Cap Market or such other national or regional
securities exchange or market system constituting the primary market for the
Stock, as reported in the Wall Street Journal or such other source as the
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Company deems reliable. If the relevant date does not fall on a day on which the
Stock has traded on such securities exchange or market system, the date on which
the Fair Market Value shall be established shall be the last day on which the
Stock was so traded prior to the relevant date, or such other appropriate day as
shall be determined by the Board, in its sole discretion.
(ii) If, on such date, there is no public market for the
Stock, the Fair Market Value of a share of Stock shall be as determined by the
Board without regard to any restriction other than a restriction which, by its
terms, will never lapse.
(q) "INCENTIVE STOCK OPTION" means an Option intended to be (as
set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
(r) "INSIDER" means an officer or a Director of the Company or
any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(s) "NONSTATUTORY STOCK OPTION" means an Option not intended to
be (as set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
(t) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(u) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(v) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(w) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
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(x) "SERVICE" means the Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. The Optionee's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. Furthermore,
the Optionee's Service with the Participating Company Group shall not be deemed
to have terminated if the Optionee takes any military leave, sick leave, or
other bona fide leave of absence approved by the Company; provided, however,
that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day
of such leave the Optionee's Service shall be deemed to have terminated unless
the Optionee's right to return to Service with the Participating Company Group
is guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company or required by law, a leave of absence shall
not be treated as Service for purposes of determining the Optionee's Vested
Ratio. The Optionee's Service shall be deemed to have terminated either upon an
actual termination of Service or upon the corporation for which the Optionee
performs Service ceasing to be a Participating Company. Subject to the
foregoing, the Company, in its sole discretion, shall determine whether the
Optionee's Service has terminated and the effective date of such termination.
(NOTE: If the Option is exercised more than three (3) months after the date on
which the Optionee ceased to be an Employee (other than by reason of death or a
permanent and total disability as defined in Section 22(e)(3) of the Code), the
Option will be treated as a Nonstatutory Stock Option and not as an Incentive
Stock Option to the extent required by Section 422 of the Code.)
(y) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 9.
(z) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural and the plural shall include the
singular. Use of the term "or" is not intended to be exclusive, unless the
context clearly requires otherwise.
2. TAX CONSEQUENCES.
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2.1 STATUS TAX OF OPTION. This Option is intended to be an
Incentive Stock Option within the meaning of Section 422(b) of the Code, but the
Company does not represent or warrant that this Option qualifies as such. The
Optionee should consult with the Optionee's own tax advisor regarding the tax
effects of this Option and the requirements necessary to obtain favorable income
tax treatment under Section 422 of the Code, including, but not limited to,
holding period requirements. (NOTE: If the aggregate Exercise Price of the
Option (that is, the Exercise Price multiplied by the Number of Option Shares)
plus the aggregate exercise price of any other Incentive Stock Options held by
the Optionee (whether granted pursuant to the Plan or any other stock option
plan of the Participating Company Group) is greater than One Hundred
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Thousand Dollars ($100,000), the Optionee should contact the Chief Financial
Officer of the Company to ascertain whether the entire Option qualifies as an
Incentive Stock Option.)
2.2 ELECTION UNDER SECTION 83(B) OF THE CODE. If the Optionee
exercises this Option to purchase shares of Stock that are both nontransferable
and subject to a substantial risk of forfeiture, the Optionee understands that
the Optionee should consult with the Optionee's tax advisor regarding the
advisability of filing with the Internal Revenue Service an election under
Section 83(b) of the Code, which must be filed no later than thirty (30) days
after the date on which the Optionee exercises the Option. Shares acquired upon
exercise of the Option are nontransferable and subject to a substantial risk of
forfeiture if, for example, (a) they are unvested and are subject to a right of
the Company to repurchase such shares at the Optionee's original purchase price
if the Optionee's Service terminates, (b) the Optionee is an Insider and, under
certain circumstances, exercises the Option within six (6) months of the Date of
Option Grant (if a class of equity security of the Company is registered under
Section 12 of the Exchange Act), or (c) the Optionee is subject to a restriction
on transfer to comply with "Pooling-of-Interests Accounting" rules. Failure to
file an election under Section 83(b), if appropriate, may result in adverse tax
consequences to the Optionee. The Optionee acknowledges that the Optionee has
been advised to consult with a tax advisor prior to the exercise of the Option
regarding the tax consequences to the Optionee of the exercise of the Option. AN
ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE DATE ON
WHICH THE OPTIONEE PURCHASES SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. THE
OPTIONEE ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE
OPTIONEE'S SOLE RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS
REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR HER BEHALF.
3. ADMINISTRATION.
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All questions of interpretation concerning this Option Agreement shall
be determined by the Board. All determinations by the Board shall be final and
binding upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
4. EXERCISE OF THE OPTION.
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4.1 RIGHT TO EXERCISE.
(a) Except as otherwise provided herein, the Option shall be
exercisable on and after the Initial Exercise Date and prior to the termination
of the Option (as provided in Section 6) in an amount not to exceed the Number
of Option Shares less the number of shares previously acquired upon exercise of
the Option, subject to the Optionee's agreement that any shares purchased upon
exercise are subject to the Company's repurchase right set forth in Section 11.
Notwithstanding the foregoing, except as provided in Section 4.1(b), the
aggregate Fair Market Value of the shares of Stock with respect to which the
Optionee may exercise the
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Option for the first time during any calendar year, when added to the aggregate
Fair Market Value of the shares subject to any other options designated as
Incentive Stock Options granted to the Optionee under all stock option plans of
the Participating Company Group prior to the Date of Option Grant with respect
to which such options are exercisable for the first time during the same
calendar year, shall not exceed One Hundred Thousand Dollars ($100,000). For
purposes of the preceding sentence, options designated as Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of shares of stock shall be determined as of the time the
option with respect to such shares is granted. Such limitation on exercise shall
be referred to in this Option Agreement as the "ISO EXERCISE LIMITATION." If
Section 422 of the Code is amended to provide for a different limitation from
that set forth in this Section 4.1(a), the ISO Exercise Limitation shall be
deemed amended effective as of the date required or permitted by such amendment
to the Code. The ISO Exercise Limitation shall terminate upon the earlier of (i)
the Optionee's termination of Service, (ii) the day immediately prior to the
effective date of a Change in Control in which the Option is not assumed or
substituted for by the Acquiring Corporation as provided in Section 8, or (iii)
the day ten (10) days prior to the Option Expiration Date. Upon such termination
of the ISO Exercise Limitation, the Option shall be deemed a Nonstatutory Stock
Option to the extent of the number of shares subject to the Option which would
otherwise exceed the ISO Exercise Limitation.
(b) Notwithstanding any other provision of this Option
Agreement, if compliance with the ISO Exercise Limitation as set forth in
Section 4.1(a) will result in the exercisability of any Vested Shares (as
defined in Section 11.2) being delayed more than thirty (30) days beyond the
date such shares become Vested Shares (the "VESTING DATE"), the Option shall be
deemed to be two (2) options. The first option shall be for the maximum portion
of the Number of Option Shares that can comply with the ISO Exercise Limitation
without causing the Option to be unexercisable in the aggregate as to Vested
Shares on the Vesting Date for such shares. The second option, which shall not
be treated as an Incentive Stock Option as described in section 422(b) of the
Code, shall be for the balance of the Number of Option Shares; that is, those
such shares which, on the respective Vesting Date for such shares, would be
unexercisable if included in the first option and thereby made subject to the
ISO Exercise Limitation. Shares treated as subject to the second option shall be
exercisable on the same terms and at the same time as set forth in this Option
Agreement; provided, however, that (i) the second sentence of Section 4.1(a)
shall not apply to the second option and (ii) each such share shall become a
Vested Share on the Vesting Date such share must first be allocated to the
second option pursuant to the preceding sentence. Unless the Optionee
specifically elects to the contrary in the Optionee's written notice of
exercise, the first option shall be deemed to be exercised first to the maximum
possible extent and then the second option shall be deemed to be exercised.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group,
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prior to the termination of the Option as set forth in Section 6, accompanied by
(i) full payment of the aggregate Exercise Price for the number of shares of
Stock being purchased and (ii) an executed copy, if required herein, of the then
current form of escrow agreement referenced below. The Option shall be deemed to
be exercised upon receipt by the Company of such written notice, the aggregate
Exercise Price, and, if required by the Company, such executed agreement.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the aggregate Exercise Price, (iii)
by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any
combination of the foregoing.
(b) TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising
upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in
whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or
(iv) the lapsing of any restriction with respect to any shares acquired upon
exercise of the Option. The Optionee is cautioned that the Option is not
exercisable unless the tax withholding obligations of the Participating Company
Group are satisfied. Accordingly, the Optionee may not be able to exercise the
Option when desired even though the Option is vested, and the Company
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shall have no obligation to issue a certificate for such shares or release such
shares from any escrow provided for herein.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise
Price is paid by means of a Cashless Exercise, the certificate for the shares as
to which the Option is exercised shall be registered in the name of the
Optionee, or, if applicable, in the names of the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES.
The grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from
any regulatory body having jurisdiction the authority, if any, deemed by the
Company's legal counsel to be necessary to the lawful issuance and sale of any
shares subject to the Option shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of the
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION.
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The Option may be exercised during the lifetime of the Optionee only
by the Optionee or the Optionee's guardian or legal representative and may not
be assigned or transferred in any manner except by will or by the laws of
descent and distribution. Following the death of the Optionee, the Option, to
the extent provided in Section 7, may be exercised by the Optionee's legal
representative or by any person empowered to do so under the deceased Optionee's
will or under the then applicable laws of descent and distribution.
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6. TERMINATION OF THE OPTION.
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The Option shall terminate and may no longer be exercised on the first
to occur of (a) the Option Expiration Date, (b) the last date for exercising the
Option following termination of the Optionee's Service as described in Section
7, or (c) a Change in Control to the extent provided in Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
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7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of six (6) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date. (NOTE: If
the Option is exercised more than three (3) months after the date on which the
Optionee's Service as an Employee terminated as a result of a Disability other
than a permanent and total disability as defined in Section 22(e)(3) of the
Code, the Option will be treated as a Nonstatutory Stock Option and not as an
Incentive Stock Option to the extent required by Section 422 of the Code.)
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee's legal representative or
other person who acquired the right to exercise the Option by reason of the
Optionee's death at any time prior to the expiration of six (6) months after the
date on which the Optionee's Service terminated, but in any event no later than
the Option Expiration Date. The Optionee's Service shall be deemed to have
terminated on account of death if the Optionee dies within three (3) months
after the Optionee's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service
with the Participating Company Group terminates for any reason, except
Disability or death, the Option, to the extent unexercised and exercisable by
the Optionee on the date on which the Optionee's Service terminated, may be
exercised by the Optionee within three (3) months (or such other longer period
of time as determined by the Board, in its sole discretion) after the date on
which the Optionee's Service terminated, but in any event no later than the
Option Expiration Date.
7.2 ADDITIONAL LIMITATIONS ON OPTION EXERCISE. Notwithstanding the
provisions of Section 7.1, the Option may not be exercised after the Optionee's
termination of Service to the extent that the shares to be acquired upon
exercise of the Option would be subject to the Unvested Share Repurchase Option
as provided in Section 11.
7.3 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1
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is prevented by the provisions of Section 4.6, the Option shall remain
exercisable until three (3) months after the date the Optionee is notified by
the Company that the Option is exercisable, but in any event no later than the
Option Expiration Date. The Company makes no representation as to the tax
consequences of any such delayed exercise. The Optionee should consult with the
Optionee's own tax advisor as to the tax consequences of any such delayed
exercise.
7.4 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B). Notwithstanding
the foregoing, if a sale within the applicable time periods set forth in Section
7.1 of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date. The Company makes no representation as to the tax consequences of any such
delayed exercise. The Optionee should consult with the Optionee's own tax
advisor as to the tax consequences of any such delayed exercise.
8. CHANGE IN CONTROL.
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8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single
or series of related transactions by the shareholders of the Company of more
than fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party; or
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be,
10
<PAGE>
either directly or through one or more subsidiary corporations. The Board shall
have the right to determine whether multiple sales or exchanges of the voting
stock of the Company or multiple Ownership Change Events are related, and its
determination shall be final, binding and conclusive.
8.2 EFFECT OF CHANGE IN CONTROL ON OPTION. In the event of a Change
in Control, the surviving, continuing, successor, or purchasing corporation or
parent corporation thereof, as the case may be (the "ACQUIRING CORPORATION"),
may either assume the Company's rights and obligations under the Option or
substitute for the Option a substantially equivalent option for the Acquiring
Corporation's stock. For purposes of this Section 8.2, the Option shall be
deemed assumed if, following the Change in Control, the Option confers the right
to purchase in accordance with its terms and conditions, for each share of Stock
subject to the Option immediately prior to the Change in Control, the
consideration (whether stock, cash or other securities or property) to which a
holder of a share of Stock on the effective date of the Change in Control was
entitled. The Option shall terminate and cease to be outstanding effective as of
the date of the Change in Control to the extent that the Option is neither
assumed or substituted for by the Acquiring Corporation in connection with the
Change in Control nor exercised as of the date of the Change in Control.
Notwithstanding the foregoing, shares acquired upon exercise of the Option prior
to the Change in Control and any consideration received pursuant to the Change
in Control with respect to such shares shall continue to be subject to all
applicable provisions of this Option Agreement except as otherwise provided
herein. Furthermore, notwithstanding the foregoing, if the corporation the stock
of which is subject to the Option immediately prior to an Ownership Change Event
described in Section 8.1(a)(i) constituting a Change in Control is the surviving
or continuing corporation and immediately after such Ownership Change Event less
than fifty percent (50%) of the total combined voting power of its voting stock
is held by another corporation or by other corporations that are members of an
affiliated group within the meaning of Section 1504(a) of the Code without
regard to the provisions of Section 1504(b) of the Code, the Option shall not
terminate unless the Board otherwise provides in its sole discretion.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.
--------------------------------------------
In the event of any stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification, or similar change in the
capital structure of the Company, appropriate adjustments shall be made in the
number, Exercise Price and class of shares of stock subject to the Option. If a
majority of the shares which are of the same class as the shares that are
subject to the Option are exchanged for, converted into, or otherwise become
(whether or not pursuant to an Ownership Change Event) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the Option to
provide that the Option is exercisable for New Shares. In the event of any such
amendment, the Number of Option Shares and the Exercise Price shall be adjusted
in a fair and equitable manner, as determined by the Board, in its sole
discretion. Notwithstanding the foregoing, any fractional share resulting from
an adjustment pursuant to this Section 9 shall be rounded up or down to the
nearest whole number, as determined by the Board, and in no event may the
Exercise Price be decreased to an amount less than the par value, if any, of the
stock subject to the Option. The adjustments determined by the Board pursuant
to this Section 9 shall be final, binding and conclusive.
11
<PAGE>
10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT.
-----------------------------------------------
The Optionee shall have no rights as a shareholder with respect to any
shares covered by the Option until the date of the issuance of a certificate for
the shares for which the Option has been exercised (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company). No adjustment shall be made for dividends, distributions
or other rights for which the record date is prior to the date such certificate
is issued, except as provided in Section 9. If the Optionee is an Employee, the
Optionee understands and acknowledges that, except as otherwise provided in a
separate, written employment agreement between a Participating Company and the
Optionee, the Optionee's employment is "at will" and is for no specified term.
Nothing in this Option Agreement shall confer upon the Optionee any right to
continue in the Service of a Participating Company or interfere in any way with
any right of the Participating Company Group to terminate the Optionee's Service
as an Employee or Consultant, as the case may be, at any time.
11. UNVESTED SHARE REPURCHASE OPTION.
--------------------------------
11.1 GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the
Optionee's Service with the Participating Company Group is terminated for any
reason or no reason, with or without cause, or, if the Optionee, the Optionee's
legal representative, or other holder of shares acquired upon exercise of the
Option attempts to sell, exchange, transfer, pledge, or otherwise dispose of
(other than pursuant to an Ownership Change Event) any shares acquired upon
exercise of the Option which exceed the Vested Shares as defined in Section 11.2
below (the "UNVESTED SHARES"), the Company shall have the right to repurchase
the Unvested Shares under the terms and subject to the conditions set forth in
this Section 11 (the "UNVESTED SHARE REPURCHASE OPTION").
11.2 VESTED SHARES AND UNVESTED SHARES DEFINED. The "VESTED SHARES"
shall mean, on any given date, a number of shares of Stock equal to the Number
of Option Shares multiplied by the Vested Ratio determined as of such date and
rounded down to the nearest whole share. On such given date, the "UNVESTED
SHARES" shall mean the number of shares of Stock acquired upon exercise of the
Option which exceed the Vested Shares determined as of such date.
11.3 EXERCISE OF UNVESTED SHARE REPURCHASE OPTION. The Company may
exercise the Unvested Share Repurchase Option by written notice to the Optionee
within sixty (60) days after (a) termination of the Optionee's Service (or
exercise of the Option, if later) or (b) the Company has received notice of the
attempted disposition of Unvested Shares. If the Company fails to give notice
within such sixty (60) day period, the Unvested Share Repurchase Option shall
terminate unless the Company and the Optionee have extended the time for the
exercise of the Unvested Share Repurchase Option. The Unvested Share Repurchase
Option must be exercised, if at all, for all of the Unvested Shares, except as
the Company and the Optionee otherwise agree.
11.4 PAYMENT FOR SHARES AND RETURN OF SHARES TO COMPANY. The
purchase price per share being repurchased by the Company shall be an amount
equal to the Optionee's
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<PAGE>
original cost per share, as adjusted pursuant to Section 9 (the "REPURCHASE
PRICE"). The Company shall pay the aggregate Repurchase Price to the Optionee
in cash within thirty (30) days after the date of the written notice to the
Optionee of the Company's exercise of the Unvested Share Repurchase Option. For
purposes of the foregoing, cancellation of any indebtedness of the Optionee to
any Participating Company shall be treated as payment to the Optionee in cash to
the extent of the unpaid principal and any accrued interest canceled. The
shares being repurchased shall be delivered to the Company by the Optionee at
the same time as the delivery of the Repurchase Price to the Optionee.
11.5 ASSIGNMENT OF UNVESTED SHARE REPURCHASE OPTION. The Company
shall have the right to assign the Unvested Share Repurchase Option at any time,
whether or not such option is then exercisable, to one or more persons as may be
selected by the Company.
11.6 OWNERSHIP CHANGE EVENT. Upon the occurrence of an Ownership
Change Event, any and all new, substituted or additional securities or other
property to which the Optionee is entitled by reason of the Optionee's ownership
of Unvested Shares shall be immediately subject to the Unvested Share Repurchase
Option and included in the terms "STOCK" and "UNVESTED SHARES" for all purposes
of the Unvested Share Repurchase Option with the same force and effect as the
Unvested Shares immediately prior to the Ownership Change Event. While the
aggregate Repurchase Price shall remain the same after such Ownership Change
Event, the Repurchase Price per Unvested Share upon exercise of the Unvested
Share Repurchase Option following such Ownership Change Event shall be adjusted
as appropriate. For purposes of determining the Vested Ratio following an
Ownership Change Event, credited Service shall include all Service with any
corporation which is a Participating Company at the time the Service is
rendered, whether or not such corporation is a Participating Company both before
and after the Ownership Change Event.
12. ESCROW.
------
12.1 ESTABLISHMENT OF ESCROW. To ensure that shares subject to the
Unvested Share Repurchase Option will be available for repurchase, the Company
may require the Optionee to deposit the certificate evidencing the shares which
the Optionee purchases upon exercise of the Option with an agent designated by
the Company under the terms and conditions of escrow and security agreements
approved by the Company. If the Company does not require such deposit as a
condition of exercise of the Option, the Company reserves the right at any time
to require the Optionee to so deposit the certificate in escrow. Upon the
occurrence of an Ownership Change Event or a change, as described in Section 9,
in the character or amount of any of the outstanding stock of the corporation
the stock of which is subject to the provisions of this Option Agreement, any
and all new, substituted or additional securities or other property to which the
Optionee is entitled by reason of the Optionee's ownership of shares of Stock
acquired upon exercise of the Option that remain, following such Ownership
Change Event or change described in Section 9, subject to the Unvested Share
Repurchase Option or any security interest held by the Company shall be
immediately subject to the escrow to the same extent as such shares of Stock
immediately before such event. The Company shall bear the expenses of the
escrow.
13
<PAGE>
12.2 DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after the
expiration of the Unvested Share Repurchase Option, but not more frequently than
twice each calendar year, the escrow agent shall deliver to the Optionee the
shares and any other property no longer subject to such restrictions.
12.3 NOTICES AND PAYMENTS. In the event the shares and any other
property held in escrow are subject to the Company's exercise of the Unvested
Share Repurchase Option, the notices required to be given to the Optionee shall
be given to the escrow agent, and any payment required to be given to the
Optionee shall be given to the escrow agent. Within thirty (30) days after
payment by the Company, the escrow agent shall deliver the shares and any other
property which the Company has purchased to the Company and shall deliver the
payment received from the Company to the Optionee.
13. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT.
-----------------------------------------------
If, from time to time, there is any stock dividend, stock split or
other change, as described in Section 9, in the character or amount of any of
the outstanding stock of the corporation the stock of which is subject to the
provisions of this Option Agreement, then in such event any and all new,
substituted or additional securities to which the Optionee is entitled by reason
of the Optionee's ownership of the shares acquired upon exercise of the Option
shall be immediately subject to the Unvested Share Repurchase Option with the
same force and effect as the shares subject to the Unvested Share Repurchase
Option immediately before such event.
14. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION.
----------------------------------------------
The Optionee shall dispose of the shares acquired pursuant to the
Option only in accordance with the provisions of this Option Agreement. In
addition, the Optionee shall promptly notify the Chief Financial Officer of the
Company if the Optionee disposes of any of the shares acquired pursuant to the
Option within one (1) year after the date of the Optionee exercises all or part
of the Option or within two (2) years after the Date of Option Grant. Until
such time as the Optionee disposes of such shares in a manner consistent with
the provisions of this Option Agreement, unless otherwise expressly authorized
by the Company, the Optionee shall hold all shares acquired pursuant to the
Option in the Optionee's name (and not in the name of any nominee) for the one-
year period immediately after the exercise of the Option and the two-year period
immediately after Date of Option Grant. At any time during the one-year or two-
year periods set forth above, the Company may place a legend on any certificate
representing shares acquired pursuant to the Option requesting the transfer
agent for the Company's stock to notify the Company of any such transfers. The
obligation of the Optionee to notify the Company of any such transfer shall
continue notwithstanding that a legend has been placed on the certificate
pursuant to the preceding sentence.
15. LEGENDS.
-------
The Company may at any time place legends referencing the Unvested
Share Repurchase Option and any applicable federal, state or foreign securities
law restrictions on all certificates representing shares of stock subject to the
provisions of this Option Agreement. The
14
<PAGE>
Optionee shall, at the request of the Company, promptly present to the Company
any and all certificates representing shares acquired pursuant to the Option in
the possession of the Optionee in order to carry out the provisions of this
Section.
16. RESTRICTIONS ON TRANSFER OF SHARES.
----------------------------------
No shares acquired upon exercise of the Option may be sold, exchanged,
transferred (including, without limitation, any transfer to a nominee or agent
of the Optionee), assigned, pledged, hypothecated or otherwise disposed of,
including by operation of law, in any manner which violates any of the
provisions of this Option Agreement and, except pursuant to an Ownership Change
Event, until the date on which such shares become Vested Shares, and any such
attempted disposition shall be void. The Company shall not be required (a) to
transfer on its books any shares which will have been transferred in violation
of any of the provisions set forth in this Option Agreement or (b) to treat as
owner of such shares or to accord the right to vote as such owner or to pay
dividends to any transferee to whom such shares will have been so transferred.
17. BINDING EFFECT.
--------------
Subject to the restrictions on transfer set forth herein, this Option
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective heirs, executors, administrators, successors and assigns.
18. TERMINATION OR AMENDMENT.
------------------------
The Board may terminate or amend the Plan or the Option at any time;
provided, however, that except as provided in Section 8.2 in connection with a
Change in Control, no such termination or amendment may adversely affect the
Option or any unexercised portion hereof without the consent of the Optionee
unless such termination or amendment is necessary to comply with any applicable
law or government regulation or is required to enable the Option to qualify as
an Incentive Stock Option. No amendment or addition to this Option Agreement
shall be effective unless in writing.
19. INTEGRATED AGREEMENT.
--------------------
This Option Agreement constitutes the entire understanding and
agreement of the Optionee and the Participating Company Group with respect to
the subject matter contained herein and there are no agreements, understandings,
restrictions, representations, or warranties among the Optionee and the
Participating Company Group with respect to such subject matter other than those
as set forth or provided for herein. To the extent contemplated herein, the
provisions of this Option Agreement shall survive any exercise of the Option and
shall remain in full force and effect.
15
<PAGE>
20. APPLICABLE LAW.
--------------
This Option Agreement shall be governed by the laws of the State of
California as such laws are applied to agreements between California residents
entered into and to be performed entirely within the State of California.
POWER INTEGRATIONS, INC.
By:
-----------------------------------------
Robert G. Staples
Vice President, Finance and
Administration
Address: 477 North Mathilda Avenue
Sunnyvale, CA 94086
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, including the Unvested Share Repurchase
Option set forth in Section 11, and hereby accepts the Option subject to all of
the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement.
OPTIONEE
Date:
--------------------------- -------------------------------------------
Optionee Address:
-------------------------------------------
-------------------------------------------
16
<PAGE>
Optionee:
----------------------
Date:
--------------------------
IMMEDIATELY EXERCISABLE
INCENTIVE STOCK OPTION
EXERCISE NOTICE
[REGISTERED SHARES]
Power Integrations, Inc.
477 North Mathilda Avenue
Sunnyvale, CA 94086
Attention: Chief Financial Officer
Ladies and Gentlemen:
1. Exercise of Option. I was granted an incentive stock option (the
------------------
"OPTION") to purchase shares of the common stock of Power Integrations, Inc.
(the "COMPANY") on , 19 , pursuant to the Company's 1997
---------------------- ----
Stock Option Plan (the "PLAN") and pursuant to the Immediately Exercisable
Incentive Stock Option Agreement dated , 19 (the "OPTION
------------------- ----
AGREEMENT"). I hereby elect to exercise the Option as to a total of
shares of the common stock of the Company (the "SHARES"), of
- --------------------
which are Vested Shares and are Unvested Shares
-------------------- ---------------
as determined in accordance with the Option Agreement.
2. Payments. Enclosed herewith or arrangements have been made for full
--------
payment in the aggregate amount of $ (representing $ per
---------------- --------
share) for the Shares in the manner set forth in the Option Agreement. I
authorize payroll withholding and otherwise will make adequate provision for
foreign, federal and state tax withholding obligations of the Company, if any.
3. Binding Effect. I agree that the Shares are being acquired in
--------------
accordance with and subject to the terms, provisions and conditions of the
Option Agreement, including the Unvested Share Repurchase Option set forth
therein, to all of which I hereby expressly assent. This Agreement shall inure
to the benefit of and be binding upon the my heirs, executors, administrators,
successors and assigns. If required, I agree to deposit the certificate or
certificates evidencing the Shares, along with a blank stock assignment separate
from certificate executed by me, with an escrow agent designated by the Company,
to be held by such escrow agent pursuant to the Company's standard Joint Escrow
Instructions, an executed copy of which I have delivered herewith.
4. Election Under Section 83(b) of the Code. I understand and
----------------------------------------
acknowledge that if I am exercising the Option to purchase Unvested Shares
(i.e., shares that remain subject to the Company's Unvested Share Repurchase
Option), that I should consult with my tax advisor
17
<PAGE>
regarding the advisability of filing with the Internal Revenue Service an
election under Section 83(b) of the Code, which must be filed no later than
thirty (30) days after the date on which I exercise the Option.
I acknowledge that I have been advised to consult with a tax advisor prior
to the exercise of the Option regarding the tax consequences to me of exercising
the Option. AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER
THE DATE ON WHICH I PURCHASE SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. I
ACKNOWLEDGE THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS MY SOLE
RESPONSIBILITY, EVEN IF I REQUEST THE COMPANY OR ITS REPRESENTATIVES TO FILE
SUCH ELECTION ON MY BEHALF.
I agree that I will promptly notify the Chief Financial Officer of the
Company if I transfer any of the Shares acquired pursuant to the Option within
one (1) year from the date I exercise all or part of the Option or within two
(2) years of the date of grant of the Option.
My address of record is:
---------------------------------------------------------------------
---------------------------------------------------------------------
My Social Security Number is:
---------------------------------------------
I understand that I am purchasing the Shares pursuant to the terms of my
Option Agreement, which I have received and carefully read and understand.
Very truly yours,
-------------------------------------------
(Signature)
-------------------------------------------
(Optionee's Name Printed)
Receipt of the above is hereby acknowledged.
POWER INTEGRATIONS, INC.
By:
----------------------------------------
Title:
-------------------------------------
Dated:
-------------------------------------
18
<PAGE>
EXHIBIT 10.4
POWER INTEGRATIONS, INC.
1997 OUTSIDE DIRECTORS STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The Power Integrations, Inc. 1997 Outside Directors
Stock Option Plan (the "PLAN") is hereby established effective as of the
effective date of the initial registration by the Company of its Stock under
Section 12 of the Exchange Act (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of the
Participating Company Group and its shareholders by providing an incentive to
attract and retain highly qualified persons to serve as Outside Directors of the
Company and by creating additional incentive for Outside Directors to promote
the growth and profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Options
granted under the Plan have lapsed.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one or
more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly appointed to
administer the Plan and having such powers as shall be specified by the
Board. Unless the powers of the Committee have been specifically limited,
the Committee shall have all of the powers of the Board granted herein,
including, without limitation, the power to amend or terminate the Plan at
any time, subject to the terms of the Plan and any applicable limitations
imposed by law.
(d) "COMPANY" means Power Integrations, Inc., a California
corporation, or any successor corporation thereto.
(e) "CONSULTANT" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or
a Director.
1
<PAGE>
(f) "DIRECTOR" means a member of the Board or the board of
directors of any other Participating Company.
(g) "EMPLOYEE" means any person treated as an employee (including
an officer or a Director who is also treated as an employee) in the records
of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(i) "FAIR MARKET VALUE" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such
determination is expressly allocated to the Company herein, subject to the
following:
(i) If, on such date, there is a public market for the Stock,
the Fair Market Value of a share of Stock shall be the closing sale price
of a share of Stock (or the mean of the closing bid and asked prices of a
share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq
National Market, the Nasdaq Small-Cap Market or such other national or
regional securities exchange or market system constituting the primary
market for the Stock, as reported in the Wall Street Journal or such other
-------------------
source as the Company deems reliable. If the relevant date does not fall on
a day on which the Stock has traded on such securities exchange or market
system, the date on which the Fair Market Value shall be established shall
be the last day on which the Stock was so traded prior to the relevant
date, or such other appropriate day as shall be determined by the Board, in
its sole discretion.
(ii) If, on such date, there is no public market for the Stock,
the Fair Market Value of a share of Stock shall be as determined by the
Board without regard to any restriction other than a restriction which, by
its terms, will never lapse .
(j) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions
of the Plan.
(k) "OPTIONEE" means a person who has been granted one or more
Options.
(l) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and
restrictions of the Option granted to the Optionee.
(m) "OUTSIDE DIRECTOR" means a Director of the Company who is not
an Employee.
(n) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
2
<PAGE>
(o) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(p) "PARTICIPATING COMPANY GROUP" means, at any point in time, all
corporations collectively which are then Participating Companies.
(q) "SERVICE" means the Optionee's service with the Participating
Company Group, whether in the capacity of an Employee, a Director or a
Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders
Service to the Participating Company Group or a change in the Participating
Company for which the Optionee renders such Service, provided that there is
no interruption or termination of the Optionee's Service. The Optionee's
Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Optionee
performs Service ceasing to be a Participating Company.
(r) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
(s) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of
the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
------------
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
use of the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION. The Plan shall be administered by the Board. All
--------------
questions of interpretation of the Plan or of any Option shall be determined by
the Board, and such determinations shall be final and binding upon all persons
having an interest in the Plan or such Option. Any officer of a Participating
Company shall have the authority to act on behalf of the Company with respect to
any matter, right, obligation, determination or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
determination or election.
4. SHARES SUBJECT TO PLAN.
----------------------
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
---------------------------------
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be two hundred thousand (200,000) and shall
consist of authorized but unissued shares or reacquired shares of Stock or any
combination thereof. If an outstanding Option for any reason expires or is
terminated or canceled or shares of Stock acquired, subject to repurchase, upon
the exercise of an Option are repurchased by the Company, the shares of Stock
allocable to the unexercised portion of such Option, or such repurchased shares
of Stock, shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
--------------------------------------------
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar
3
<PAGE>
change in the capital structure of the Company, appropriate adjustments shall be
made in the number and class of shares subject to the Plan, to the "Initial
Option" and "Annual Option" (as defined in Section 6.1), and to any outstanding
Options, and in the exercise price of any outstanding Options. If a majority of
the shares which are of the same class as the shares that are subject to
outstanding Options are exchanged for, converted into, or otherwise become
(whether or not pursuant to an "Ownership Change Event" as defined in Section
8.1) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the outstanding Options to provide that such Options are
exercisable for New Shares. In the event of any such amendment, the number of
shares subject to, and the exercise price of, the outstanding Options shall be
adjusted in a fair and equitable manner as determined by the Board, in its sole
discretion. Notwithstanding the foregoing, any fractional share resulting from
an adjustment pursuant to this Section 4.2 shall be rounded down to the nearest
whole number, and in no event may the exercise price of any Option be decreased
to an amount less than the par value, if any, of the stock subject to the
Option.
5. ELIGIBILITY AND TYPE OF OPTIONS.
-------------------------------
5.1 PERSONS ELIGIBLE FOR OPTIONS. An Option shall be granted only to a
----------------------------
person who, at the time of grant, is an Outside Director.
5.2 OPTIONS AUTHORIZED. Options shall be nonstatutory stock options;
------------------
that is, options which are not treated as incentive stock options within the
meaning of Section 422(b) of the Code.
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option
-------------------------------
Agreements specifying the number of shares of Stock covered thereby, in such
form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1 AUTOMATIC GRANT OF OPTIONS. Subject to execution by an Outside
Director of the appropriate Option Agreement, Options shall be granted
automatically and without further action of the Board, as follows:
(a) INITIAL OPTION. Each person who is (i) serving as an
Outside Director on the Effective Date, or (ii) first elected or appointed as an
Outside Director after the Effective Date shall be granted an Option to purchase
fifteen thousand (15,000) shares of Stock on the Effective Date or the date of
such initial election or appointment, respectively (an "INITIAL OPTION").
Notwithstanding anything herein to the contrary, an Initial Option shall not be
granted to a Director of the Company who previously did not qualify as an
Outside Director but subsequently becomes an Outside Director as a result of the
termination of his or her status as an Employee.
(b) ANNUAL OPTION. Each Outside Director (including any Director
who previously did not qualify as an Outside Director but who subsequently
becomes an Outside Director) shall be granted an Option to purchase five
thousand (5,000) shares of Stock on each of his or her "Anniversary Dates",
provided such person remains an Outside Director on such
4
<PAGE>
Anniversary Date (an "ANNUAL OPTION"). The Anniversary Date for an Outside
Director who was serving on the Board on the Effective Date shall be the date
which is twelve (12) months after the Effective Date and successive
anniversaries thereof. The Anniversary Date for an Outside Director who is
elected or appointed to the Board after the Effective Date shall be the date
which is twelve (12) months after such election or appointment and successive
anniversaries thereof.
(c) RIGHT TO DECLINE OPTION. Notwithstanding the foregoing, any
person may elect not to receive an Option by delivering written notice of such
election to the Board no later than the day prior to the date such Option would
otherwise be granted. A person so declining an Option shall receive no payment
or other consideration in lieu of such declined Option. A person who has
declined an Option may revoke such election by delivering written notice of such
revocation to the Board no later than the day prior to the date such Option
would be granted pursuant to Section 6.1(a) or (b), as the case may be.
6.2 EXERCISE PRICE. The exercise price per share of Stock subject to
an Option shall be the Fair Market Value of a share of Stock on the date the
Option is granted.
6.3 EXERCISE PERIOD. Each Option shall terminate and cease to be
exercisable on the date ten (10) years after the date of grant of the Option
unless earlier terminated pursuant to the terms of the Plan or the Option
Agreement.
6.4 RIGHT TO EXERCISE OPTIONS.
(a) INITIAL OPTIONS. Except as otherwise provided in the Plan or
in the Option Agreement, an Initial Option shall (i) first become exercisable on
the date which is one (1) year after the date on which the Initial Option was
granted (the "INITIAL OPTION VESTING DATE"); and (ii) be exercisable on and
after the Initial Option Vesting Date and prior to the termination thereof in an
amount equal to the number of shares of Stock initially subject to the Initial
Option multiplied by the Vested Ratio as set forth below, less the number of
shares previously acquired upon exercise thereof. The Vested Ratio described in
the preceding sentence shall be determined as follows:
Vested Ratio
------------
Prior to Initial Option Vesting Date 0
On Initial Option Vesting Date, provided the Optionee's 1/3
Service has not terminated prior to such date
Plus
----
For each full month of the Optionee's continuous 1/36
Service from the Initial Option Vesting Date until the
Vested Ratio equals 1/1, an additional
(b) ANNUAL OPTIONS. Except as otherwise provided in the Plan or
in the Option Agreement, an Annual Option shall (i) first become exercisable on
the date which is
5
<PAGE>
twenty-five (25) months after the date on which the Annual Option was granted
(the "ANNUAL OPTION VESTING DATE"); and (ii) be exercisable on and after the
Annual Option Vesting Date and prior to the termination thereof in an amount
equal to the number of shares of Stock initially subject to the Annual Option
multiplied by the Vested Ratio as set forth below, less the number of shares
previously acquired upon exercise thereof. The Vested Ratio described in the
preceding sentence shall be determined as follows:
Vested Ratio
------------
Prior to Annual Option Vesting Date 0
On Annual Option Vesting Date, provided 1/12
the Optionee's Service is continuous from the date
of grant of the Annual Option until the
Annual Option Vesting Date
Plus
----
For each full month of the Optionee's continuous 1/12
Service from the Annual Option Vesting Date
until the Vested Ratio equals 1/1, an additional
6.5 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value not less than the exercise price, (iii) by
the assignment of the proceeds of a sale or loan with respect to some or all of
the shares being acquired upon the exercise of the Option (including, without
limitation, through an exercise complying with the provisions of Regulation T as
promulgated from time to time by the Board of Governors of the Federal Reserve
System) (a "CASHLESS EXERCISE"), or (iv) by any combination thereof.
(b) TENDER OF STOCK. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.
6
<PAGE>
6.6 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value equal to all or any part of the federal,
state, local and foreign taxes, if any, required by law to be withheld by the
Participating Company Group with respect to such Option or the shares acquired
upon exercise thereof. Alternatively or in addition, in its sole discretion, the
Company shall have the right to require the Optionee to make adequate provision
for any such tax withholding obligations of the Participating Company Group
arising in connection with the Option or the shares acquired upon exercise
thereof. The Company shall have no obligation to deliver shares of Stock until
the Participating Company Group's tax withholding obligations have been
satisfied.
7. STANDARD FORM OF OPTION AGREEMENT.
---------------------------------
7.1 GENERAL. Each Option shall comply with and be subject to the
terms and conditions set forth in the appropriate form of Nonstatutory Stock
Option Agreement adopted by the Board concurrently with its adoption of the Plan
and as amended from time to time.
7.2 AUTHORITY TO VARY TERMS. The Board shall have the authority from
time to time to vary the terms of any of the standard forms of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement are not
inconsistent with the terms of the Plan.
8. CHANGE IN CONTROL.
-----------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single
or series of related transactions by the shareholders of the Company of more
than fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or change in all or substantially
all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or
a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the
7
<PAGE>
Company's voting stock immediately before the Transaction, direct or indirect
beneficial ownership of more than fifty percent (50%) of the total combined
voting power of the outstanding voting stock of the Company or the corporation
or corporations to which the assets of the Company were transferred (the
"TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the preceding
sentence, indirect beneficial ownership shall include, without limitation, an
interest resulting from ownership of the voting stock of one or more
corporations which, as a result of the Transaction, own the Company or the
Transferee Corporation(s), as the case may be, either directly or through one or
more subsidiary corporations. The Board shall have the right to determine
whether multiple sales or exchanges of the voting stock of the Company or
multiple Ownership Change Events are related, and its determination shall be
final, binding and conclusive.
8.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of a Change
in Control, any unexercisable or unvested portion of the outstanding Options
shall be immediately exercisable and vested in full as of the date ten (10) days
prior to the date of the Change in Control. The exercise or vesting of any
Option that was permissible solely by reason of this Section 8.2 shall be
conditioned upon the consummation of the Change in Control. In addition, the
surviving, continuing, successor, or purchasing corporation or parent
corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may
either assume the Company's rights and obligations under outstanding Options or
substitute for outstanding Options substantially equivalent options for the
Acquiring Corporation's stock. For purposes of this Section 8.2, an Option shall
be deemed assumed if, following the Change in Control, the Option confers the
right to purchase in accordance with its terms and conditions, for each share of
Stock subject to the Option immediately prior to the Change in Control, the
consideration (whether stock, cash or other securities or property) to which a
holder of a share of Stock on the effective date of the Change in Control was
entitled. Any Options which are neither assumed or substituted for by the
Acquiring Corporation in connection with the Change in Control nor exercised as
of the date of the Change in Control shall terminate and cease to be outstanding
effective as of the date of the Change in Control. Notwithstanding the
foregoing, shares acquired upon exercise of an Option prior to the Change in
Control and any consideration received pursuant to the Change in Control with
respect to such shares shall continue to be subject to all applicable provisions
of the Option Agreement evidencing such Option except as otherwise provided in
such Option Agreement. Furthermore, notwithstanding the foregoing, if the
corporation the stock of which is subject to the outstanding Options immediately
prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a
Change in Control is the surviving or continuing corporation and immediately
after such Ownership Change Event less than fifty percent (50%) of the total
combined voting power of its voting stock is held by another corporation or by
other corporations that are members of an affiliated group within the meaning of
Section 1504(a) of the Code without regard to the provisions of Section 1504(b)
of the Code, the outstanding Options shall not terminate.
9. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee,
-----------------------------
an Option shall be exercisable only by the Optionee or the Optionee's guardian
or legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
8
<PAGE>
10. INDEMNIFICATION. In addition to such other rights of indemnification as
---------------
they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board is
delegated shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
11. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the
--------------------------------
Plan at any time. However, subject to changes in applicable law, regulations or
rules that would permit otherwise, without the approval of the Company's
shareholders, there shall be (a) no increase in the total number of shares of
Stock that may be issued under the Plan (except by operation of the provisions
of Section 4.2), and (b) no other amendment of the Plan that would require
approval of the Company's shareholders under any applicable law, regulation or
rule. In any event, no termination or amendment of the Plan may adversely
affect any then outstanding Option, or any unexercised portion thereof, without
the consent of the Optionee, unless such termination or amendment is necessary
to comply with any applicable law, regulation or rule.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing Power Integrations, Inc. 1997 Outside Directors Stock Option Plan
was duly adopted by the Board on _________________________, 1997.
-----------------------------
Secretary
9
<PAGE>
POWER INTEGRATIONS, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
FOR OUTSIDE DIRECTORS
(INITIAL OPTION)
THIS NONSTATUTORY STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS
(INITIAL OPTION) (the "OPTION AGREEMENT") is made and entered into as of
______________________________, 19____, by and between Power Integrations, Inc.
and ___________________________ (the "OPTIONEE").
The Company has granted to the Optionee an option to purchase certain
shares of Stock, upon the terms and conditions set forth in this Option
Agreement (the "OPTION").
1. DEFINITIONS AND CONSTRUCTION.
----------------------------
1.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "DATE OF OPTION GRANT" means__________________, 19____.
(b) "NUMBER OF OPTION SHARES" means fifteen thousand
(15,000) shares of Stock, as adjusted from time to time pursuant to Section 9.
(c) "EXERCISE PRICE" means $ ____________ per share of
Stock, as adjusted from time to time pursuant to Section 9.
(d) "INITIAL EXERCISE DATE" means the Initial Vesting Date.
(e) "INITIAL VESTING DATE" means the date occurring one (1)
year after the Date of Option Grant.
1
<PAGE>
(f) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, provided the 1/3
Optionee's Service has not terminated
prior to such date
Plus
----
For each full month of the Optionee's 1/36
continuous Service from the Initial
Vesting Date until the Vested Ratio
equals 1/1, an additional
</TABLE>
(g) "OPTION EXPIRATION DATE" means the date ten (10) years
after the Date of Option Grant.
(h) "BOARD" means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the Plan,
"Board" shall also mean such Committee(s).
(i) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(j) "COMMITTEE" means a committee of the Board duly
appointed to administer the Plan and having such powers as shall be specified by
the Board. Unless the powers of the Committee have been specifically limited,
the Committee shall have all of the powers of the Board granted in the Plan,
including, without limitation, the power to amend or terminate the Plan at any
time, subject to the terms of the Plan and any applicable limitations imposed by
law.
(k) "COMPANY" means Power Integrations, Inc., a California
corporation, or any successor corporation thereto.
(l) "CONSULTANT" means any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.
(m) "DIRECTOR" means a member of the Board or of the board
of directors of any other Participating Company.
2
<PAGE>
(n) "DISABILITY" means the permanent and total disability
of the Optionee within the meaning of Section 22(e)(3) of the Code.
(o) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(p) "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.
(q) "FAIR MARKET VALUE" means, as of any date, the value of
a share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
(i) If, on such date, there is a public market for the
Stock, the Fair Market Value of a share of Stock shall be the closing sale price
of a share of Stock (or the mean of the closing bid and asked prices of a share
of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, the Nasdaq Small-Cap Market or such other national or regional
securities exchange or market system constituting the primary market for the
Stock, as reported in the Wall Street Journal or such other source as the
-------------------
Company deems reliable. If the relevant date does not fall on a day on which the
Stock has traded on such securities exchange or market system, the date on which
the Fair Market Value shall be established shall be the last day on which the
Stock was so traded prior to the relevant date, or such other appropriate day as
shall be determined by the Board, in its sole discretion.
(ii) If, on such date, there is no public market for
the Stock, the Fair Market Value of a share of Stock shall be as determined by
the Board without regard to any restriction other than a restriction which, by
its terms, will never lapse.
(r) "PARENT CORPORATION" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the Code.
(s) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(t) "PARTICIPATING COMPANY GROUP" means, at any point in
time, all corporations collectively which are then Participating Companies.
(u) "PLAN" means the Power Integrations, Inc. 1997 Outside
Directors Stock Option Plan.
(v) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
3
<PAGE>
(w) "SERVICE" means the Optionee's service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. The Optionee's Service shall be deemed
to have terminated either upon an actual termination of Service or upon the
corporation for which the Optionee performs Service ceasing to be a
Participating Company.
(x) "STOCK" means the common stock of the Company, as
adjusted from time to time in accordance with Section 9.
(y) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
2. TAX STATUS OF THE OPTION. This Option is intended to be a
------------------------
nonstatutory stock option and shall not be treated as an incentive stock option
within the meaning of Section 422(b) of the Code.
3. ADMINISTRATION. All questions of interpretation concerning this
--------------
Option Agreement shall be determined by the Board, including any duly appointed
Committee of the Board. All determinations by the Board shall be final and
binding upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
4. EXERCISE OF THE OPTION.
----------------------
4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable on and after the Initial Exercise Date and prior to
the termination of the Option (as provided in Section 6) in an amount not to
exceed the Number of Option Shares multiplied by the Vested Ratio less the
number of shares previously acquired upon exercise of the Option. In no event
shall the Option be exercisable for more shares than the Number of Option
Shares.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by
written notice to the Company which must state the election to exercise the
Option, the number of whole shares of Stock for which the Option is being
exercised and such other representations and agreements as to the Optionee's
investment intent with respect to such shares as may be required pursuant to the
4
<PAGE>
provisions of this Option Agreement. The written notice must be signed by the
Optionee and must be delivered in person, by certified or registered mail,
return receipt requested, by confirmed facsimile transmission, or by such other
means as the Company may permit, to the Chief Financial Officer of the Company,
or other authorized representative of the Participating Company Group, prior to
the termination of the Option as set forth in Section 6, accompanied by full
payment of the aggregate Exercise Price for the number of shares of Stock being
purchased. The Option shall be deemed to be exercised upon receipt by the
Company of such written notice and the aggregate Exercise Price.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value not less than the
aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in
Section 4.3(c), or (iv) by any combination of the foregoing.
(b) TENDER OF STOCK. Notwithstanding the foregoing, the
Option may not be exercised by tender to the Company of shares of Stock to the
extent such tender of Stock would constitute a violation of the provisions of
any law, regulation or agreement restricting the redemption of the Company's
stock. The Option may not be exercised by tender to the Company of shares of
Stock unless such shares either have been owned by the Optionee for more than
six (6) months or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure .
4.4 TAX WITHHOLDING. At the time the Option is exercised,
in whole or in part, or at any time thereafter as requested by the Company, the
Optionee agrees to make adequate provision for any sums required to satisfy the
federal, state, local and foreign tax withholding obligations of the
Participating Company Group, if any, which arise in connection with the Option,
including, without limitation, obligations arising upon (i) the exercise, in
whole or in part, of the Option, (ii) the transfer, in whole or in part, of any
shares acquired upon exercise of the Option, or (iii) the lapsing of any
restriction with respect to any shares acquired upon exercise of the Option.
5
<PAGE>
4.5 CERTIFICATE REGISTRATION. Except in the event the
Exercise Price is paid by means of a Cashless Exercise, the certificate for the
shares as to which the Option is exercised shall be registered in the name of
the Optionee, or, if applicable, the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF
SHARES. The grant of the Option and the issuance of shares of Stock upon
exercise of the Option shall be subject to compliance with all applicable
requirements of federal, state or foreign law with respect to such securities.
The Option may not be exercised if the issuance of shares of Stock upon exercise
would constitute a violation of any applicable federal, state or foreign
securities laws or other law or regulations or the requirements of any stock
exchange or market system upon which the Stock may then be listed. In addition,
the Option may not be exercised unless (i) a registration statement under the
Securities Act shall at the time of exercise of the Option be in effect with
respect to the shares issuable upon exercise of the Option or (ii) in the
opinion of legal counsel to the Company, the shares issuable upon exercise of
the Option may be issued in accordance with the terms of an applicable exemption
from the registration requirements of the Securities Act. THE OPTIONEE IS
CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS
ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION
WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares subject to the Option shall relieve the Company of any
liability in respect of the failure to issue or sell such shares as to which
such requisite authority shall not have been obtained. As a condition to the
exercise of the Option, the Company may require the Optionee to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation and to make any representation or warranty with
respect thereto as may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to
issue fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised
--------------------------------
during the lifetime of the Optionee only by the Optionee or the Optionee's
guardian or legal representative and may not be assigned or transferred in any
manner except by will or by the laws of descent and distribution. Following the
death of the Optionee, the Option, to the extent provided in Section 7, may be
exercised by the Optionee's legal representative or by any person empowered to
do so under the deceased Optionee's will or under the then applicable laws of
descent and distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Expiration Date, (b)
the last date for exercising the Option following termination of the Optionee's
Service as described in Section 7, or (c) a Change in Control to the extent
provided in Section 8.
6
<PAGE>
7. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of twelve (12) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee's legal representative or
other person who acquired the right to exercise the Option by reason of the
Optionee's death at any time prior to the expiration of twelve (12) months after
the date on which the Optionee's Service terminated, but in any event no later
than the Option Expiration Date. The Optionee's Service shall be deemed to have
terminated on account of death if the Optionee dies within three (3) months
after the Optionee's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service
with the Participating Company Group terminates for any reason, except
Disability or death, the Option, to the extent unexercised and exercisable by
the Optionee on the date on which the Optionee's Service terminated, may be
exercised by the Optionee within three (3) months after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
7.2 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.
7.3 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale, within the applicable time periods set
forth in Section 7.1, of shares acquired upon the exercise of the Option would
subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option
shall remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
7
<PAGE>
8 OWNERSHIP CHANGE AND CHANGE IN CONTROL.
--------------------------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a
single or series of related transactions by the shareholders of the Company of
more than fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is
a party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the shareholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF CHANGE IN CONTROL ON OPTION. In the event of a
Change in Control, any unexercised portion of the Option shall be immediately
exercisable and vested in full as of the date ten (10) days prior to the date of
the Change in Control. Any exercise of the Option that was permissible solely by
reason of this Section 8.2 shall be conditioned upon the consummation of the
Change in Control. In addition, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may either assume the Company's rights and obligations
under the Option or substitute for the Option a substantially equivalent option
for the Acquiring Corporation's stock. The Option shall terminate and cease to
be outstanding effective as of the date of the Change in Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Change in Control nor exercised as of the
date of the Change
8
<PAGE>
in Control. Notwithstanding the foregoing, shares acquired upon exercise of the
Option prior to the Change in Control and any consideration received pursuant to
the Change in Control with respect to such shares shall continue to be subject
to all applicable provisions of this Option Agreement except as otherwise
provided herein. Furthermore, notwithstanding the foregoing, if the corporation
the stock of which is subject to the Option immediately prior to an Ownership
Change Event described in Section 8.1(a)(i) constituting a Change in Control is
the surviving or continuing corporation and immediately after such Ownership
Change Event less than fifty percent (50%) of the total combined voting power of
its voting stock is held by another corporation or by other corporations that
are members of an affiliated group within the meaning of Section 1504(a) of the
Code without regard to the provisions of Section 1504(b) of the Code, the Option
shall not terminate.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
--------------------------------------------
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number, Exercise Price and class of
shares of stock subject to the Option. If a majority of the shares which are of
the same class as the shares that are subject to the Option are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the Option to provide that the Option is exercisable for New
Shares. In the event of any such amendment, the Number of Option Shares and the
Exercise Price shall be adjusted in a fair and equitable manner, as determined
by the Board, in its sole discretion. Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 9 shall
be rounded down to the nearest whole number, and in no event may the Exercise
Price be decreased to an amount less than the par value, if any, of the stock
subject to the Option.
10. RIGHTS AS A SHAREHOLDER. The Optionee shall have no rights as a
------------------------
shareholder with respect to any shares covered by the Option until the date of
the issuance of a certificate for the shares for which the Option has been
exercised (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company). No adjustment shall be made
for dividends, distributions or other rights for which the record date is prior
to the date such certificate is issued, except as provided in Section 9.
11. LEGENDS. The Company may at any time place legends referencing
-------
any applicable federal, state or foreign securities law restrictions on all
certificates representing shares of stock subject to the provisions of this
Option Agreement. The Optionee shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to the Option in the possession of the Optionee in order to carry out
the provisions of this Section.
12. BINDING EFFECT. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
9
<PAGE>
13. TERMINATION OR AMENDMENT. The Board may terminate or amend the
------------------------
Plan or the Option at any time; provided, however, that no such termination or
amendment may adversely affect the Option or any unexercised portion hereof
without the consent of the Optionee unless such termination or amendment is
necessary to comply with any applicable law, regulation or rule. No amendment or
addition to this Option Agreement shall be effective unless in writing.
14. INTEGRATED AGREEMENT. This Option Agreement constitutes the
--------------------
entire understanding and agreement of the Optionee and the Participating Company
Group with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other than those as set forth or provided for herein. To the extent
contemplated herein, the provisions of this Option Agreement shall survive any
exercise of the Option and shall remain in full force and effect.
15. APPLICABLE LAW. This Option Agreement shall be governed by the
--------------
laws of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
POWER INTEGRATIONS, INC.
By:_________________________________
Title:______________________________
The Optionee represents that the Optionee is familiar with the terms
and provisions of this Option Agreement and hereby accepts the Option subject to
all of the terms and provisions thereof. The Optionee hereby agrees to accept
as binding, conclusive and final all decisions or interpretations of the Board
upon any questions arising under this Option Agreement.
OPTIONEE
Date:_______________________________ ____________________________________
10
<PAGE>
POWER INTEGRATIONS, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
FOR OUTSIDE DIRECTORS
(ANNUAL OPTION)
THIS NONSTATUTORY STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS (INITIAL
OPTION) (the "OPTION AGREEMENT") is made and entered into as of
______________________________, 19____, by and between Power Integrations, Inc.
and ___________________________ (the "OPTIONEE").
The Company has granted to the Optionee an option to purchase certain
shares of Stock, upon the terms and conditions set forth in this Option
Agreement (the "OPTION").
(1) DEFINITIONS AND CONSTRUCTION.
----------------------------
1.1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "DATE OF OPTION GRANT" means ______________________________,
19____.
(b) "NUMBER OF OPTION SHARES" means fifteen thousand (15,000)
shares of Stock, as adjusted from time to time pursuant to Section 9.
(c) "EXERCISE PRICE" means $ ____________ per share of Stock, as
adjusted from time to time pursuant to Section 9.
(d) "INITIAL EXERCISE DATE" means the Initial Vesting Date.
(e) "INITIAL VESTING DATE" means the date occurring one (1) year
after the Date of Option Grant .
1
<PAGE>
(f) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, provided the 1/12
Optionee's Service has not
terminated prior to such date
Plus
----
For each full month of the Optionee's 1/12
continuous Service from the Initial
Vesting Date until the Vested Ratio
equals 1/1, an additional
</TABLE>
(g) "OPTION EXPIRATION DATE" means the date ten (10) years after
the Date of Option Grant.
(h) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" shall also mean such Committee(s).
(i) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(j) "COMMITTEE" means a committee of the Board duly appointed to
administer the Plan and having such powers as shall be specified by the Board.
Unless the powers of the Committee have been specifically limited, the Committee
shall have all of the powers of the Board granted in the Plan, including,
without limitation, the power to amend or terminate the Plan at any time,
subject to the terms of the Plan and any applicable limitations imposed by law.
(k) "COMPANY" means Power Integrations, Inc., a California
corporation, or any successor corporation thereto.
(l) "CONSULTANT" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.
(m) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(n) "DISABILITY" means the permanent and total disability of the
Optionee within the meaning of Section 22(e)(3) of the Code.
2
<PAGE>
(o) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(p) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(q) "FAIR MARKET VALUE" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
(i) If, on such date, there is a public market for the
Stock, the Fair Market Value of a share of Stock shall be the closing sale price
of a share of Stock (or the mean of the closing bid and asked prices of a share
of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, the Nasdaq Small-Cap Market or such other national or regional
securities exchange or market system constituting the primary market for the
Stock, as reported in the Wall Street Journal or such other source as the
-------------------
Company deems reliable. If the relevant date does not fall on a day on which the
Stock has traded on such securities exchange or market system, the date on which
the Fair Market Value shall be established shall be the last day on which the
Stock was so traded prior to the relevant date, or such other appropriate day as
shall be determined by the Board, in its sole discretion.
(ii) If, on such date, there is no public market for the
Stock, the Fair Market Value of a share of Stock shall be as determined by the
Board without regard to any restriction other than a restriction which, by its
terms, will never lapse.
(r) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(s) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(t) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(u) "PLAN" means the Power Integrations, Inc. 1997 Outside
Directors Stock Option Plan.
(v) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(w) "SERVICE" means the Optionee's service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change
3
<PAGE>
in the Participating Company for which the Optionee renders such Service,
provided that there is no interruption or termination of the Optionee's Service.
The Optionee's Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Optionee performs
Service ceasing to be a Participating Company.
(x) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 9.
(y) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
2. TAX STATUS OF THE OPTION. This Option is intended to be a nonstatutory
------------------------
stock option and shall not be treated as an incentive stock option within the
meaning of Section 422(b) of the Code.
3. ADMINISTRATION. All questions of interpretation concerning this Option
--------------
Agreement shall be determined by the Board, including any duly appointed
Committee of the Board. All determinations by the Board shall be final and
binding upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
4. EXERCISE OF THE OPTION.
----------------------
4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable on and after the Initial Exercise Date and prior to
the termination of the Option (as provided in Section 6) in an amount not to
exceed the Number of Option Shares multiplied by the Vested Ratio less the
number of shares previously acquired upon exercise of the Option. In no event
shall the Option be exercisable for more shares than the Number of Option
Shares.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating
4
<PAGE>
Company Group, prior to the termination of the Option as set forth in Section 6,
accompanied by full payment of the aggregate Exercise Price for the number of
shares of Stock being purchased. The Option shall be deemed to be exercised upon
receipt by the Company of such written notice and the aggregate Exercise Price.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value not less than the
aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in
Section 4.3(c), or (iv) by any combination of the foregoing.
(b) TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole or
in part, or at any time thereafter as requested by the Company, the Optionee
agrees to make adequate provision for any sums required to satisfy the federal,
state, local and foreign tax withholding obligations of the Participating
Company Group, if any, which arise in connection with the Option, including,
without limitation, obligations arising upon (i) the exercise, in whole or in
part, of the Option, (ii) the transfer, in whole or in part, of any shares
acquired upon exercise of the Option, or (iii) the lapsing of any restriction
with respect to any shares acquired upon exercise of the Option.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such
5
<PAGE>
securities. The Option may not be exercised if the issuance of shares of Stock
upon exercise would constitute a violation of any applicable federal, state or
foreign securities laws or other law or regulations or the requirements of any
stock exchange or market system upon which the Stock may then be listed. In
addition, the Option may not be exercised unless (i) a registration statement
under the Securities Act shall at the time of exercise of the Option be in
effect with respect to the shares issuable upon exercise of the Option or (ii)
in the opinion of legal counsel to the Company, the shares issuable upon
exercise of the Option may be issued in accordance with the terms of an
applicable exemption from the registration requirements of the Securities Act.
THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE
FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO
EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. The inability
of the Company to obtain from any regulatory body having jurisdiction the
authority, if any, deemed by the Company's legal counsel to be necessary to the
lawful issuance and sale of any shares subject to the Option shall relieve the
Company of any liability in respect of the failure to issue or sell such shares
as to which such requisite authority shall not have been obtained. As a
condition to the exercise of the Option, the Company may require the Optionee to
satisfy any qualifications that may be necessary or appropriate, to evidence
compliance with any applicable law or regulation and to make any representation
or warranty with respect thereto as may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during
--------------------------------
the lifetime of the Optionee only by the Optionee or the Optionee's guardian or
legal representative and may not be assigned or transferred in any manner except
by will or by the laws of descent and distribution. Following the death of the
Optionee, the Option, to the extent provided in Section 7, may be exercised by
the Optionee's legal representative or by any person empowered to do so under
the deceased Optionee's will or under the then applicable laws of descent and
distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Expiration Date, (b)
the last date for exercising the Option following termination of the Optionee's
Service as described in Section 7, or (c) a Change in Control to the extent
provided in Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the expiration
of twelve (12) months after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date.
6
<PAGE>
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee's legal representative or
other person who acquired the right to exercise the Option by reason of the
Optionee's death at any time prior to the expiration of twelve (12) months after
the date on which the Optionee's Service terminated, but in any event no later
than the Option Expiration Date. The Optionee's Service shall be deemed to have
terminated on account of death if the Optionee dies within three (3) months
after the Optionee's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with
the Participating Company Group terminates for any reason, except Disability or
death, the Option, to the extent unexercised and exercisable by the Optionee on
the date on which the Optionee's Service terminated, may be exercised by the
Optionee within three (3) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.
7.2 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.
7.3 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B). Notwithstanding
the foregoing, if a sale, within the applicable time periods set forth in
Section 7.1, of shares acquired upon the exercise of the Option would subject
the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
8. OWNERSHIP CHANGE AND CHANGE IN CONTROL.
--------------------------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single
or series of related transactions by the shareholders of the Company of more
than fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
7
<PAGE>
(iv) a liquidation or dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF CHANGE IN CONTROL ON OPTION. In the event of a Change
in Control, any unexercised portion of the Option shall be immediately
exercisable and vested in full as of the date ten (10) days prior to the date of
the Change in Control. Any exercise of the Option that was permissible solely by
reason of this Section 8.2 shall be conditioned upon the consummation of the
Change in Control. In addition, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may either assume the Company's rights and obligations
under the Option or substitute for the Option a substantially equivalent option
for the Acquiring Corporation's stock. The Option shall terminate and cease to
be outstanding effective as of the date of the Change in Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Change in Control nor exercised as of the
date of the Change in Control. Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Change in Control and any consideration
received pursuant to the Change in Control with respect to such shares shall
continue to be subject to all applicable provisions of this Option Agreement
except as otherwise provided herein. Furthermore, notwithstanding the foregoing,
if the corporation the stock of which is subject to the Option immediately prior
to an Ownership Change Event described in Section 8.1(a)(i) constituting a
Change in Control is the surviving or continuing corporation and immediately
after such Ownership Change Event less than fifty percent (50%) of the total
combined voting power of its voting stock is held by another corporation or by
other corporations that are members of an affiliated group within the meaning of
Section 1504(a) of the Code without regard to the provisions of Section 1504(b)
of the Code, the Option shall not terminate.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
--------------------------------------------
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number, Exercise Price and class of
shares of stock subject to the Option. If a majority of the
8
<PAGE>
shares which are of the same class as the shares that are subject to the Option
are exchanged for, converted into, or otherwise become (whether or not pursuant
to an Ownership Change Event) shares of another corporation (the "NEW SHARES"),
the Board may unilaterally amend the Option to provide that the Option is
exercisable for New Shares. In the event of any such amendment, the Number of
Option Shares and the Exercise Price shall be adjusted in a fair and equitable
manner, as determined by the Board, in its sole discretion. Notwithstanding the
foregoing, any fractional share resulting from an adjustment pursuant to this
Section 9 shall be rounded down to the nearest whole number, and in no event may
the Exercise Price be decreased to an amount less than the par value, if any, of
the stock subject to the Option.
10. RIGHTS AS A SHAREHOLDER. The Optionee shall have no rights as a
-----------------------
shareholder with respect to any shares covered by the Option until the date of
the issuance of a certificate for the shares for which the Option has been
exercised (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company). No adjustment shall be made
for dividends, distributions or other rights for which the record date is prior
to the date such certificate is issued, except as provided in Section 9.
11. LEGENDS. The Company may at any time place legends referencing any
-------
applicable federal, state or foreign securities law restrictions on all
certificates representing shares of stock subject to the provisions of this
Option Agreement. The Optionee shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to the Option in the possession of the Optionee in order to carry out
the provisions of this Section.
12. BINDING EFFECT. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
13. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan
------------------------
or the Option at any time; provided, however, that no such termination or
amendment may adversely affect the Option or any unexercised portion hereof
without the consent of the Optionee unless such termination or amendment is
necessary to comply with any applicable law, regulation or rule. No amendment
or addition to this Option Agreement shall be effective unless in writing.
14. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire
--------------------
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other than those as set forth or provided for herein. To the extent
contemplated herein, the provisions of this Option Agreement shall survive any
exercise of the Option and shall remain in full force and effect.
9
<PAGE>
15. APPLICABLE LAW. This Option Agreement shall be governed by the laws of
--------------
the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
POWER INTEGRATIONS, INC.
By:________________________________
Title:_______________________________
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement and hereby accepts the Option subject to all
of the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement.
OPTIONEE
Date:_______________________________ ____________________________________
10
<PAGE>
EXHIBIT 10.5
POWER INTEGRATIONS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
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1.1 ESTABLISHMENT. The Power Integrations, Inc. 1997 Employee Stock
Purchase Plan (the "PLAN") is hereby established effective as of the effective
date of the initial registration by the Company of its Stock under Section 12 of
the Securities Exchange Act of 1934, as amended (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
Company and its shareholders by providing an incentive to attract, retain and
reward Eligible Employees of the Participating Company Group and by motivating
such persons to contribute to the growth and profitability of the Participating
Company Group. The Plan provides such Eligible Employees with an opportunity to
acquire a proprietary interest in the Company through the purchase of Stock. The
Company intends that the Plan qualify as an "employee stock purchase plan" under
Section 423 of the Code (including any amendments or replacements of such
section), and the Plan shall be so construed.
1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
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2.1 DEFINITIONS. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. Whenever used herein, the following terms shall have their respective
meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly appointed to
administer the Plan and having such powers as shall be specified by the Board.
Unless the powers of the Committee have been specifically limited, the Committee
shall have all of the powers of the Board granted herein, including, without
limitation, the power to amend or terminate the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law.
(d) "COMPANY" means Power Integrations, Inc., a California
corporation, or any successor corporation thereto.
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(e) "COMPENSATION" means, with respect to any Offering Period,
base wages or salary, commissions, overtime, bonuses, annual awards, other
incentive payments, shift premiums, and all other compensation paid in cash
during such Offering Period before deduction for any contributions to any plan
maintained by a Participating Company and described in Section 401(k) or Section
125 of the Code. Compensation shall not include reimbursements of expenses,
allowances, long-term disability, workers' compensation or any amount deemed
received without the actual transfer of cash or any amounts directly or
indirectly paid pursuant to the Plan or any other stock purchase or stock option
plan, or any other compensation not included above.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the Plan.
(g) "EMPLOYEE" means a person treated as an employee of a
Participating Company for purposes of Section 423 of the Code. A Participant
shall be deemed to have ceased to be an Employee either upon an actual
termination of employment or upon the corporation employing the Participant
ceasing to be a Participating Company. For purposes of the Plan, an individual
shall not be deemed to have ceased to be an Employee while such individual is on
any military leave, sick leave, or other bona fide leave of absence approved by
the Company of ninety (90) days or less. In the event an individual's leave of
absence exceeds ninety (90) days, the individual shall be deemed to have ceased
to be an Employee on the ninety-first (91st) day of such leave unless the
individual's right to reemployment with the Participating Company Group is
guaranteed either by statute or by contract. The Company shall determine in good
faith and in the exercise of its discretion whether an individual has become or
has ceased to be an Employee and the effective date of such individual's
employment or termination of employment, as the case may be. For purposes of an
individual's participation in or other rights, if any, under the Plan as of the
time of the Company's determination, all such determinations by the Company
shall be final, binding and conclusive, notwithstanding that the Company or any
governmental agency subsequently makes a contrary determination.
(h) "FAIR MARKET VALUE" means, as of any date, if there is then
a public market for the Stock, the closing price of a share of Stock (or the
mean of the closing bid and asked prices if the Stock is so quoted instead) as
quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other
national or regional securities exchange or market system constituting the
primary market for the Stock, as reported in The Wall Street Journal or such
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other source as the Company deems reliable. If the relevant date does not fall
on a day on which the Stock has traded on such securities exchange or market
system, the date on which the Fair Market Value shall be established shall be
the last day on which the Stock was so traded prior to the relevant date, or
such other appropriate day as shall be determined by the Board, in its sole
discretion. If there is then no public market for the Stock, the Fair Market
Value on any relevant date shall be as determined by the Board. Notwithstanding
the foregoing, the Fair Market Value per share of Stock on the Effective Date
shall be deemed to be the public offering price set forth in the final
prospectus filed with the Securities and Exchange Commission in connection with
the initial public offering of the Stock.
(i) "OFFERING" means an offering of Stock as provided in Section
6.
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(j) "OFFERING DATE" means, for any Offering, the first day of the
Offering Period with respect to such Offering.
(k) "OFFERING PERIOD" means a period established in accordance
with Section 6.1.
(l) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(m) "PARTICIPANT" means an Eligible Employee who has become a
participant in an Offering Period in accordance with Section 7 and remains a
participant in accordance with the Plan.
(n) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation designated by the Board as a corporation
the Employees of which may, if Eligible Employees, participate in the Plan. The
Board shall have the sole and absolute discretion to determine from time to time
which Parent Corporations or Subsidiary Corporations shall be Participating
Companies.
(o) "PARTICIPATING COMPANY GROUP" means, at any point in time,
the Company and all other corporations collectively which are then Participating
Companies.
(p) "PURCHASE DATE" means, for any Purchase Period, the last day
of such period.
(q) "PURCHASE PERIOD" means a period established in accordance
with Section 6.2.
(r) "PURCHASE PRICE" means the price at which a share of Stock
may be purchased under the Plan, as determined in accordance with Section 9.
(s) "PURCHASE RIGHT" means an option granted to a Participant
pursuant to the Plan to purchase such shares of Stock as provided in Section 8,
which the Participant may or may not exercise during the Offering Period in
which such option is outstanding. Such option arises from the right of a
Participant to withdraw any accumulated payroll deductions of the Participant
not previously applied to the purchase of Stock under the Plan and to terminate
participation in the Plan at any time during an Offering Period.
(t) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
(u) "SUBSCRIPTION AGREEMENT" means a written agreement in such
form as specified by the Company, stating an Employee's election to participate
in the Plan and authorizing payroll deductions under the Plan from the
Employee's Compensation.
(v) "SUBSCRIPTION DATE" means the last business day prior to the
Offering Date of an Offering Period or such earlier date as the Company shall
establish.
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(w) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
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3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board. All questions of interpretation of the Plan, of any form of agreement
or other document employed by the Company in the administration of the Plan, or
of any Purchase Right shall be determined by the Board and shall be final and
binding upon all persons having an interest in the Plan or the Purchase Right.
Subject to the provisions of the Plan, the Board shall determine all of the
relevant terms and conditions of Purchase Rights granted pursuant to the Plan;
provided, however, that all Participants granted Purchase Rights pursuant to the
Plan shall have the same rights and privileges within the meaning of Section
423(b)(5) of the Code. All expenses incurred in connection with the
administration of the Plan shall be paid by the Company.
3.2 AUTHORITY OF OFFICERS. Any officer of the Company shall have the
authority to act on behalf of the Company with respect to any matter, right,
obligation, determination or election that is the responsibility of or that is
allocated to the Company herein, provided that the officer has apparent
authority with respect to such matter, right, obligation, determination or
election.
3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY. The Company
may, from time to time, consistent with the Plan and the requirements of Section
423 of the Code, establish, change or terminate such rules, guidelines,
policies, procedures, limitations, or adjustments as deemed advisable by the
Company, in its sole discretion, for the proper administration of the Plan,
including, without limitation, (a) a minimum payroll deduction amount required
for participation in an Offering, (b) a limitation on the frequency or number of
changes permitted in the rate of payroll deduction during an Offering, (c) an
exchange ratio applicable to amounts withheld in a currency other than United
States dollars, (d) a payroll deduction greater than or less than the amount
designated by a Participant in order to adjust for the Company's delay or
mistake in processing a Subscription Agreement or in otherwise effecting a
Participant's election under the Plan or as advisable to comply with the
requirements of Section 423 of the Code, and (e) determination of the date and
manner by which the Fair Market Value of a share of Stock is determined for
purposes of administration of the Plan.
4. SHARES SUBJECT TO PLAN.
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4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be two hundred fifty thousand (250,000) and
shall consist of authorized but
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unissued or reacquired shares of Stock, or any combination thereof. If an
outstanding Purchase Right for any reason expires or is terminated or canceled,
the shares of Stock allocable to the unexercised portion of such Purchase Right
shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, or in the event of any merger (including a merger effected for the
purpose of changing the Company's domicile), sale of assets or other
reorganization in which the Company is a party, appropriate adjustments shall be
made in the number and class of shares subject to the Plan and each Purchase
Right and in the Purchase Price. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Purchase Rights are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the
Board may unilaterally amend the outstanding Purchase Rights to provide that
such Purchase Rights are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the Purchase Price of, the
outstanding Purchase Rights shall be adjusted in a fair and equitable manner, as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded down to the nearest whole number, and in no event may the
Purchase Price be decreased to an amount less than the par value, if any, of the
stock subject to the Purchase Right. The adjustments determined by the Board
pursuant to this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY.
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5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of a
Participating Company is eligible to participate in the Plan and shall be deemed
an Eligible Employee, except the following:
(a) Any Employee who is customarily employed by the Participating
Company Group for less than twenty (20) hours per week; or
(b) Any Employee who is customarily employed by the Participating
Company Group for not more than five (5) months in any calendar year.
5.2 EXCLUSION OF CERTAIN SHAREHOLDERS. Notwithstanding any provision
of the Plan to the contrary, no Employee shall be granted a Purchase Right under
the Plan if, immediately after such grant, such Employee would own or hold
options to purchase stock of the Company or of any Parent Corporation or
Subsidiary Corporation possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of such corporation, as
determined in accordance with Section 423(b)(3) of the Code. For purposes of
this Section 5.2, the attribution rules of Section 424(d) of the Code shall
apply in determining the stock ownership of such Employee.
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6. OFFERINGS.
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6.1 OFFERING PERIODS. Except as otherwise set forth below, the Plan
shall be implemented by sequential Offerings of approximately twenty-four (24)
months duration (an "OFFERING PERIOD"); provided, however, that the first
Offering Period shall commence on the Effective Date and end on January 31, 2000
(the "INITIAL OFFERING PERIOD"). Subsequent Offerings shall commence on the
first day of February and August of each year and end on the last day of the
second January and July, respectively, occurring thereafter. Notwithstanding the
foregoing, the Board may establish a different duration for one or more future
Offering Periods or different commencing or ending dates for such Offering
Periods; provided, however, that no Offering Period may have a duration
exceeding twenty-seven (27) months. If the first or last day of an Offering
Period is not a day on which the national securities exchanges or Nasdaq Stock
Market are open for trading, the Company shall specify the trading day that will
be deemed the first or last day, as the case may be, of the Offering Period.
6.2 PURCHASE PERIODS. Each Offering Period shall consist of four (4)
consecutive Purchase Periods of approximately six (6) months duration, or such
other number or duration as the Board shall determine. The Purchase Period
commencing on the Offering Date of the Initial Offering Period shall end on July
31, 1998. A Purchase Period commencing on or about February 1 shall end on or
about the next July 31. A Purchase Period commencing on or about August 1 shall
end on or about the next January 31. Notwithstanding the foregoing, the Board
may establish a different duration for one or more future Purchase Periods or
different commencing or ending dates for such Purchase Periods. If the first or
last day of a Purchase Period is not a day on which the national securities
exchanges or Nasdaq Stock Market are open for trading, the Company shall specify
the trading day that will be deemed the first or last day, as the case may be,
of the Purchase Period.
7. PARTICIPATION IN THE PLAN.
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7.1 INITIAL PARTICIPATION. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the office designated by the Company not later than
the close of business for such office on the Subscription Date established by
the Company for such Offering Period. An Eligible Employee who does not deliver
a properly completed Subscription Agreement to the Company's designated office
on or before the Subscription Date for an Offering Period shall not participate
in the Plan for that Offering Period or for any subsequent Offering Period
unless such Eligible Employee subsequently delivers a properly completed
Subscription Agreement to the appropriate office of the Company on or before the
Subscription Date for such subsequent Offering Period. An Employee who becomes
an Eligible Employee after the Offering Date of an Offering Period shall not be
eligible to participate in such Offering Period but may participate in any
subsequent Offering Period provided such Employee is still an Eligible Employee
as of the Offering Date of such subsequent Offering Period.
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7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the next Offering Period commencing immediately after the final
Purchase Date of each Offering Period in which the Participant participates
provided that such Participant remains an Eligible Employee on the Offering Date
of the new Offering Period and has not either (a) withdrawn from the Plan
pursuant to Section 12.1 or (b) terminated employment as provided in Section 13.
A Participant who may automatically participate in a subsequent Offering Period,
as provided in this Section, is not required to deliver any additional
Subscription Agreement for the subsequent Offering Period in order to continue
participation in the Plan. However, a Participant may deliver a new Subscription
Agreement for a subsequent Offering Period in accordance with the procedures set
forth in Section 7.1 if the Participant desires to change any of the elections
contained in the Participant's then effective Subscription Agreement. Eligible
Employees may not participate simultaneously in more than one Offering.
8. RIGHT TO PURCHASE SHARES.
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8.1 GRANT OF PURCHASE RIGHT. Except as set forth below, on the Offering
Date of each Offering Period, each Participant in such Offering Period shall be
granted automatically a Purchase Right consisting of an option to purchase the
lesser of (a) that number of whole shares of Stock determined by dividing Fifty
Thousand Dollars ($50,000) by the Fair Market Value of a share of Stock on such
Offering Date or (b) five thousand (5,000) shares of Stock. No Purchase Right
shall be granted on an Offering Date to any person who is not, on such Offering
Date, an Eligible Employee.
8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT. Notwithstanding the provisions
of Section 8.1, if the Board establishes an Offering Period of any duration
other than twenty-four months, then (a) the dollar amount in Section 8.1 shall
be determined by multiplying $2,083.33 by the number of months (rounded to the
nearest whole month) in the Offering Period and rounding to the nearest whole
dollar, and (b) the share amount in Section 8.1 shall be determined by
multiplying 208.33 shares by the number of months (rounded to the nearest whole
month) in the Offering Period and rounding to the nearest whole share.
8.3 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding any provision of
the Plan to the contrary, no Participant shall be granted a Purchase Right which
permits his or her right to purchase shares of Stock under the Plan to accrue at
a rate which, when aggregated with such Participant's rights to purchase shares
under all other employee stock purchase plans of a Participating Company
intended to meet the requirements of Section 423 of the Code, exceeds Twenty-
Five Thousand Dollars ($25,000) in Fair Market Value (or such other limit, if
any, as may be imposed by the Code) for each calendar year in which such
Purchase Right is outstanding at any time. For purposes of the preceding
sentence, the Fair Market Value of shares purchased during a given Offering
Period shall be determined as of the Offering Date for such Offering Period. The
limitation described in this Section 8.3 shall be applied in conformance with
applicable regulations under Section 423(b)(8) of the Code.
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9. PURCHASE PRICE.
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The Purchase Price at which each share of Stock may be acquired in an
Offering Period upon the exercise of all or any portion of a Purchase Right
shall be established by the Board; provided, however, that the Purchase Price
shall not be less than eighty-five percent (85%) of the lesser of (a) the Fair
Market Value of a share of Stock on the Offering Date of the Offering Period or
(b) the Fair Market Value of a share of Stock on the Purchase Date. Unless
otherwise provided by the Board prior to the commencement of an Offering Period,
the Purchase Price for that Offering Period shall be eighty-five percent (85%)
of the lesser of (a) the Fair Market Value of a share of Stock on the Offering
Date of the Offering Period, or (b) the Fair Market Value of a share of Stock on
the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.
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Shares of Stock acquired pursuant to the exercise of all or any portion of
a Purchase Right may be paid for only by means of payroll deductions from the
Participant's Compensation accumulated during the Offering Period for which such
Purchase Right was granted, subject to the following:
10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise provided herein,
the amount to be deducted under the Plan from a Participant's Compensation on
each payday during an Offering Period shall be determined by the Participant's
Subscription Agreement. The Subscription Agreement shall set forth the
percentage of the Participant's Compensation to be deducted on each payday
during an Offering Period in whole percentages of not less than one percent (1%)
(except as a result of an election pursuant to Section 10.3 to stop payroll
deductions made effective following the first payday during an Offering) or more
than fifteen percent (15%). Notwithstanding the foregoing, the Board may change
the limits on payroll deductions effective as of any future Offering Date.
10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
herein.
10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS. During an Offering
Period, a Participant may elect to increase or decrease the rate of or to stop
deductions from his or her Compensation by delivering to the Company's
designated office an amended Subscription Agreement authorizing such change on
or before the "Change Notice Date." The "CHANGE NOTICE DATE" shall be a date
prior to the beginning of the first pay period for which such election is to be
effective as established by the Company from time to time and announced to the
Participants. A Participant who elects to decrease the rate of his or her
payroll deductions to zero percent (0%) shall nevertheless remain a Participant
in the current Offering Period unless such Participant withdraws from the Plan
as provided in Section 12.1.
10.4 ADMINISTRATIVE SUSPENSION OF PAYROLL DEDUCTIONS. The Company may,
in its sole discretion, suspend a Participant's payroll deductions under the
Plan as the Company deems advisable to avoid accumulating payroll deductions in
excess of the amount that could reasonably be anticipated to purchase the
maximum number of shares of Stock permitted during
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a calendar year under the limit set forth in Section 8.3. Payroll deductions
shall be resumed at the rate specified in the Participant's then effective
Subscription Agreement at the beginning of the next Purchase Period the Purchase
Date of which falls in the following calendar year.
10.5 PARTICIPANT ACCOUNTS. Individual bookkeeping accounts shall be
maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such Participant's Plan account and shall be
deposited with the general funds of the Company. All payroll deductions received
or held by the Company may be used by the Company for any corporate purpose.
10.6 NO INTEREST PAID. Interest shall not be paid on sums deducted from
a Participant's Compensation pursuant to the Plan.
10.7 VOLUNTARY WITHDRAWAL FROM PLAN ACCOUNT. A Participant may withdraw
all or any portion of the payroll deductions credited to his or her Plan account
and not previously applied toward the purchase of Stock by delivering to the
Company's designated office a written notice on a form provided by the Company
for such purpose. A Participant who withdraws the entire remaining balance
credited to his or her Plan account shall be deemed to have withdrawn from the
Plan in accordance with Section 12.1. Amounts withdrawn shall be returned to the
Participant as soon as practicable after the withdrawal and may not be applied
to the purchase of shares in any Offering under the Plan. The Company may from
time to time establish or change limitations on the frequency of withdrawals
permitted under this Section, establish a minimum dollar amount that must be
retained in the Participant's Plan account, or terminate the withdrawal right
provided by this Section.
11. PURCHASE OF SHARES.
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11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date of an Offering
Period, each Participant who has not withdrawn from the Plan and whose
participation in the Offering has not terminated before such Purchase Date shall
automatically acquire pursuant to the exercise of the Participant's Purchase
Right the number of whole shares of Stock determined by dividing (a) the total
amount of the Participant's payroll deductions accumulated in the Participant's
Plan account during the Offering Period and not previously applied toward the
purchase of Stock by (b) the Purchase Price. However, in no event shall the
number of shares purchased by the Participant during an Offering Period exceed
the number of shares subject to the Participant's Purchase Right. No shares of
Stock shall be purchased on a Purchase Date on behalf of a Participant whose
participation in the Offering or the Plan has terminated before such Purchase
Date.
11.2 PRO RATA ALLOCATION OF SHARES. In the event that the number of
shares of Stock which might be purchased by all Participants in the Plan on a
Purchase Date exceeds the number of shares of Stock available in the Plan as
provided in Section 4.1, the Company shall make a pro rata allocation of the
remaining shares in as uniform a manner as shall be practicable and as the
Company shall determine to be equitable. Any fractional share resulting from
such pro rata allocation to any Participant shall be disregarded.
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11.3 DELIVERY OF CERTIFICATES. As soon as practicable after each
Purchase Date, the Company shall arrange the delivery to each Participant, as
appropriate, of a certificate representing the shares acquired by the
Participant on such Purchase Date; provided that the Company may deliver such
shares to a broker that holds such shares in street name for the benefit of the
Participant. Shares to be delivered to a Participant under the Plan shall be
registered in the name of the Participant, or, if requested by the Participant,
in the name of the Participant and his or her spouse, or, if applicable, in the
names of the heirs of the Participant.
11.4 RETURN OF CASH BALANCE. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to the
Participant as soon as practicable after such Purchase Date. However, if the
cash to be returned to a Participant pursuant to the preceding sentence is an
amount less than the amount that would have been necessary to purchase an
additional whole share of Stock on such Purchase Date, the Company may retain
such amount in the Participant's Plan account to be applied toward the purchase
of shares of Stock in the subsequent Purchase Period or Offering Period, as the
case may be.
11.5 TAX WITHHOLDING. At the time a Participant's Purchase Right is
exercised, in whole or in part, or at the time a Participant disposes of some or
all of the shares of Stock he or she acquires under the Plan, the Participant
shall make adequate provision for the foreign, federal, state and local tax
withholding obligations of the Participating Company Group, if any, which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which the Purchase Right relates shall expire immediately upon the end of the
Offering Period.
11.7 REPORTS TO PARTICIPANTS. Each Participant who has exercised all or
part of his or her Purchase Right shall receive, as soon as practicable after
the Purchase Date, a report of such Participant's Plan account setting forth the
total payroll deductions accumulated prior to such exercise, the number of
shares of Stock purchased, the Purchase Price for such shares, the date of
purchase and the cash balance, if any, remaining immediately after such purchase
that is to be refunded or retained in the Participant's Plan account pursuant to
Section 11.4. The report required by this Section may be delivered in such form
and by such means, including by electronic transmission, as the Company may
determine.
12. WITHDRAWAL FROM OFFERING OR PLAN.
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12.1 VOLUNTARY WITHDRAWAL FROM THE PLAN. A Participant may withdraw from
the Plan by signing and delivering to the Company's designated office a written
notice of withdrawal on a form provided by the Company for such purpose. Such
withdrawal may be elected at any time prior to the end of an Offering Period;
provided, however, that if a Participant withdraws from the Plan after the
Purchase Date of a Purchase Period, the withdrawal shall not affect shares of
Stock acquired by the Participant on such Purchase Date. A Participant who
voluntarily withdraws from the Plan is prohibited from resuming participation in
the Plan in the same Offering from which he or she withdrew, but may participate
in any subsequent Offering by
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again satisfying the requirements of Sections 5 and 7.1. The Company may
impose, from time to time, a requirement that the notice of withdrawal from the
Plan be on file with the Company's designated office for a reasonable period
prior to the effectiveness of the Participant's withdrawal.
12.2 AUTOMATIC WITHDRAWAL FROM AN OFFERING. If the Fair Market Value of
a share of Stock on a Purchase Date of an Offering Period (other than the final
Purchase Date of such offering) is less than the Fair Market Value of a share of
Stock on the Offering Date for such Offering Period, then every Participant
shall automatically be (a) withdrawn from such Offering Period after the
acquisition of shares of Stock on the Purchase Date and (b) enrolled in the new
Offering Period effective on its Offering Date. A Participant may elect not to
be automatically withdrawn from an Offering Period pursuant to this Section 12.2
by delivering to the Company's designated office not later than the close of
business on Offering Date new Offering Period a written notice indicating such
election.
12.3 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's voluntary
withdrawal from the Plan pursuant to Sections 12.1 or automatic withdrawal from
an Offering pursuant to Section 12.2, the Participant's accumulated payroll
deductions which have not been applied toward the purchase of shares of Stock
(except, in the case of an automatic withdrawal pursuant to Section 12.2, for an
amount necessary to purchase an additional whole share as provided in Section
11.4) shall be refunded to the Participant as soon as practicable after the
withdrawal, without the payment of any interest, and the Participant's interest
in the Plan or the Offering, as applicable, shall terminate. Such accumulated
payroll deductions to be refunded in accordance with this Section may not be
applied to any other Offering under the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
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Upon a Participant's ceasing, prior to a Purchase Date, to be an Employee
of the Participating Company Group for any reason, including retirement,
disability or death, or the failure of a Participant to remain an Eligible
Employee, the Participant's participation in the Plan shall terminate
immediately. In such event, the payroll deductions credited to the Participant's
Plan account since the last Purchase Date shall, as soon as practicable, be
returned to the Participant or, in the case of the Participant's death, to the
Participant's legal representative, and all of the Participant's rights under
the Plan shall terminate. Interest shall not be paid on sums returned pursuant
to this Section 13. A Participant whose participation has been so terminated may
again become eligible to participate in the Plan by again satisfying the
requirements of Sections 5 and 7.1.
11
<PAGE>
14. CHANGE IN CONTROL.
-----------------
14.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company: (i) the direct
or indirect sale or exchange in a single or series of related transactions
by the shareholders of the Company of more than fifty percent (50%) of the
voting stock of the Company; (ii) a merger or consolidation in which the
Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or
a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the shareholders of the Company immediately before
the Transaction do not retain immediately after the Transaction, in
substantially the same proportions as their ownership of shares of the
Company's voting stock immediately before the Transaction, direct or
indirect beneficial ownership of more than fifty percent (50%) of the
total combined voting power of the outstanding voting stock of the Company
or the corporation or corporations to which the assets of the Company were
transferred (the "TRANSFEREE CORPORATION(S)"), as the case may be. For
purposes of the preceding sentence, indirect beneficial ownership shall
include, without limitation, an interest resulting from ownership of the
voting stock of one or more corporations which, as a result of the
Transaction, own the Company or the Transferee Corporation(s), as the case
may be, either directly or through one or more subsidiary corporations.
The Board shall have the right to determine whether multiple sales or
exchanges of the voting stock of the Company or multiple Ownership Change
Events are related, and its determination shall be final, binding and
conclusive.
14.2 EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In the event of a
Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may assume the Company's rights and obligations under the Plan.
If the Acquiring Corporation elects not to assume the Company's rights and
obligations under outstanding Purchase Rights, the Purchase Date of the then
current Purchase Period shall be accelerated to a date before the date of the
Change in Control specified by the Board, but the number of shares of Stock
subject to outstanding Purchase Rights shall not be adjusted. All Purchase
Rights which are neither assumed by the Acquiring Corporation in connection with
the Change in Control nor exercised as of the date of the Change in Control
shall terminate and cease to be outstanding effective as of the date of the
Change in Control.
15. NONTRANSFERABILITY OF PURCHASE RIGHTS.
-------------------------------------
A Purchase Right may not be transferred in any manner otherwise than by
will or the laws of descent and distribution and shall be exercisable during the
lifetime of the Participant only by the Participant.
16. COMPLIANCE WITH SECURITIES LAW.
------------------------------
12
<PAGE>
The issuance of shares under the Plan shall be subject to compliance with
all applicable requirements of federal, state and foreign law with respect to
such securities. A Purchase Right may not be exercised if the issuance of shares
upon such exercise would constitute a violation of any applicable federal, state
or foreign securities laws or other law or regulations or the requirements of
any securities exchange or market system upon which the Stock may then be
listed. In addition, no Purchase Right may be exercised unless (a) a
registration statement under the Securities Act of 1933, as amended, shall at
the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of a
Purchase Right, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation, and to make any representation or warranty
with respect thereto as may be requested by the Company.
17. RIGHTS AS A SHAREHOLDER AND EMPLOYEE.
------------------------------------
A Participant shall have no rights as a shareholder by virtue of the
Participant's participation in the Plan until the date of the issuance of a
certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 4.2. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Participating Company Group or interfere
in any way with any right of the Participating Company Group to terminate the
Participant's employment at any time.
18. LEGENDS.
-------
The Company may at any time place legends or other identifying symbols
referencing any applicable federal, state or foreign securities law restrictions
or any provision convenient in the administration of the Plan on some or all of
the certificates representing shares of Stock issued under the Plan. The
Participant shall, at the request of the Company, promptly present to the
Company any and all certificates representing shares acquired pursuant to a
Purchase Right in the possession of the Participant in order to carry out the
provisions of this Section. Unless otherwise specified by the Company, legends
placed on such certificates may include but shall not be limited to the
following:
13
<PAGE>
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION
TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN EMPLOYEE STOCK
PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY SHALL NOTIFY THE
CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE REGISTERED HOLDER
HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE PLAN IN
THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY NOMINEE)."
19. NOTIFICATION OF SALE OF SHARES.
------------------------------
The Company may require the Participant to give the Company prompt notice
of any disposition of shares acquired by exercise of a Purchase Right within two
years from the date of granting such Purchase Right or one year from the date of
exercise of such Purchase Right. The Company may require that until such time as
a Participant disposes of shares acquired upon exercise of a Purchase Right, the
Participant shall hold all such shares in the Participant's name (or, if elected
by the Participant, in the name of the Participant and his or her spouse but not
in the name of any nominee) until the lapse of the time periods with respect to
such Purchase Right referred to in the preceding sentence. The Company may
direct that the certificates evidencing shares acquired by exercise of a
Purchase Right refer to such requirement to give prompt notice of disposition.
20. NOTICES.
-------
All notices or other communications by a Participant to the Company under
or in connection with the Plan shall be deemed to have been duly given when
received in the form specified by the Company at the location, or by the person,
designated by the Company for the receipt thereof.
21. INDEMNIFICATION.
---------------
In addition to such other rights of indemnification as they may have as
members of the Board or officers or employees of the Participating Company
Group, members of the Board and any officers or employees of the Participating
Company Group to whom authority to act for the Board or the Company is delegated
shall be indemnified by the Company against all reasonable expenses, including
attorneys' fees, actually and necessarily incurred in connection with the
defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
14
<PAGE>
22. AMENDMENT OR TERMINATION OF THE PLAN.
------------------------------------
The Board may at any time amend or terminate the Plan, except that (a)
such termination shall not affect Purchase Rights previously granted under the
Plan, except as permitted under the Plan, and (b) no amendment may adversely
affect a Purchase Right previously granted under the Plan (except to the extent
permitted by the Plan or as may be necessary to qualify the Plan as an employee
stock purchase plan pursuant to Section 423 of the Code or to obtain
qualification or registration of the shares of Stock under applicable federal,
state or foreign securities laws). In addition, an amendment to the Plan must be
approved by the shareholders of the Company within twelve (12) months of the
adoption of such amendment if such amendment would authorize the sale of more
shares than are authorized for issuance under the Plan or would change the
definition of the corporations that may be designated by the Board as
Participating Companies.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing Power Integrations, Inc. 1997 Employee Stock Purchase Plan was
duly adopted by the Board of Directors of the Company on ________________, 1997.
____________________________________
Secretary
15
<PAGE>
POWER INTEGRATIONS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NAME (Please print):
____________________________________________________________________
(Last) (First) (Middle)
[_] Original Application for the Offering Period beginning
____________________, 199__.
[_] Change in Payroll Deduction rate effective with the pay period ending
___________________, 199__.
I hereby elect to participate in the 1997 Employee Stock Purchase Plan (the
"PLAN") of Power Integrations, Inc. (the "COMPANY") and subscribe to purchase
shares of the Company's Stock in accordance with this Subscription Agreement and
the Plan.
I hereby authorize payroll deductions in the amount of ________ percent (in
whole percentages not less than 1% (unless an election to stop deductions is
being made) or more than 15%) of my "COMPENSATION" on each payday throughout the
"OFFERING PERIOD" in accordance with the Plan. I understand that these payroll
deductions will be accumulated for the purchase of shares of Stock at the
applicable purchase price determined in accordance with the Plan. I understand
that, except as otherwise provided by the Plan, I will automatically purchase
shares on each Purchase Date under the Plan unless I withdraw from the Plan by
giving written notice on a form provided by the Company or unless my employment
terminates.
I understand that I will automatically participate in each subsequent
Offering that commences immediately after the last day of an Offering in which I
am participating until I withdraw from the Plan by giving written notice on a
form provided by the Company or my employment terminates.
Shares I purchase under the Plan should be issued in the name(s) set forth
below. (Shares may be issued in the participant's name alone or together with
the participant's spouse as community property or in joint tenancy.)
NAME(S): ________________________________________________________________
ADDRESS: _______________________________________________________________
MY SOCIAL SECURITY NUMBER: _______________________________________________
I agree to make adequate provision for the federal, state, local and
foreign tax withholding obligations, if any, which may arise upon my purchase of
shares under the Plan and/or my disposition of such shares. The Company may,
but will not be obligated to, withhold from my compensation the amount necessary
to meet such withholding obligations.
I agree that, unless otherwise permitted by the Company, until I dispose of
the shares I purchased under the Plan, I will hold such shares in the name(s)
entered above (and not in the name of any nominee) for at least two years from
the first day of the Offering Period in which, and at least one year from the
Purchase Date on which, I acquired such shares.
I AGREE THAT I WILL NOTIFY THE CHIEF FINANCIAL OFFICER OF THE COMPANY IN
WRITING WITHIN 30 DAYS AFTER ANY SALE, GIFT, TRANSFER OR OTHER DISPOSITION OF
ANY KIND PRIOR TO THE END OF THE PERIODS REFERRED TO IN THE PRECEDING PARAGRAPH
(A "DISQUALIFYING DISPOSITION") OF ANY SHARES I PURCHASED UNDER THE PLAN. I
FURTHER AGREE THAT IF I DO NOT RESPOND WITHIN 30 DAYS OF THE DATE OF A
DISQUALIFYING DISPOSITION SURVEY DELIVERED TO ME BY CERTIFIED MAIL, THE COMPANY
MAY TREAT MY NONRESPONSE AS MY NOTICE TO THE COMPANY OF A DISQUALIFYING
DISPOSITION AND MAY COMPUTE AND REPORT TO THE INTERNAL REVENUE SERVICE THE
ORDINARY INCOME I MUST RECOGNIZE UPON SUCH DISQUALIFYING DISPOSITION.
I am familiar with the provisions of the Plan and agree to participate in
the Plan subject to all of its provisions. I understand that the Board of
Directors of the Company reserves the right to terminate the Plan or to amend
the Plan and my right to purchase stock under the Plan to the extent provided by
the Plan. I understand that the effectiveness of this Subscription Agreement is
dependent upon my eligibility to participate in the Plan.
Date: _______________________ Signature:___________________________________
17
<PAGE>
POWER INTEGRATIONS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
NAME (Please print): __________________________________________________________
(Last) (First) (Middle)
I hereby elect to withdraw from the Offering under Power Integrations, Inc.
1997 Employee Stock Purchase Plan (the "PLAN") which began on
_________________________, 19____ and in which I am currently participating (the
"CURRENT OFFERING").
ELECT EITHER A OR B BELOW:
[_] A. I elect to terminate immediately my participation in the Current
Offering and in the Plan.
I request that the Company cease all further payroll deductions from
my Compensation under the Plan (provided that I have given sufficient
notice prior to the next payday). I request that all payroll
deductions credited to my account under the Plan (if any) not
previously used to purchase shares under the Plan shall not be used to
---
purchase shares on the next Purchase Date of the Current Offering.
Instead, I request that all such amounts be paid to me as soon as
practicable. I understand that this election immediately terminates
my interest in the Current Offering and in the Plan.
[_] B. I elect to terminate my participation in the Current Offering and in
the Plan following my purchase of shares on next Purchase Date of the
Current Offering.
I request that the Company cease all further payroll deductions from
my Compensation under the Plan (provided that I have given sufficient
notice prior to the next payday). I request that all payroll
deductions credited to my account under the Plan (if any) not
previously used to purchase shares under the Plan shall be used to
purchase shares on the next Purchase Date of the Current Offering to
the extent permitted by the Plan. I understand that this election
will terminate my interest in the Current Offering and in the Plan
immediately following such purchase. I request that any cash balance
remaining in my account under the Plan after my purchase of shares be
paid to me as soon as practicable.
I understand that by making this election I am terminating my interest in
the Plan and that no further payroll deductions will be made (provided that I
have given sufficient notice prior to the next payday) unless I elect in
accordance with the Plan to become a participant in another Offering under the
Plan by filing a new Subscription Agreement with the Company.
Date:______________________________ Signature:_______________________________
18
<PAGE>
EXHIBIT 10.6
AMENDED TECHNOLOGY LICENSE AGREEMENT
------------------------------------
This Agreement is made on this 29th day of June, 1995 by and between POWER
INTEGRATIONS, INC., a corporation duly organized and existing under the laws of
the State of California, U.S.A., having its principal place of business at 411
Clyde Avenue, Mountain View, California 94043 ("PI"), and
MATSUSHITA ELECTRONICS CORPORATION, a corporation duly organized and
existing under the laws of Japan, having its principal place of business at 1-1
Saiwai-cho, Takatsuki-shi, Osaka-fu, 569 Japan ("MEC").
RECITALS
--------
A. PI is the owner and developer of certain integrated circuit process
technologies required to manufacture high voltage integrated circuits.
B. PI has no wafer fabrication facility and desires to obtain a cost
competitive foundry to manufacture wafers for PI, in order to provide a source
for the wafers PI requires, and to assure a long term supply of wafers.
C. MEC has wafer fabrication facilities in Japan and desires full
utilization and efficient operation of its wafer fabrication facilities.
D. MEC and PI desire to enhance the types of product available for sale
by each of them through complementary and cooperative product development
activity.
E. PI and MEC desire that PI license MEC to manufacture wafers for
certain integrated circuits, designed by either PI or MEC, using PI process
technology, for sale to PI and for sale by MEC as finished products in certain
geographic markets on the terms set forth in this Agreement.
F. Effective June 29, 1990, MEC and PI entered into a Technology License
Agreement (the "Prior License Agreement"), a Wafer Foundry Agreement (the "Prior
Foundry Agreement") and a Distribution Agreement.
G. The Prior License Agreement and the Prior Foundry Agreement will
expire, unless previously extended, on June 29, 1995.
H. MEC and PI desire to extend the Prior License Agreement on the terms
set forth in this Agreement.
I. MEC and PI intend to enter into an extension of the Prior Foundry
Agreement (the "Amended Foundry Agreement") at the same time that they enter
into this Agreement.
[*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
1
<PAGE>
J. MEC and PI desire to continue to promote their co-existence and co-
prosperity through international division of labor.
AGREEMENT
---------
PI and MEC, intending to be legally bound, hereby agree as follows:
ARTICLE I
---------
DEFINITIONS
-----------
For the purposes of this Agreement, the following terms shall have the
following meanings:
1.1 "Asian Territory" means the [*].
1.2 "Asian Company" means a corporation organized and existing under the
laws of any country in the Asian Territory and operating in such country.
1.3 "Baseline Process" means (a) the specific n-channel power technology
(nominally [*]) of PI and (b) extensions of the foregoing to higher voltages,
that is more fully described in Appendix A attached to the Prior License
----------
Agreement, and does not include PI's p-channel process technology. Reference to
the Baseline Process covers device structures that fit within (a) and (b) above,
but does not include other device structures.
1.4 "Confidential Information" means information relating to the subject
matter of this Agreement which is regarded as confidential or proprietary by one
party or the other; information received as a consequence of the rendering or
receiving of technical assistance under this Agreement and/or the Prior License
Agreement; information transferred during meetings between the parties relating
to this Agreement and/or the Prior License Agreement which is owned or
controlled by either party and which relates to its past, present or future
activities with respect to the subject matter of this Agreement if such
information is disclosed by one of the parties to the other party in written,
graphic, model or other tangible form or in the form of a computer program or in
a machine readable medium or any derivation thereof and is designated in writing
as confidential by an appropriate legend, together with the name of the party so
disclosing it, or, if such information is disclosed orally, which is identified
at the time of oral disclosure as confidential and which is reduced to written,
graphic, model, or other tangible form, marked as confidential and delivered by
the disclosing party within thirty (30) days after such oral disclosure;
provided, however, that "Confidential Information" shall not include any
information that PI is not permitted to disclose pursuant to its technology
license
[*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
2
<PAGE>
agreements and wafer supply agreements with AT&T Microelectronics, MagneTek,
Inc., and Oki Electric Industry Co., Ltd.
1.5 "Japanese Company" means a corporation organized and existing under
the laws of Japan and operating in Japan, other than a Subsidiary of a
corporation organized and existing under the laws of any other country.
1.6 "Mask Work" and "Semiconductor Chip Product" are defined as those
terms are defined in Section 901 of the Semiconductor Chip Protection Act, Title
17, United States Code.
1.7 "Matsushita Group" means MEC, Matsushita Electric Industrial Co., Ltd.
(MEI), a company that owns over fifty percent (50%) of the voting stock of MEC,
and their respective wholly owned subsidiaries and their respective subsidiaries
in which MEC or MEI owns, directly or indirectly, more than fifty percent (50%)
of the stock interest, or the maximum percentage of the stock interest that a
foreign investor may own, if equal to or less than fifty percent (50%), pursuant
to local laws and regula tions of any country, as of the Effective Date.
(Further, from time to time during the term of the Agreement, the definition of
"Matsushita Group" shall be extended to include certain corporation or entity
based upon the request of MEC and the written approval by PI.) It is explicitly
understood by the parties that Matsushita Electric Works ("MEW") and all of its
subsidiaries, in which MEW owns, directly or indirectly, more than fifty percent
(50%) of the stock interest, or the maximum percentage of the stock interest
that a foreign investor may own, if equal to or less than fifty percent (50%),
pursuant to local laws and regulations of any country, as of the Effective Date,
shall be included in the definition of "Matsushita Group".
1.8 "MEC Product" means any and every Semiconductor Chip Product designed
and released to production by MEC prior to and during the term of this
Agreement, incorporating or utilizing at least one of (i) the Baseline Process;
(ii) any Update to the Baseline Process made by PI or MEC; and (iii) any PI
Patents; provided, however, that any MEC improvement or derivative of a PI
Product will be deemed to be a MEC Product only if it is "substantially
different in functionality" (as defined below) from the PI Product from which it
was derived.
1.9 "PI Product" means any and every Semiconductor Chip Product designed
and released to production by PI prior to and during the term of this Agreement,
utilizing at least one of (i) the Baseline Process; (ii) any Update to the
Baseline Process made by PI or MEC; and (iii) any PI Patents; provided, however,
that any PI improvement or derivative of a MEC Product will be deemed to be a PI
Product only if it is "substantially different in functionality" (as defined
below) from the MEC Product from which it was derived.
1.10 "Substantially different in functionality" means that at least 50% of
the functional blocks of the derivative circuit are different from the
functional blocks of the circuit (the "original circuit") from which the
derivative circuit is derived; provided, however, that derivative circuits with
only some or all of the following
3
<PAGE>
changes will be deemed not to be substantially different in functionality from
the original circuits from which they were derived: [*].
1.11 "Product" without further qualification means, collectively, PI
Product and/or MEC Product.
1.12 "Restricted Product" means any Product covered by the Restricted
Patents.
1.13 "Net Sales" shall have the meaning provided in Section 5.3 below.
1.14 (a) "Patents" means letters patent, pending applications, utility
models, rights and privileges to or under letters patent and utility models in
existence prior to the expiration or earlier termination of this Agreement, to
the extent they relate to the Baseline Process or the design or manufacture of
Products made on the Baseline Process or any Updates to the Baseline Process.
(b) "PI's Patents" means Patents owned or controlled by PI during the
term of this Agreement, with respect to which and to the extent to which, and
subject to the conditions under which, PI shall have the right to grant
licenses, rights and privileges to licensees during the term of this Agreement;
it does not include, however, Patents with respect to which a license cannot be
granted excepting pursuant to an agreement which requires the payment to a third
party of royalties or other consideration measured by the use made of such
Patents, unless MEC requests licenses under such Patents and agrees in writing
to assume its fair share of such royalties or other consideration. PI
represents and warrants that a list of all PI's Patents as of the date of this
Agreement not already listed in Appendix C to the Prior License Agreement is set
forth in Appendix C - Amended attached hereto.
--------------------
(c) "Restricted Patents" means all PI Patents relating to
semiconductor circuit design or system level architectures issued or first
applied for after [*], other than PI Patents relating to the
Baseline Process and Updates to the Baseline Process such as improvements to
high voltage device structures and improvements to semiconductor processing.
(d) "MEC's Patents" means Patents owned or controlled by MEC during
the term of this Agreement, with respect to which and to the extent to which,
and subject to the conditions under which, MEC shall have the right to grant
licenses, rights and privileges to licensees during the term of this Agreement;
it does not include, however, Patents with respect to which a license cannot be
granted excepting pursuant to an agreement which requires the payment to a third
party of royalties or other consideration measured by the use made of such
Patents, unless PI requests licenses under such Patents and agrees in writing to
assume its fair share of such
[*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
4
<PAGE>
royalties or other consideration. MEC represents and warrants that a list of
all MEC's Patents as of the date of this Agreement not already listed in
Appendix D to the Prior License Agreement is set forth in Appendix D - Amended
--------------------
attached hereto.
1.15 "Subsidiary" of a company means a corporation or other legal entity
(i) the majority of whose shares or other securities entitled to vote for
election of directors (or other managing authority) is now or hereafter
controlled by such company either directly or indirectly; or (ii) which does not
have outstanding shares or securities but the majority of whose ownership
interest representing the right to manage such corporation or other legal entity
is now or hereafter owned and controlled by such company either directly or
indirectly; but any such corporation or other legal entity shall be deemed to be
a Subsidiary of such company only as long as such control or ownership and
control exists.
1.16 "Update" shall mean:
(a) with respect to a Product, a modification or addition made during
the term of this Agreement to effect a cost improvement or to correct the design
or to improve the specific Product to meet the specifications of such Product
or, if no specifications are set forth, to meet data sheet specifications, and
(b) with respect to the Baseline Process, any modification or change
during the term of this Agreement to an item of information included in Appendix
A to the Prior License Agreement, which improves or increases the efficiency,
speed or yield of the Baseline Process.
Both parties hereby understand that the Updates shall include any and all
modifications or changes of copyrights or Mask Works in connection with the
Products or Baseline Process.
1.17 "Wafers" means silicon wafers for Products.
1.18 "Work" means all works of authorship as defined in Sections 101, 102
and 103 of the Copyright Act, Title 17, United States Code.
1.19 "Effective Date" shall mean the date of the execution hereof by both
parties or the date of approval by the respective governmental authority, if
necessary, whichever comes later.
ARTICLE II
----------
TRANSFER OF INFORMATION
-----------------------
2.1 Information Transfer. MEC and PI shall disclose and provide to each
--------------------
other any and all available information reasonably necessary in order for the
other party to obtain the full benefit of the licenses granted hereunder.
5
<PAGE>
2.2 Update Information Transfer. During the term of this Agreement, each
---------------------------
party shall disclose and provide to the other any Updates which it develops
regarding a Product or the Baseline Process. Any Update relating to a Product
shall be disclosed and provided to the other as soon as practically available
but within two (2) months after the fabrication of functionally operative
silicon at the latest. Any Update relating to the Baseline Process shall be
disclosed and provided to the other as soon as practically available but within
two (2) months of the incorporation of such Update into the developing party's
manufacturing process at the latest.
2.3 Documentation. Documentation furnished hereunder by MEC and PI has
-------------
been, or will be, prepared and compiled with reasonable care. The liability of
the party providing documentation is limited to replacing such documentation,
free from the error or deficiency in question, with reasonable promptness after
notice thereof from the receiving party, at no additional charge to the
receiving party.
2.4 Periodic Exchange of Information. It is contemplated and agreed by
--------------------------------
both parties that current information transfer by informal meetings and other
communications by and between the parties' technical representatives will be
encouraged and will take place on a regular basis.
The parties hereby confirm that any information transferred even by the
informal meetings and other communications by and between the parties' technical
representatives shall fall within the scope of the Confidential Information in
the event such information satisfies the definition thereof as contemplated in
Section 1.4.
ARTICLE III
-----------
CONFIDENTIAL INFORMATION
------------------------
3.1 Confidentiality Obligation.
--------------------------
(a) Each party agrees that the Confidential Information of the other
party which it receives pursuant to this Agreement is received only for its own
use and only to the extent provided in this Agreement. Each party agrees to
keep the Confidential Information confidential for a period extending for [*]
after the earlier of the expiration date of the Prior License Agreement and the
date of this Agreement. Neither party shall be liable for the unauthorized use
or disclosure of such information provided (i) such party exercises at least the
same degree of care as the receiving party normally exercises to protect against
the unauthorized use or disclosure of its own confidential or proprietary data
and information, and (ii) such degree of care affords at least reasonable
protection.
(b) Either party may disclose Confidential Information of the other
party to one or more third parties for the sole purpose and to the extent
reasonably necessary to have such third parties provide the disclosing party
with foundry, assembly and testing services relating to Semiconductor Chip
Products in accordance with the terms of the licenses set forth in Sections 4.1
and 4.2; provided that such
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disclosures shall be made under terms and conditions which protect the
confidentiality of the disclosed information upon the terms, and for a period,
which is not less than that contained in this Agreement.
3.2 Confidentiality Exception. Notwithstanding the provisions of Section
-------------------------
3.1, nothing received by the parties hereunder shall be construed as
Confidential Information which prior hereto, or during the term of this
Agreement, is:
(a) published or otherwise made available to the public other than by
a breach of this Agreement by such party hereto, or
(b) rightfully received by one party hereto from an independent third
party without restrictions on disclosure, or
(c) approved in writing for release by the party designating the
information as Confidential Information, or
(d) except as otherwise provided in Section 3.4 below, known to or
independently developed by the party receiving the Confidential Information
without reference to such Confidential Information.
3.3 Other Disclosure. Neither party shall be liable for disclosure of any
----------------
Confidential Information if such disclosure is:
(a) in response to a valid order of a court or other government body
or any political subdivision thereof; provided, however, that the receiving
party shall first make a good faith effort to obtain a protective order
requiring that the Confidential Information so disclosed be used only for the
purpose for which such protective order is issued; or
(b) in connection with a patent application the subject matter of
which patent application belongs to the receiving party and which the receiving
party discloses to an appropriate patent agent and/or patent office or court of
any country of the world in pursuance thereof; or
(c) otherwise required by law.
3.4 Information Already Known. If a party receives information that the
-------------------------
disclosing party is treating as Confidential Information and which is already
known to the receiving party, such information shall nonetheless be Confidential
Information for the purposes of this Agreement unless the receiving party
demonstrates by reasonable evidence within a reasonable time after the
information is disclosed that such information was already known to it before it
was disclosed by the disclosing party.
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ARTICLE IV
----------
RIGHTS AND LICENSES
-------------------
4.1 PI Licenses.
-----------
(a) Subject to all the terms and conditions of this Agreement, PI
hereby grants to MEC, for the term of this Agreement, a non-transferable, non-
assignable right and license to use PI's Confidential Information transferred
hereunder or under the Prior License Agreement relating to Products, the
Baseline Process and Updates, including all such information designated as
proprietary or confidential:
(i) to design MEC Products;
(ii) to improve and make derivatives of PI Products;
(iii) to make Wafers and Products at manufacturing facilities of
MEC or MEC's Subsidiaries;
(iv) to have Products assembled;
(v) to use, sell, lease or otherwise dispose of:
(1) Products to the Matsushita Group worldwide;
(2) Products to any and all companies established or to be
established under the laws of Japan;
(3) Products to any and all Subsidiaries of Japanese
Companies in the Asian Territory;
(4) Products other than Restricted Products to Asian
Companies in the Asian Territory; and
(vi) to sell Wafers and Products to PI.
This license will be exclusive to the extent provided in Section 4.1(e)
below; otherwise it is non-exclusive.
(b) Subject to all the terms and conditions of this Agreement, PI
hereby grants to MEC, for the term of this Agreement, a non-transferable, non-
assignable, indivisible right and license under the PI Patents:
(i) to design MEC Products;
(ii) to improve and make derivatives of PI Products;
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(iii) to make Wafers and Products at manufacturing facilities of
MEC or MEC's Subsidiaries;
(iv) to have Products assembled;
(v) to use, sell, lease or otherwise dispose of:
(1) Products to the Matsushita Group worldwide;
(2) Products to any and all companies established or to be
established under the laws of Japan;
(3) Products to any and all Subsidiaries of Japanese
Companies in the Asian Territory;
(4) Products other than Restricted Products to Asian
Companies in the Asian Territory; and
(vi) to sell Wafers and Products to PI.
This license will be exclusive to the extent provided in Section 4.1(e)
below; otherwise it is non-exclusive.
(c) MEC will not sell, lease or otherwise dispose of Products to any
of the international procurement offices located in Japan of companies
established under the laws of countries other than Japan unless, in the case of
Products other than Restricted Products, MEC is advised by the customer, has a
reasonable basis to believe, and does actually believe that the final
destination of such Products is an Asian Company in the Asian Territory.
(d) Notwithstanding anything to the contrary contained herein, in
case Japanese Companies wish to procure Products from MEC outside the
territories where MEC is allowed to sell Products under this Agreement and PI is
unable to satisfy such customer's product quality and volume requirements, both
parties shall negotiate the terms and conditions under which MEC shall be
entitled to supply Products other than Restricted Products to such customers.
(e) During the term of this Agreement, except as otherwise provided
in PI's existing agreements with [*], as the same may be amended from time to
time, PI will not grant to any companies established or to be established under
the laws of Japan and any Subsidiaries of Japanese Companies worldwide other
than MEC a whole or any part of the rights and licenses which MEC is granted
hereunder, including, but not limited to, the right to use the Baseline Process,
and any such rights and licenses granted to [*] in the future shall not be more
favorable, taken as a whole, than those granted to MEC hereunder.
Notwithstanding the foregoing, in case MEC should fail to supply Wafers to PI in
material respect to satisfy PI's requirement in accordance with the terms of the
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Amended Foundry Agreement, or MEC should fail to comply with the terms of this
Agreement in any material respect, PI will be entitled, subject to advance
written notice to MEC and consultation with MEC, in case such failure should not
be cured within sixty (60) days after PI's written notice, to grant any such
rights and licenses to other companies established or to be established under
the laws of Japan, without any infringement of MEC's proprietary rights.
(f) MEC shall not have the right to sell, lease or otherwise dispose
of Wafers or Products as die, wafers or packaged units for purposes of resale by
any third party as Semiconductor Chip Products under any third party's own brand
label or marking.
(g) MEC and any other licensees under this Agreement shall not have
any rights under this Agreement or the licenses granted herein to use any
Confidential Information of PI or Updates of PI delivered to MEC on or after
June 29, 1995, or any PI Patents first owned or controlled by PI on or after
June 29, 1995, to design, develop, manufacture, use, sell, lease or otherwise
dispose of any products for any application for energizing light.
(h) Although MEC's Subsidiaries are not otherwise granted licenses
under this Agreement, any MEC Subsidiary outside Japan that has manufactured or
assembled Products as permitted by this Section 4.1 may make, sell, lease or
otherwise dispose of such Products to the same extent MEC is licensed to do so
under Sections 4.1 and 4.3 of this Agreement. MEC shall assure that each MEC
Subsidiary that makes, sells, leases or otherwise disposes of Products pursuant
to this Section 4.1(h) does so in compliance with all applicable provisions of
this Agreement. MEC shall be responsible for any noncompliance by any MEC
Subsidiary to the same extent as if MEC itself were not in compliance.
4.2 MEC License
-----------
(a) Subject to all the terms and conditions of this Agreement, MEC
hereby grants to PI a perpetual, paid-up, worldwide, non-exclusive, non-
assignable (except as otherwise provided in Section 9.4 below), non-
transferable right and license to use MEC's Confidential Information transferred
hereunder or under the Prior License Agreement relating to Products, the
Baseline Process, and Updates, including all such information designated as
proprietary or confidential, to design, make and have made Products, other than
MEC Products, and to use, sell, lease or otherwise dispose of such Products.
(b) Subject to all the terms and conditions of this Agreement, MEC
hereby grants to PI a perpetual, paid-up, worldwide, non-exclusive, non-
assignable (except as otherwise provided in Section 9.4 below), non-
transferable, indivisible right and license under the MEC Patents to make, have
made, use, sell, lease or otherwise dispose of Products, other than MEC
Products.
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(c) Subject to all of the terms and conditions of this Agreement, MEC
hereby grants to PI, for the term of this Agreement, a worldwide, non-exclusive,
non-assignable (except as otherwise provided in Section 9.4 below),
nontransferable right and license to use MEC's Confidential Information
transferred hereunder or under the Prior License Agreement relating to Products,
the Baseline Process, and Updates, including all such information designated as
proprietary or confidential, to make and have any companies other than Japanese
Companies make MEC Products and derivatives and improvements of MEC Products and
to use, sell, lease or otherwise dispose of such MEC Products and derivatives
and improvements of MEC Products worldwide.
(d) Subject to all of the terms and conditions of this Agreement, MEC
hereby grants to PI, for the term of this Agreement, a worldwide, non-exclusive,
non-assignable (except as otherwise provided in Section 9.4 below),
nontransferable, indivisible right and license under the MEC Patents to make,
have any companies other than Japanese Companies make, use, sell, lease or
otherwise dispose of MEC Products and derivatives and improvements of MEC
Products.
(e) PI shall not have any rights under this Agreement or the licenses
granted herein to use any Confidential Information of MEC or Updates of MEC
delivered to PI on or after June 29, 1995, to design, develop, manufacture, use,
sell, lease or otherwise dispose of any products for any application for
energizing light.
(f) Although PI's Subsidiaries are not otherwise granted licenses
under this Agreement, any PI Subsidiary outside Japan may design, make, sell,
lease or otherwise dispose of Products to the same extent PI is licensed to do
so under Sections 4.2 and 4.3 of this Agreement. PI shall assure that each PI
Subsidiary that designs, makes, sells, leases or otherwise disposes of Products
pursuant to this Section 4.2(f) does so in compliance with all applicable
provisions of this Agreement. PI shall be responsible for any noncompliance by
any PI Subsidiary to the same extent as if PI itself were not in compliance.
4.3 Copyright and Mask Work Licenses. Subject to all of the terms and
--------------------------------
conditions of this Agreement, MEC and PI each grant to the other non-exclusive,
non-assignable (except as otherwise provided in Section 9.4 below), non-
transferable, royalty-free licenses under its copyrights and Mask Works to make
reproductions in copies and to distribute, import, export and sell Products and
to distribute such copies and Products to the extent necessary to manufacture,
use, lease, sell or otherwise dispose of Products as otherwise permitted by this
Article IV; provided, however, that each party shall take the necessary actions,
including but not limited to the affixing of copyright and Mask Work notices, to
protect the copyrights and Mask Works of the other party.
4.4 Other Rights Reserved. Anything in this Agreement to the contrary
---------------------
notwithstanding, no license is herein granted, and no act or acts hereunder
shall be construed as or result in conveying any license or right to either
party or to any third party expressly or by implication, estoppel or otherwise,
excepting the licenses and
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rights expressly granted and agreed to be granted under Article IV of this
Agreement.
4.5 Ownership. PI and MEC hereby acknowledge and agree that any Update or
---------
other improvements to Products attained by either party under this Agreement
shall be owned by the party making such Updates or other improvements and
subject to the licenses granted herein.
ARTICLE V
---------
COMPENSATION
------------
5.1 Product Royalties Payable to PI.
-------------------------------
(a) MEC shall pay PI royalties, in Japanese yen, on all units of
Product made by MEC and MEC's Subsidiaries and used, leased, sold or otherwise
disposed of by MEC and MEC's Subsidiaries, other than to PI, at the following
rates based upon the Net Sales of such Products:
Royalty Rate
------------
Until the amount of the cumulative [*]
Net Sales on or after June 29, 1995 of the Net Sales
reaches [*]
After the amount of the cumulative [*]
Net Sales on or after June 29, 1995 of the Net Sales
exceeds [*]
(b) Product shall be considered as used, sold, leased or disposed of,
as the case may be, when billed out, delivered, shipped or mailed to a customer
or lessee, or when first used or first set aside for future use by the
Matsushita Group, whichever shall first occur. Product disposed of as scrap
shall not be considered as Product manufactured under this Agreement.
5.2 Product Royalties Payable to MEC.
--------------------------------
(a) PI shall pay MEC royalties, in Japanese yen, on all units of MEC
Product used, leased, sold or otherwise disposed of by PI and PI's Subsidiaries,
other than to MEC, at the following rates based upon the Net Sales of such MEC
Products:
Royalty Rate
------------
Until the amount of the cumulative [*]
Net Sales on or after June 29, 1995 of the Net Sales
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reaches [*]
After the amount of the cumulative [*]
Net Sales on or after June 29, 1995 of the Net Sales
exceeds [*]
(b) MEC Product shall be considered as used, sold, leased or disposed
of, as the case may be, when billed out, delivered, shipped or mailed to a
customer or lessee, or when first used or first set aside for future use by PI
or any of its Subsidiaries, whichever shall first occur. MEC Product disposed of
as scrap shall not be considered as Product manufactured under this Agreement.
5.3 Determination of "Net Sales"
---------------------------
(a) "Net Sales" of Product shall be determined as follows:
(i) In respect of Product in the form of packaged, tested product
or as die or wafers sold in normal, arm's length, commercial transactions
between parties which are not in affiliation, the Net Sales shall be the
aggregate of the genuine selling prices at which customers are billed in the
usual course of business for such Product, without any deductions or credits
other than those determined in accordance with Section 5.3(b), if any.
(ii) In respect to Product in the form of packaged, tested product
or as die or wafers used, leased or otherwise disposed of, or sold otherwise
than in normal, arm's length, commercial transactions between parties which are
not in affiliation, the Net Sales shall be the aggregate of the genuine selling
prices of the same quantities of similar or substantially similar Product which
are sold in normal, arm's length, commercial transactions between parties which
are not in affiliation, or, if there be no similar or substantially similar
Product so sold, then the fair market value thereof, without any deductions
other than those determined in accordance with Section 5.3(b), if any.
(b) In determining its Net Sales, a party may deduct from the genuine
selling price, equivalent thereof or fair market value, as the case may be, of
product, the amount of any sales, excise or other taxes, as well as any packing,
freight and transportation, payable by the party in respect of any such Product
to the extent that any such amount is included in the genuine selling price,
equivalent thereof or fair market value, as the case may be, of such Product and
is billed separately by the party to its customers. Each party shall be allowed
to take as a credit in determining Net Sales, (i) customary trade and quantity
discounts actually allowed, and (ii) allowances or credits to customers on
account of rejections or returns.
(c) MEC warrants that sales of the Products from MEC to any company in
the Matsushita Group shall be priced as though such company was a
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third party customer and that the selling prices between MEC and such company
will be determined in normal arm's length transaction.
5.4 Certification of Royalties; Audit Rights.
----------------------------------------
(a) Within two (2) months after, and as of March 31, June 30,
September 30 and December 31 of each year during the period MEC is obligated to
pay royalties pursuant to this Agreement, MEC shall furnish PI with a written
statement certified by an officer of MEC specifying (i) the number of units of
each kind of Product used, sold, leased, or otherwise disposed of by MEC during
the quarter ending such March 31, June 30, September 30 and December 31, and
with respect to which compensation is payable under this Agreement, (ii) the
aggregate of the Net Sales of each such kind of such Product, (iii) the total
net compensation payable for reach such kind of such Product pursuant to this
Agreement. At the time of furnishing such statements, MEC shall also make the
payments prescribed therefor in Section 5.1.
(b) Within two (2) months after, and as of, each March 31, June 30,
September 30 and December 31 of each year during the period PI is obligated to
pay royalties pursuant to this Agreement, PI shall furnish MEC with a written
statement certified by an officer of PI specifying (i) the number of units of
each kind of MEC Product under PI Label used, sold, leased, or otherwise
disposed of by PI during the quarter ending such March 31, June 30, September 30
and December 31, and with respect to which compensation is payable under this
Agreement, (ii) the aggregate of the Net Sales of each such kind of such
Product, (iii) the total net compensation payable for each such kind of such
Product pursuant to this Agreement. At the time of furnishing such statements,
PI shall also make the payments prescribed therefor in Section 5.2.
(c) A similar statement shall be rendered and payment made within two
(2) months after, and as of, the date of any termination of this Agreement
covering the period from the end of that covered by the last preceding statement
to such date of termination. Such statement and payment shall include all
Product manufactured prior to such date of termination but not covered by prior
statements and payments, which Product shall be considered as sold as of such
date of termination.
(d) In the event that any payments under this Agreement by either
party are taxable by the government of Japan/United States, whichever
applicable, and such tax is required to be withheld from the payment to the
other party, the party to make the payment shall deduct such amount from the
payment to the receiving party to the extent permitted under U.S./Japan Income
Tax Convention and shall pay such tax on behalf of the receiving party. In such
event, the party to make payment shall obtain and transmit to the receiving
party the proper tax receipt evidencing the payment of such tax.
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(e) Each party shall keep, notwithstanding any termination or the
expiration of this Agreement, true and accurate records, files and books of
account containing all the data reasonably required for the full computation and
verification of the amounts to be paid and the information to be given in the
statements provided hereunder. Each party shall, during usual business hours,
permit certified public accountants designated by the other party, at the
requesting party's expense and by prior arrangement, and not more than once a
year, adequately to inspect the same for the sole purpose of determining the
amounts payable pursuant to this Article V. Such record need not be retained by
each party beyond three (3) years from the date on which the royalties hereunder
becomes due.
5.5 PI and MEC will each exert reasonable efforts to assert their rights
under law to protect the Baseline Process against infringement by others.
ARTICLE VI
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
6.1 Representations and Warranties. PI and MEC each represents that: it
------------------------------
has the right to grant the rights and licenses granted under this Agreement, to
transfer the information transferred under this Agreement, and to provide the
technical assistance called for; that its execution, delivery and performance of
this Agreement have been duly authorized by its Board of Directors and any other
necessary corporate action; and that the terms and conditions of this Agreement
do not violate its Articles of Incorporation or Bylaws (or their equivalent) and
do not conflict with any other material agreement to which it is a party or by
which it is bound.
6.2 Certain Disclaimers.
-------------------
(a) Nothing contained in this Agreement shall be construed as (i) a
warranty or representation by either party as to the validity or scope of any
Patents; or (ii) a warranty or representation that any manufacture, sale, lease,
use, or other disposition hereunder will be free from infringement of Patents
other than those under which, and to the extent to which, licenses are granted
hereunder; or (iii) a warranty or representation that any product can be
manufactured without infringing the patents or other proprietary rights of third
parties; or (iv) an agreement to bring or prosecute actions or suits against
third parties for infringement or conferring any right to bring or prosecute
actions or suits against third parties for infringement; or (v) conferring any
right to use in advertising, publicity, or otherwise, any trademark, trade name
or name or any contraction, abbreviation or simulation thereof, of either party
(provided, however, that PI may identify MEC as a foundry and second source for
PI's products); or (vi) conferring by implication, estoppel or otherwise upon
any party licensed hereunder, any license or other right under any Patent or
other right except the licenses and rights expressly granted hereunder; or (vii)
a warranty that
15
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one party shall be able to make successfully any products using the other
party's technical information; or (viii) that the receiving party will be able
to use the technology without infringing patents or other rights of third
parties.
(b) EXCEPT AS OTHERWISE EXPRESSLY STATED IN THIS AGREEMENT, NEITHER
PARTY MAKES ANY WARRANTY AS TO THE ACCURACY, SUFFICIENCY OR SUITABILITY FOR THE
OTHER PARTY'S USE OF ANY TECHNICAL INFORMATION OR ASSISTANCE PROVIDED HEREUNDER,
NOR FOR THE QUALITY OF ANY PRODUCT OR PROCESS MADE HEREUNDER.
ARTICLE VII
-----------
EXPORT CONTROL
--------------
7.1 Technical Data.
--------------
(a) Each party hereby assures the other that it will not, without
prior authorization, if required, of the Office of Export Administration, U.S.
Department of Commerce, 14th and Constitution Ave., N.W., Washington, D.C.
20230, export or reexport (as defined in Section 779.1 (b)-(c) of the Export
Administration Regulations - "Regulations" - and any amendments thereto) the
technical data covered thereby. PI shall inform MEC in writing of the technical
data restricted under such Regulations as well as its restricted country group
upon PI's disclosure or provision of technical information.
(b) Other Restrictions. In exercising its rights under this
------------------
Agreement, each party agrees to comply strictly and fully with all export
controls imposed on Products, by any country or organization or nations within
whose jurisdiction each party operates or does business. Each party agrees not
to export or permit export of Products or any related technical data or any
direct product of any related technical data, without complying with the export
control laws in the relevant jurisdiction.
(c) Each party shall not export the Product to any country designated
as "Countries against which the sanctions should be taken" by certain
resolutions of the Security Council of the United Nations regarding the
sanctions against certain countries, as long as such resolutions remain valid
and effective. For purposes of this Agreement, any re-export in violation of
such resolutions by a customer of either MEC or PI will not be considered to be
an export in violation of such resolutions by MEC or PI, as the case may be, so
long as MEC or PI, as the case may be, did not knowingly participate in such re-
export.
(d) During and after the term of this Agreement, to the extent the
same practically is within its control, each party shall not sell, lease or
otherwise dispose of, directly or indirectly, any Product to customers whom such
party knows intend to make use of the Product for Military Purposes (defined
hereinbelow). For the purpose of this Agreement, "Military Purposes" means the
design, development,
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manufacture or use of any weapons, including without limitation nuclear weapons,
biological weapons, chemical weapons and missiles.
(e) In the event either party violates the provision of this Section
7, the non-violating party shall have the right to require reasonable written
assurances from the violating party that such violation, whether or not past
incidents of violation can be cured, will not continue in the future, and if the
violating party does not deliver such assurances to the non-violating party
promptly after its request, the non-violating party may suspend the performance
of its obligations under this Agreement until such time as it receives such
assurances, without any prejudice to the rights and remedies which the non-
violating party may have under this Agreement. In the event that such assurance
is not delivered to the non-violating party within three (3) months after
request, the non-violating party shall have the right to terminate forthwith,
without any prejudice to the rights and remedies which it may have hereunder,
this Agreement, by giving a written notice to the violating party.
ARTICLE VIII
------------
EXPIRATION AND TERMINATION
--------------------------
8.1 Term of Agreement. This Agreement shall become effective as of the
-----------------
Effective Date and shall continue in full force and effect, unless sooner
terminated as elsewhere provided in this Agreement, until the fifth (5th)
anniversary of the Effective Date, at which time it shall expire.
8.2 Renewal.
-------
(a) If this Agreement has not earlier terminated, the parties agree to
negotiate in good faith, beginning on the [*] anniversary of the Effective Date
of this Agreement, for the continuation on mutually agreeable terms of the
licenses, royalty arrangements, manufacturing commitments and other terms and
conditions included in this Agreement and the Amended Wafer Foundry Agreement.
In reviewing and deciding the royalty rates for such re-extended term, both
parties shall take into consideration Section 8.4 below.
(b) Both parties hereby acknowledge and confirm that, except for the
running royalties accrued under the Prior License Agreement prior to the end of
the term thereof, the license fees and royalty amount for any and all the
information furnished and the rights granted under the Prior License Agreement
shall be fully paid-up and no additional royalty shall be payable to PI for the
use thereof by MEC.
(c) Both parties hereby further acknowledge and confirm that, except
the running royalties payable hereunder, including, without limitation, all
royalties payable pursuant to Section 8.4 hereof, the royalty amount for any and
all the information furnished and the rights granted under this Agreement shall
be fully
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paid-up and no additional royalty would be payable to PI for the use thereof by
MEC.
8.3 Termination
-----------
(a) Except as otherwise set forth in this section, if either party
shall at any time default, without any material causative fault on the part of
the other party, by failing to substantially perform any material provision of
this Agreement or the Amended Foundry Agreement, and such default shall not be
cured within sixty (60) days after written notice to it from the other party
specifying the nature of the default, the non-defaulting party shall have the
right to terminate this Agreement at any time thereafter by giving written
notice of termination to the other party, and upon the giving of such notice of
termination this Agreement shall terminate immediately. The party receiving
notice shall have the right to cure any such default up to the date of
termination. In the event either party defaults by failing to substantially
perform any material provision of this Agreement or the Amended Foundry
Agreement, the other party shall have the right to suspend further transfers of
information, including Updates, by it and shall not be obligated to resume such
transfers until such default has been cured.
(b) Each party shall have the right to terminate this Agreement by
giving written notice of termination to the other at any time upon or after, (i)
the filing by the other party of a petition in bankruptcy or insolvency, or (ii)
upon or after the filing of any voluntary or involuntary petition or answer
seeking reorganization, readjustment or arrangement of the other party's
business under any law relating to bankruptcy or insolvency, or (iii) upon or
after the appointment of a receiver for all or substantially all of its
property, or (iv) upon or after the making by the other party of any assignment
or attempted assignment for the benefit of creditors, or (v) upon or after the
institution of any proceedings for the liquidation or winding up of the other
party's business or for the termination of its corporate charter; and this
Agreement shall terminate automatically on the thirtieth (30th) day after such
notice of termination is given, without further notice, demand or opportunity to
cure.
(c) All rights and licenses granted under or pursuant to this
Agreement by PI to MEC are, and shall otherwise be deemed to be, for purposes of
Section 365(n) of the U.S. Bankruptcy Code (the "Code"), licenses of
"intellectual property" as defined under Section 101(56) of the Code. The
parties agree that MEC, as a licensee of such rights and licenses, shall retain
and may fully exercise all of its rights and elections under the Code. The
parties further agree that in the event that any proceeding shall be instituted
by or against PI seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding-up, reorganization, arrangement, adjustment protection,
relief or composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking an entry of an
order for relief or the appointment of a receiver trustee or other similar
official for it or any substantial part of its property or it shall take any
action to authorize any of the foregoing actions (each, a "Proceeding"), MEC
shall
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have the right to retain and enforce its rights under this Agreement, including
but not limited to the following rights:
(i) the right to a complete duplicate of (or complete access
to, as appropriate) all relevant license materials and all embodiments of
such, and the same, if not already in MEC's possession, shall be promptly
delivered to MEC upon written request therefor by MEC (1) upon any such
commencement of a Proceeding, unless PI elects to continue to perform all of
its obligations under this Agreement, or (2) if not delivered under (1) above,
upon the rejection of this Agreement by or on behalf of PI;
(ii) the right to continue to use the relevant license
materials and all versions derivative thereof, and all documentation and other
supporting material related thereto, in accordance with the terms and
conditions of this Agreement; and
(iii) the right to obtain from PI all documentation and other
supporting materials related to the relevant license materials and all versions
and derivatives thereof.
8.4 Consequences of Expiration.
--------------------------
(a) Upon expiration of this Agreement, all rights and obligations of
the parties hereunder shall cease and determine, except for rights and
obligations which, by the terms of this Agreement, continue after expiration or
earlier termination of this Agreement and except that the expiration of this
Agreement shall not release either party from any of its obligations accrued
hereunder prior to the time expiration becomes effective.
(b) Without limiting the generality of the foregoing, upon expiration
of this Agreement, the rights and licenses granted by the parties to each other
for the term of this Agreement in Article IV hereof shall terminate immediately;
provided, however, that:
(i) subject to the continuing payment of royalties to be agreed
upon by both parties, MEC shall retain the licenses granted by PI under Article
IV; and
(ii) subject to the continuing payment of royalties to be agreed
upon by both parties, PI shall retain the licenses granted by MEC under Article
IV.
In determining the amount of royalties after the expiration of the
Agreement, the market competitiveness and the sales forecast of the Products
after the expiration must be taken into consideration, but in any case, the
royalty rate to be paid to the other will not exceed [*] per annum and the
royalty amount shall be deemed fully paid-up in [*] after the expiration of this
Agreement (the "Additional Term").
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19
<PAGE>
Upon the expiration of the Additional Term, so long as the parties have
performed their respective obligations hereunder during such Additional Term,
the rights and licenses granted under Article IV of the Agreement shall be fully
paid-up and both parties shall have free right to utilize any information
furnished and rights granted under this Agreement on or before such expiration
date, without any further payments, subject to continuing confidentiality
obligations as provided in Article III of this Agreement and compliance with the
terms of the rights and licenses granted under Article IV of the Agreement.
It is confirmed by the parties that, after the expiration of this
Agreement, neither party shall be obligated to continue to furnish any
information nor grant its Patents obtained after the expiration date to the
other party.
8.5 Consequences of Termination.
---------------------------
(a) Upon termination of this Agreement, all rights and obligations of
the parties hereunder shall cease and determine as from such date of
termination, except for rights and obligations which, by the terms of this
Agreement, continue after such termination and except that no termination of
this Agreement shall release either party from any of its obligations accrued
hereunder but not yet performed prior to the time such termination becomes
effective.
(b) Notwithstanding the above Section 8.5(a);
(i) in the event of termination by PI of this Agreement pursuant
to Section 8.3 above, the rights and licenses granted by the parties to each
other under Article IV shall terminate upon such termination, provided, however,
that MEC shall retain the rights to manufacture, use, sell or otherwise dispose
of the Products which have been ordered by its customers or any inventory of the
Products at the time of termination subject to the royalty payment by MEC to PI
pursuant to Section 5.1(a) hereof.
(ii) in the event of termination by MEC of this Agreement pursuant
to Section 8.3 above, the rights and licenses granted to MEC under Article IV of
the Agreement shall become perpetual, fully paid-up and irrevocable upon payment
by MEC to PI of all royalties that MEC would owe PI during the [*] period
following the termination date, if such termination had not occurred.
ARTICLE IX
----------
MISCELLANEOUS AND GENERAL PROVISIONS
------------------------------------
9.1 Alternate Sources. Subject to the terms of this Agreement, PI and MEC
-----------------
may act as alternate sources for the Products and advise their customers and
distributors of each other's ability to do so. Except as otherwise expressly
set forth in the Amended Foundry Agreement, if at all, nothing in this Agreement
or the
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20
<PAGE>
Amended Foundry Agreement shall be interpreted as requiring either party to manu
facture specific products nor as requiring either party to act as an alternate
source for the other.
9.2 Publicity. PI and MEC shall agree on the content and release of a
---------
press announcement relating to the transactions contemplated by this Agreement
and the Amended Foundry Agreement. Neither party shall, however, except as, to
the extent, and in the manner, required by law or regulation, disclose to any
third party any of the specific terms or conditions, including payment terms,
under which the transactions contemplated by this Agreement are to be carried
out.
9.3 Possible Future Cooperation. PI agrees to consider MEC for the
---------------------------
license of other technology developed by PI in the future before licensing such
future technology to other parties. However, nothing in this Agreement shall be
interpreted as requiring the parties to enter into any future agreements.
9.4 Successors and Assigns; No Assignment. This Agreement, and rights and
-------------------------------------
obligations herein, shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, provided that except
as set forth below neither party shall assign this Agreement or any of its
rights hereunder without the prior written consent of the other Party.
Notwithstanding any other provision of the Agreement, PI may without the prior
consent of MEC assign all of its rights under this Agreement to a purchaser of
all or substantially all of PI's stock or assets or to a third party
participating in a merger or other corporate reorganization in which PI is a
constituent corporation. As a condition of any assignment of this Agreement or
any of the rights granted hereunder, any successor shall expressly assume in
writing the performance of all terms and conditions of this Agreement to be
performed by the assigning party including such party's obligations hereunder
with respect to the protection of Confidential Information. In the event of
such assignment, the other party shall reserve the right to terminate this
Agreement on its sole discretion; provided, however, that any such termination
by MEC with respect to an assignment by PI resulting from a sale of PI's assets
or a merger or other corporate reorganization involving PI, as described above,
shall have the consequences set forth in Section 8.5(b)(ii) above.
9.5 No Rights to Marks, Etc. Except as provided in Section 9.2 above,
-----------------------
nothing contained in this Agreement shall confer any rights to use in
advertising, publicity, or otherwise, any trademarks, trade names, or any
contraction, abbreviation or simulation thereof, of either party, provided such
restriction shall not apply to identification numbers and descriptions of
devices and software which are the subject matter of this Agreement.
9.6 No Joint Venture. Nothing contained in this Agreement shall be
----------------
construed as:
(a) creating any partnership, joint venture or other similar
relationship between PI and MEC; or
21
<PAGE>
(b) obligating either party to commercially produce or to continue to
commercially produce, any solid state device of any type whatsoever, or any
parts or components thereof (except as provided in the Amended Foundry
Agreement).
9.7 Force Majeure. Anything contained in this Agreement to the contrary
-------------
notwithstanding, the obligations of the parties hereto shall be subject to all
laws, both present and future, of any government having jurisdiction over the
parties hereto, and to orders, regulations, directions or requests of any such
government, or any department, agency or corporation thereof, and to war, acts
of public enemies, strikes or other labor disturbances, fires, floods,
earthquakes, acts of God, or causes of like or different kind beyond the control
of the parties and the parties hereto shall be excused from any failure to
perform any obligation hereunder to the extent such failure is caused by any
such law, order, regulation, direction, request or contingency, for the period
such cause endures. Notwithstanding the foregoing, in the event any such cause
delays either party's performance of any of its material obligations under this
Agreement, the other party may suspend its performance hereunder for the period
such delay continues and if any such cause renders impossible or delays for a
period of more than six months either Party's performance of any of its material
obligations under this Agreement, the other party may terminate this Agreement
pursuant to Section 8.3, as if a material default had occurred hereunder and
shall have the rights and remedies specified in Article VIII. The party whose
performance is delayed on account of any such cause shall promptly notify the
other party, and shall exert its best efforts to recommence performance as soon
as possible.
9.8 Entire Agreement. This Agreement and the Amended Foundry Agreement to
----------------
be entered into along with this Agreement set forth the entire agreement and
understanding between the parties as to the subject matter hereof and thereof
and supersede all prior discussions, negotiations and agreements, written, oral
or implied, between them in respect of the subject matter of this Agreement.
None of the parties shall be bound by any conditions, definitions, warranties,
understandings or representations with respect to such subject matter other than
as expressly provided herein or therein or as duly set forth on or subsequent to
the date hereof or thereof in writing and signed by a proper and duly authorized
officer or representative of the party to be bound thereby.
9.9 Remedies. Upon the breach by any party to this Agreement of any
--------
provision of this Agreement or the Amended Foundry Agreement, the non-breaching
party shall have the right to pursue all available remedies at law or in equity
it may elect, in order to obtain the benefits to have been provided pursuant to
this Agreement, or to obtain adequate recourse or compensation in the event the
same are not so provided.
9.10 Absence of Waivers. Failure or delay on the part of a party hereto to
------------------
enforce any of the provisions of this Agreement or any rights with respect
thereto, or to exercise any election provided for herein shall in no way be
considered to be a waiver of such provisions, rights or elections or in any way
affect the validity of this
22
<PAGE>
Agreement. Failure or delay on the part of a party to exercise any of the said
provisions, rights or elections shall not preclude or prejudice such party from
later enforcing or exercising the same or any other provisions, rights or
elections which it may have under this Agreement.
9.11 Notices. All notices shall be given in writing either by personal
-------
delivery to the party to whom notice is given, or by confirmed telex or
facsimile, or by a commercial overnight courier service, or by registered or
certified mail, return receipt requested. The date upon which any such notice
is so personally delivered, the date of confirmation of telex, facsimile, or
courier delivery, or if the notice is given by registered or certified mail, the
date three (3) days after it is deposited in the U.S. mails, shall be deemed to
be the date of such notice, irrespective of the date appearing therein.
If to PI: POWER INTEGRATIONS, INC.
411 Clyde Avenue
Mountain View, California 94043
Attn: President
If to MEC: MATSUSHITA ELECTRONICS CORPORATION
1 Kotariyakemachi, Nagaokakyo,
Kyoto 617 JAPAN
Attn: Director, Discrete Device Division
9.12 Injunctive Relief. Unauthorized use or disclosure of Confidential
-----------------
Information will diminish the value to the parties of the trade secrets and
other intellectual property rights which are the subject of this Agreement.
Therefore, if either party breaches any of its obligations hereunder, the other
party shall be entitled to equitable relief to protect its intellectual property
rights, including but not limited to injunctive relief, as well as monetary
damages.
9.13 Attorneys' Fees. In the event of any action, suit or proceeding,
---------------
including arbitration, between the parties hereto, the prevailing party shall be
entitled to recover its costs, including those for expert witnesses, and
reasonable attorneys' fees therein.
9.14 Headings. All paragraph captions are for reference only and shall not
--------
be considered in construing this Agreement.
9.15 Severability. Any provision or provisions of this Agreement which in
------------
any way contravenes a law of any state or country which the Agreement is in
effect shall, in such state or country and to the extent of such contravention
of local law, be deemed separable and shall not affect any other provision or
provisions of this Agreement.
9.16 Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereunder shall be governed by, and construed in accordance with, the
laws
23
<PAGE>
of the United States and the State of California as applied to agreements
entered into and to be performed entirely within California between California
residents.
9.17 Arbitration. Disputes arising out of or in connection with the
-----------
validity, interpretation, application, or enforcement of this Agreement or the
performance of either party will be discussed and settled amicably by good faith
negotiations between PI and MEC. Any such disputes which cannot be settled
amicably and by such good faith negotiations within sixty (60) days after
written notice by one party to the other of such inability to amicably settle
shall thereafter be settled by binding arbitration. The arbitration shall be
conducted in English pursuant to the Rules of Arbitration of the International
Chamber of Commerce, which shall be held in San Francisco, California. Any
judgement or award rendered in these arbitrations may be entered and enforced by
any court of competent jurisdiction and may include, when appropriate, equitable
relief.
9.18 Time of Essence. Time is of the essence in the performance of each
---------------
and every obligation of the parties under this Agreement.
9.19 Originals. This Agreement shall be executed in duplicate, each of
---------
which shall be an original, and shall be kept by PI and MEC, respectively.
9.20 Prior License Agreement; Amended License Agreement. Except as
--------------------------------------------------
expressly provided otherwise in this Agreement, the rights and obligations of
the parties prior to June 30, 1995 are as stated in the Prior License Agreement,
the Prior Foundry Agreement and the Distribution Agreement between the parties,
and the rights and obligations of the parties after June 29, 1995 are as stated
in this Agreement and the Amended Foundry Agreement.
IN WITNESS WHEREOF, PI and MEC have caused this Agreement to be executed in
their names by the duly authorized officers or representatives as of the date
first above written.
POWER INTEGRATIONS, INC. MATSUSHITA ELECTRONICS CORPORATION
By: ____________________________ By: ________________________________
Name: __________________________ Name: ______________________________
24
<PAGE>
APPENDIX-C-PI PATENTS
<TABLE>
<CAPTION>
NAME TITLE COUNTRY PATENT NO.
---- ----- ------- ----------
<S> <C> <C> <C>
K. Eklund High Voltage MOS Transistors USA 4,811,075
Same Same European (designated France, EP 0 295391
Germany, Great Britain,
Italy, Netherlands, Sweden)
[*] [*] [*] [*]
B. Leman Regulated Flyback Converter with USA 5,008,794
Spike Suppressing Coupled
Inductors
[*] [*] [*] [*]
A. Djenguerian/ Temperature-Compensated USA 5,038,053
B. Balakrishnan Integrated Circuit for Uniform
Current Generation
D. Kung Pulse Width Modulator Control USA 5,045,800
Circuit
[*] [*] [*] [*]
B. Balakrishnan Self Powering Technique for USA 5,014,178
Integrated Switched Mode Power
Supply
[*] [*] [*] [*]
V. Rumennik MOS Gated Bipolar Transistor USA 5,072,268
[*] [*] [*] [*]
[*]
</TABLE>
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TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PAGE 1
<PAGE>
APPENDIX-C-PI PATENTS
<TABLE>
<CAPTION>
Name Title Country Patent No.
---- ----- ------- ----------
<S> <C> <C> <C>
[*] [*] [*] [*]
B. Balakrishnan Low Cost High Frequency Switched USA 5,161,098
Mode Converter & Method for
Making Same
[*] [*] [*] [*]
Same Same Taiwan 56,268
[*] [*] [*] [*]
R. Busse/ Semiconductor Device w/ Improved USA 5,258,636
V. Rumennik Breakdown Voltage Characteristics
[*] [*] [*] [*]
[*]
[*] [*] [*] [*]
R. Keller Linear Load Circuit to Control Switch- USA 5,285,367
ing Power Supplies Under Minimum
Load Conditions
[*] [*] [*] [*]
[*]
[*] [*] [*] [*]
R. Keller/L. Lund/ Below Ground Current Sensing with USA 5,245,526
B. Balakrishnan Current Input to Control Threshold
[*] [*] [*] [*]
[*]
[*] [*] [*] [*]
[*] [*] [*] [*]
</TABLE>
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TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PAGE 2
<PAGE>
APPENDIX-C-PI PATENTS
<TABLE>
<CAPTION>
NAME TITLE COUNTRY PATENT NO.
---- ----- ------- ----------
<S> <C> <C> <C>
K. Eklund High Voltage MOS Transistor With A USA 5,313,082
Low On-Resistance
[*] [*] [*] [*]
[*] [*] [*] [*]
[*]
B. Leman/ Dual Threshold Differential USA 5,274,274
B. Balakrishnan Discriminator
[*] [*] [*] [*]
[*]
[*] [*] [*] [*]
B. Balakrishnan Switched Mode Power Supply USA 5,285,369
Integrated Circuit with Start-up
Self-Biasing
[*] [*] [*] [*]
[*] [*] [*] [*]
[*]
B. Balakrishnan Three Terminal Switched Mode Power USA 5,313,381
Supply Integrated Circuit
[*] [*] [*] [*]
[*] [*] [*] [*]
[*]
B. Balakrishnan Power MOSFET Safe Operating Area USA 5,282,107
Current Limiting Device
[*] [*] [*] [*]
[*] [*] [*] [*]
[*]
</TABLE>
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PAGE 3
<PAGE>
APPENDIX-C-PI-PATENTS
<TABLE>
<CAPTION>
NAME TITLE COUNTRY PATENT NO.
---- ----- ------- ----------
<S> <C> <C> <C>
[*] [*] [*] [*]
[*] [*]
R. Keller Low Noise Voltage Regulator Using A USA 5,164,891
Gated Single Ended Oscillator
V. Rumennik Bi-Directional MOSFET Switch USA 5,323,044
W. Grabowski
[*] [*] [*] [*]
[*]
[*] [*] [*] [*]
V. Rumennik/ High Voltage Transistor USA 5,274,259
W. Grabowski
V. Rumennik/ Same USA 5,411,901
W. Grabowski
[*] [*] [*] [*]
[*]
[*] [*] [*] [*]
</TABLE>
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PAGE 4
<PAGE>
APPENDIX - D - AMENDED
----------------------
MEC PATENTS
-----------
All Patents listed below were applied to Japanese Patent Office, but not yet
issued.
<TABLE>
<CAPTION>
Title Patent No. Name
----- ---------- ----
<S> <C> <C>
[*] [*] [*]
</TABLE>
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<PAGE>
AMENDMENT NUMBER ONE TO
-----------------------
AMENDED TECHNOLOGY LICENSE AGREEMENT
------------------------------------
This Amendment Number One (the "Amendment") to the Amended Technology
License Agreement (the "Agreement") dated June 29, 1995 by and between POWER
INTEGRATIONS, INC., a corporation duly organized and existing under the laws of
the State of California, U.S.A., having its principal place of business at 477
North Mathilda Avenue, Sunnyvale, California, 94086 ("PI"), and
MATSUSHITA ELECTRONICS CORPORATION, a corporation duly organized and
existing under the laws of Japan, having its principal place of business at 1-1
Saiwai-cho, Takatsuki-shi, Osaka-fu, 569 Japan ("MEC") is made effective as of
the first day of April, 1997.
RECITALS
--------
A. MEC and PI desire to amend the Agreement on the terms set forth in
this Amendment.
B. Based on the relationship between PI and MEC established under the
Agreement and intended to be promoted by this Amendment, PI intends not to
pursue additional sales of PI Products in Japan, beyond sales from existing
business or designs in process, for the term of the Agreement.
AMENDMENT
---------
PI and MEC, intending to be legally bound, hereby agree as follows:
1. Amendment of Section 1.3 (Definition of Baseline Process). Section
----------------------------------------------------------
1.3 of the Agreement is amended to read in its entirety as follows:
1.3 "Baseline Process" means (a) the specific n-channel power
technology (nominally [*]) of PI and (b) extensions of the foregoing to higher
voltages, that is more fully described in Appendix A attached to the Prior
----------
License Agreement, and does not include PI's p-channel process technology and
(c) PI's technology, developed during the term of the Agreement, necessary to
manufacture high voltage n-channel devices with MOS structure including, but not
limited to, [*]. Reference to the Baseline Process covers the process,
manufacturing method and device structures relevant to (a), (b) and (c) above.
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<PAGE>
2. Amendment of Section 1.14(c) (Restricted Patents). Section 1.14(c) of
-------------------------------------------------
the Agreement is amended to read in its entirety as follows:
(c) "Restricted Patents" means all PI Patents relating to
Semiconductor circuit design or system level architectures issued or first
applied for after [*], other than PI Patents solely relating to the Baseline
Process and Updates to the Baseline Process such as improvements to high voltage
device structures and improvements to semiconductor processing.
3. Amendment of Section 1.16(b) (Definition of Update). Section 1.16(b)
---------------------------------------------------
of the Agreement is amended to read in its entirety as follows:
(b) with respect to the Baseline Process, any modification or change
during the term of this Agreement to the Baseline Process, as defined in Section
1.3 of the Agreement, which improves or increases the efficiency, speed or yield
of the Baseline Process.
4. Amendment to Section 2.4 (Periodic Exchange of Information). Section
-----------------------------------------------------------
2.4 of the Agreement is amended to read in its entirety as follows:
2.4 Periodic Exchange of Information; MEC Employee Onsite at PI.
-----------------------------------------------------------
Both parties hereby agree that they will have periodic meetings for the exchange
of information by and between the parties' technical representatives with
respect to the current and future product development and application which
either party is separately performing in the field of the Product and Baseline
Process. In addition, PI will permit one employee of MEC to remain onsite at
PI's principal facility in Sunnyvale, California on a full time basis or such
other basis as MEC desires and will provide such MEC employee with office
furniture and fixtures, access to designated PI photocopiers and fax machines
and telephone services. All costs and expenses of such employee, including the
salary of such employee and all telephone toll charges while in the PI facility,
will be borne by MEC.
The parties hereby confirm that any information transferred even by the
informal meetings and other communications by and between the parties' technical
representatives shall fall within the scope of the Confidential Information in
the event such information satisfies the definition thereof as contemplated in
Section 1.4.
5. New Section 2.5:
2.5 Application / Technical Support. PI will allocate during the
-------------------------------
term of this Agreement, at PI's expense, the equivalent of at least [*] for the
applications and technical support of MEC.
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<PAGE>
6. Amendment of Section 4.1(e) (Exclusivity Clause with Respect to PI
------------------------------------------------------------------
Licenses to MEC). Section 4.1(e) of the Agreement is amended to read in its
- ----------------
entirety as follows:
(e) (i) During the term of this Agreement, except as otherwise
provided in PI's existing agreements with [*], as the same may be amended from
time to time (the "[*]") PI will not grant to any companies established or to be
established under the laws of Japan and any Subsidiaries of Japanese Companies
worldwide other than MEC a whole or any part of the rights and licenses which
MEC is granted hereunder, including, but not limited to, the right to use the
Baseline Process, and any such rights and licenses granted to [*] in the future
shall not be more favorable, taken as a whole, than those granted to MEC
hereunder. Notwithstanding the foregoing, in case MEC should fail to supply
Wafers to PI in material respect to satisfy PI's requirement in accordance with
the terms of the Amended Foundry Agreement, or MEC should fail to comply with
the terms of this Agreement in any material respect, PI will be entitled,
subject to advance written notice to MEC and consultation with MEC, in case such
failure should not be cured within sixty (60) days after PI's written notice, to
grant any such rights and licenses to other companies established or to be
established under the laws of Japan, without any infringement of MEC's
proprietary rights.
(ii) During the term of this Agreement, PI will not pursue
additional sales of PI Products in Japan beyond sales from existing business or
designs in process. By virtue of this section 4.1(e)(ii), MEC is not assuming
any obligation or responsibility to PI's customers. Notwithstanding the
foregoing, in case MEC should fail to comply with the terms of this Agreement in
any material respect, PI will be entitled, subject to advance written notice to
MEC and consultation with MEC, in case such failure should not be cured within
sixty (60) days after PI's written notice, to sell, lease or otherwise dispose
of Products in Japan or to grant the right to other persons or companies to
sell, lease or otherwise dispose of Products in Japan.
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3
<PAGE>
7. Amendment of Section 5.1(a) (Product Royalties Payable to PI).
-------------------------------------------------------------
Section 5.1(a) of the Agreement is amended to read in its entirety as follows:
(a) MEC shall pay PI royalties, in Japanese yen, on all units of
Product made by MEC and MEC's Subsidiaries and used, leased, sold or otherwise
disposed of by MEC and MEC's Subsidiaries, other than to PI, at the following
rates based upon the Net Sales of such Products:
<TABLE>
<CAPTION>
Royalty Rate
------------
<S> <C>
Until the amount of the cumulative Net Sales on or after June 29, 1995 [*] of the Net
reaches [*] Sales
After the amount of the cumulative Net Sales on or after June 29, 1995 [*] of the Net
exceeds [*] Sales
</TABLE>
8. Amendment of Section 5.2(a) (Product Royalties Payable to MEC).
--------------------------------------------------------------
Section 5.2(a) of the Agreement is amended to read in its entirety as follows:
(a) PI shall pay MEC royalties, in Japanese yen, on all units of
MEC Product used, leased, sold or otherwise disposed of by PI and PI's
Subsidiaries, other than to MEC, at the following rates based upon the Net Sales
of such MEC Products:
<TABLE>
<CAPTION>
Royalty Rate
------------
<S> <C>
Until the amount of the cumulative Net Sales on or after June 29, 1995 [*] of the Net
reaches [*] Sales
After the amount of the cumulative Net Sales on or after June 29, 1995 [*] of the Net
exceeds [*] Sales
</TABLE>
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4
<PAGE>
9. Addition of New Section 5.6 (Quarterly Fee Payable to PI). A new
---------------------------------------------------------
Section 5.6 shall be added to the Agreement and shall read in its entirety as
follows:
5.6 Quarterly Fee Payable to PI. Within ten (10) days after each of
---------------------------
the following dates: June 30, September 30 and December 31 of calendar 1997,
March 31, June 30, September 30 and December 31 of calendar of 1998, and March
31 of calendar 1999, MEC shall pay a non-refundable, non-deductible license fee
to PI in the amount of U.S. [*].
10. Amendment of Section 8.4(b) (Consequences of Expiration). Section
--------------------------------------------------------
8.4(b) of the Agreement is amended to read in its entirety as follows:
(b) Without limiting the generality of the foregoing, upon
expiration of this Agreement, the rights and licenses granted by the parties to
each other for the term of this Agreement in Article IV hereof shall terminate
immediately; provided, however, that:
a. subject to the continuing payment of royalties to be
agreed upon by both parties, MEC shall retain the licenses granted by PI under
Article IV; and
b. subject to the continuing payment of royalties to be
agreed upon by both parties, PI shall retain the licenses granted by MEC under
Article IV.
After the expiration of the Agreement the royalty rate to be paid to
the other will be [*] per annum and the royalty amount shall be deemed fully
paid-up in [*] after the expiration of this Agreement (the "Additional Term").
11. No Other Changes. Except as expressly amended by this Amendment, the
----------------
rights and obligations of the parties under the Agreement and the provisions
thereof shall remain unchanged and in full force and effect.
IN WITNESS WHEREOF, PI and MEC have caused this Amendment to be executed in
their names by the duly authorized officers or representatives as of the date
first above written.
POWER INTEGRATIONS, INC. MATSUSHITA ELECTRONICS CORPORATION
By: ______________________________ By: _______________________________
Name: ____________________________ By: _______________________________
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EXHIBIT 10.7
AMENDED WAFER FOUNDRY AGREEMENT
-------------------------------
This Agreement is made on this 29th day of June, 1995 by and among
POWER INTEGRATIONS, INC., a corporation duly organized and existing under the
laws of the State of California, U.S.A., having its principal place of business
at 411 Clyde Avenue, Mountain View, California 94043 ("PI"), and
MATSUSHITA ELECTRONICS CORPORATION, a corporation duly organized under the laws
of Japan, having its principal place of business at 1-1 Saiwai-cho, Takatsuki-
shi, Osaka-fu, 569 Japan ("MEC"), and
MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD., a corporation duly organized under the
laws of Japan, acting through Industrial Sales Office for Americas having its
principal place of business at Twin 21 National Tower, 1-61 Shiromi 2 Chome,
Chuo-ku, Osaka 540 Japan ("MEI"), (MEC and MEI shall be hereby regarded as
single party when indicated as "MEC/MEI").
RECITALS
--------
A. PI is the owner and developer of certain integrated circuit
process technologies required to manufacture high voltage integrated circuits.
B. PI has no wafer fabrication facility and desires to obtain a cost
competitive foundry to manufacture wafers for PI, in order to provide a source
for the wafers PI requires, and to assure a long term supply of wafers.
C. MEC/MEI has wafer fabrication facilities in Japan and the United
States and desires full utilization and efficient operation of its wafer
fabrication facilities.
D. Effective June 29, 1990, MEC and PI entered into a Technology
License Agreement (the "Prior License Agreement"), a Wafer Foundry Agreement
(the "Prior Foundry Agreement") and a Distribution Agreement.
E. The Prior License Agreement and the Prior Foundry Agreement will
expire, unless previously extended, on June 29, 1995.
F. MEC/MEI and PI have established a fruitful business relationship.
G. MEC/MEI and PI desire to extend the Prior Foundry Agreement on the
terms set forth in this Agreement.
H. MEC and PI intend to enter into an extension of the Prior License
Agreement (the "Amended License Agreement") at the same time that they enter
into this Agreement.
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AGREEMENT
PI and MEC/MEI, intending to be legally bound, hereby agree as
follows:
ARTICLE I
---------
DEFINITION
----------
For the purpose of this Agreement, all capitalized terms not otherwise
defined in this Agreement and defined in the Amended License Agreement shall
have the meanings set forth in the Amended License Agreement, and the following
terms have the following meanings:
1.1 "Fab" means any of the existing or future wafer fabrication
facilities in Japan or the United States of any company in the Matsushita Group.
1.2 "Wafer(s)" means wafer(s) for Products which MEC fabricates under this
Agreement for sale to PI through MEI.
ARTICLE II
----------
MEC DEVELOPMENT ASSISTANCE AND WAFER FOUNDRY SERVICE
----------------------------------------------------
2.1 Information Transfer. Information relating to the Baseline
--------------------
Process, Products and Updates, if any, shall continue to be transferred,
pursuant to the provisions of Article II of the Amended License Agreement, from
PI to MEC/MEI and from MEC/MEI to PI for purposes of prototype development
fabrication and production fabrication by MEC/MEI at the Fab pursuant to the
terms of this Article II.
2.2 5-Inch Wafer Manufacturing.
--------------------------
(a) MEC plans to begin manufacturing 5-inch Wafers for PI beginning in
about October 1995.
(b) MEC will pay for mask sets and sample Wafers for two PI Products
that will be required for the qualification of the 5" wafer process.
(c) MEC will also pay for the generation of mask sets for the transfer
to the 5" production line of eight additional Products to be designated by PI.
MEC and PI will each bear 50% of the costs for generating mask sets for the
transfer to the 5" production line of more additional Products to be designated
by PI. PI can substitute improved versions of Products for these mask sets
instead of the current Products in the 4" line, which will be replaced to the
improved type after product qualification on the 5" manufacturing line. PI will
pay for the sample 5" Wafers on all of these Products that pass the wafer
acceptance criteria.
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(d) PI will pay all costs of mask making and for all sample Wafers of
any PI Products to be newly introduced to the 5" line in addition to the
transferred Product types stipulated in subsections (b) and (c) of this Section
2.2.
(e) PI Products will be introduced to the 5" line starting in October
1995 at a rate that will require MEC to produce no more than 2 to 3 new mask
sets for PI Products per month. Only that number of PI Products may be
introduced to the 5" line before June 1996 that will require MEC to produce not
more than ten total mask sets for PI Products, including new types and
transferred types, in that time period.
(f) Notwithstanding the foregoing provisions of this Section 2.2, for
PI Products that will be second sourced by MEC, the mask set and sample wafer
costs will be shared equally between MEC and PI.
2.3 Updates of Baseline Process.
---------------------------
(a) Except as otherwise provided in Section 2.2 above, MEC/MEI shall
use its best efforts to bring-up Updates of Baseline Process, if any, at the Fab
at which PI Products then are made in order to supply PI with prototype Wafers
and production Wafers as contemplated by this Agreement.
(b) Except as otherwise provided in Section 2.2 above, the parties
agree that each party shall pay all of its own expenses incurred in order to
perform its obligations under Section 2.3(a).
(c) Except as otherwise provided in Section 2.2 above, during the term
of this Agreement, the allocation of the costs and expenses incurred by MEC,
after consultation with PI and if requested by PI, for (i) improvement of the
existing manufacturing processes for PI Products; or (ii) establishment of a new
manufacturing process, and/or (iii) transfer of manufacturing process from one
Fab to another Fab, whichever is necessary to diligently comply with this
Agreement shall be negotiated in good faith between the parties hereto.
2.4 Bring-Up of New Products, etc.
------------------------------
(a) Throughout the term of this Agreement, MEC/MEI shall make its best
effort to commit human, capital and financial resources necessary and reasonably
calculated to permit it to timely fulfill all of its obligations under this
Agreement, including, but not limited to, appropriate capital expenditures and
allocation of capacity, facilities and experienced personnel for an
engineering/manufacturing team to ensure an expeditious Product technology
transfer; an expeditious bring-up of new Products including Updates of Products
at the Fab; and a smooth production build-up beyond the period of prototype
development of such Products.
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(b) Except as otherwise provided in Section 2.2 above, during the
period of prototype production development and sample Wafer production
development for new Products including Updates of Products, PI shall bear the
cost of mask making for all PI Products and pay for all Wafers requested by and
delivered to PI.
(c) Except as otherwise provided in Section 2.2 above, during the
period of prototype production development and sample Wafer production
development for new Products including Updates of Products, MEC/MEI shall bear
any and all the costs of Wafers used or disposed of by MEC/MEI for the
production or development.
2.5 Qualification of a New Fab. A Fab not qualified under the Prior
--------------------------
Foundry Agreement shall be qualified by PI for the purpose of this Agreement in
the event three runs of wafers for the qualifying Product at that Fab have
passed the evaluation test of PI then in effect. Except as otherwise provided
in Section 2.2 above, MEC/MEI shall bear all costs of qualifying any new Fab,
including the cost of all Wafers used or disposed of by MEC/MEI or PI during
such qualification.
ARTICLE III
-----------
WAFER SUPPLY
------------
3.1 Wafer Quantities.
----------------
(a) MEC/MEI shall make available to PI from the production capacity of
the Fab not less than the following quantities of tested wafers for delivery to
PI during the following months, and PI shall purchase not less than [*] of
such quantities:
<TABLE>
<CAPTION>
1995 1996
JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4" wafers [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
5" wafers [*] [*] [*] [*] [*] [*]
</TABLE>
If MEC is unable to supply the quantities of 5" wafers set forth above, for any
5" wafers not supplied, MEC will substitute that number of 4" wafers that will
provide an equivalent number of die, at a price of [*] per 4" wafer. The monthly
wafer quantities supplied by MEC may vary by about [*] from the quantities shown
above, provided that a shortfall in any month will be made up within the next
two months.
(b) During the term of this Agreement, the parties hereto will
negotiate in good faith to establish, by the end of each February, the minimum
annual quantity and minimum monthly quantity of wafers for the next fiscal year
of MEC/MEI (April 1 through March 31), that MEC/MEI shall supply to PI, and PI
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shall purchase from MEC/MEI, under this Agreement, and MEC shall reserve the
production capacity therefor, except that the quantities for April, May and June
1996 will be as set forth in Section 3.1(a) above.
(c) At either party's request, the parties shall negotiate in good
faith the terms and conditions for MEC/MEI to supply to PI, and for PI to
purchase from MEC/MEI, more than the minimum quantities of wafers agreed between
the parties.
(d) PI shall order Products in lots, each of which contains the number
of Wafers as set forth in Appendix B to the Prior Foundry Agreement.
----------
3.2 Prices.
------
(a) Except as otherwise provided in Section 3.1 above, the purchase
price payable by PI to MEC/MEI for the quantities of wafers set forth in the
table in Section 3.1 above will be [*] per wafer for 4" wafers and
[*] per wafer for 5" wafers. Wafer pricing for Products manufactured
after June 30, 1996 will be established by the parties in good faith
negotiations.
(b) If the parties, after good faith negotiations, do not agree on
future wafer pricing or quantities, then, until June 30, 1997, MEC/MEI will
supply to PI, and PI will purchase from MEC, monthly, wafers at the quantities
actually sold by MEC/MEI to PI during June 1996. If MEC is unable to supply
only 5" wafers during such period, for any 5" wafers not supplied, MEC will
supply that number of 4" wafers that will provide an equivalent number of die.
The prices of wafers supplied during such period will be [*] per wafer
for 4" wafers and [*] per wafer for 5" wafers. If the parties, after
good faith negotiations, do not agree on future wafer pricing or quantities for
any time after June 30, 1997, then, after such date, neither party will have any
obligation to purchase or supply wafers under this Agreement.
(c) Wafers shall be tested in accordance with test procedures as
agreed by MEC and PI. All Wafers shall be FOB point of shipment by MEC/MEI.
3.3 Most Favored Customer. The prices of Wafers purchased by PI under
---------------------
this Agreement shall be the lowest price charged by MEC/MEI to any foundry
customers for similar products being purchased in similar volumes under similar
terms and conditions as this Agreement and during the term hereof. Should
MEC/MEI sell or agree to sell the same or similar products at lower price under
more favorable terms and conditions or at the same price under more favorable
terms and conditions, MEC/MEI will notify PI in writing within thirty (30) days
of the effective date of such sale or agreement and shall automatically extend
to PI as of such effective date the benefit of such more favorable prices or
terms and conditions.
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3.4 Leadtimes. After the bring-up of the baseline process:
---------
(a) MEC/MEI will complete mask sets for any PI Product within ten (10)
working days after the receipt by MEC/MEI of a final database tape for such PI
Product. PI will bear all the costs of mask tooling.
(b) MEC/MEI will deliver to PI (ex the Fab) prototype Wafers of any PI
Products within forty-four (44) working days after availability of mask sets for
such PI Product. MEC/MEI and PI will negotiate in good faith the possibility of
making available to PI fast-turn lots for certain prototype Wafers. PI will pay
for those prototype wafers.
(c) MEC/MEI will deliver (ex the Fab) the first (1st) shipment of the
Wafers ordered by PI for that month no later than fifty-four (54) working days
after the start of the production as per PI's purchase order for such PI
Products, unless PI's purchase order specifies a later delivery date. The rest
of the ordered Wafers for that month will be shipped so that PI receives all
such Wafers, in equal weekly quantities to the extent practicably possible,
within twenty (20) working days after the first (1st) shipment. MEC/MEI shall
use its reasonable and best efforts to improve actual leadtime for the
production of Wafers.
(d) In the event the production of new Products (including Updates of
the Products) requires more complicated manufacturing process to MEC, including
the case, but not limited to, where the increase of the number of masks used for
such production, or the manufacturing processes of the Products are transferred
from the present Fab. to another qualified Fab., the leadtime stated in Section
3.5(c) may be changed according to such different conditions if both parties
agree to such change.
3.5 Order Forecasts. Once PI Product enters volume production, MEC/MEI
---------------
shall provide PI sufficient information concerning wafer lot sizes and cycle
times to enable PI to plan its purchase orders. PI agrees to place monthly
orders/releases for tested Wafers with MEC/MEI. PI shall issue purchase orders
and rolling six (6) month forecasts on a monthly basis as follows:
(a) PI shall deliver an initial binding purchase order covering four
(4) months of deliveries of tested Wafers and a nonbinding forecast[s] for same
for the following two (2) months.
(b) In order to allow MEC the smooth production of the Wafers, by the
twenty-fifth (25th) day of each month during the term of this Agreement, PI
shall deliver a purchase order and updated forecast, specifying (i) its firm,
noncancellable order for Wafer starts for the next four (4) months ahead; the
first month of which is specified by product, and the next three months of which
are forecast by product, against which the numbers of Wafers (but not
necessarily the product mix) stated in PI's actual orders shall be the same, and
(ii) the quantities of Wafers to be ordered by PI for the months five (5) and
six (6) months ahead, against which PI's actual orders will be within the range
of plus or minus thirty percent (30%).
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3.6 Acceptance. All Wafers delivered to PI by MEC/MEI hereunder shall
----------
be subject to the inspection and acceptance criteria being used at the time of
this Agreement or the ones to be mutually agreed upon by the parties hereto
during the term of this Agreement, which basically consists of [*]. In the event
any lot or Wafers is found to fail such applicable inspection and acceptance
criteria, PI shall have the right to reject such lot or Wafers by giving notice
of such effect within sixty (60) days after PI receives them and return them at
MEC/MEI's cost and risk after obtaining a return authorization number from
MEC/MEI in writing. PI shall provide MEC/MEI with a report specifying the reason
for such rejection. MEC/MEI shall provide either a refund, or a replacement lot
of the Wafers within forty-five (45) days after the receipt thereof pursuant to
the mutual consent of the parties. All rejected products may be subject to
inspection by MEC/MEI to confirm that they are defective. Any product not
rejected by PI within sixty (60) days after receipt by PI shall be deemed
accepted.
3.7 Warranty. EXCEPT AS EXPRESSLY SET FORTH IN SECTION 3.7 HEREOF,
--------
MEC/MEI MAKES AND PI RECEIVES NO WARRANTIES OR CONDITIONS ON THE WAFERS, EXPRESS
OR IMPLIED, STATUTORY OR OTHERWISE, AND MEC/MEI SPECIFICALLY DISCLAIMS ANY
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. MEC/MEI
AGREES TO KEEP RECORDS FOR THREE (3) YEARS OF EACH PROCESSED LOT MANUFACTURED
AND SUMMARIES OF PROCESS MONITORS FOR ONE (1) YEAR FOR WARRANTY TRACEABILITY.
THE FOREGOING IS PI'S SOLE REMEDY FOR BREACH OF WARRANTY BY MEC/MEI WITH RESPECT
TO ANY WAFERS SUPPLIED BY MEC/MEI. NOTWITHSTANDING ANYTHING TO THE CONTRARY
CONTAINED HEREIN, IN THE EVENT ANY CUSTOMER OF PI CLAIMS ANY INCONVENIENCE IN
ANY PRODUCTS RESULTING FROM MEC'S DIFFUSION OF WAFERS AND PI DECIDES TO DEAL
WITH SUCH INCONVENIENCE, MEC SHALL GIVE NECESSARY SUPPORT TO PI UPON REQUEST.
3.8 Terms and Conditions. To the extent not inconsistent with the
--------------------
provisions of this Agreement, the terms and conditions of PI's standard purchase
order shall apply to MEC/MEI's provision of goods and services to PI under this
Agreement.
3.9 Payment Terms. Unless otherwise agreed in writing, payment to
-------------
MEC/MEI for Products shall be through the use of a Letter of Credit payable at
sight.
3.10 Title and Transportation. All shipments to PI will be made F.O.B.
------------------------
point of shipment. Title and risk of loss and damage will pass to PI upon
delivery of Products to the carrier at the shipping point in good conditions.
Unless written instructions from PI specify the method of shipment, MEC/MEI will
use the least expensive means of shipment which will permit on time delivery of
the products to PI.
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ARTICLE IV
----------
EXPORT CONTROL
--------------
(a) Technical Data. Each party hereby assures the others that it will
--------------
not, without prior authorization, if required, of the Office of Export
Administration, U.S. Department of Commerce, 14th and Constitution Ave., N.W.,
Washington, D.C. 20230, export or reexport (as defined in Section 779.1(b)-(c)
of the Export Administration Regulations - "Regulations" - and any amendments
thereto) the technical data covered thereby. PI shall inform MEC in writing of
the technical data restricted under such Regulations as well as its restricted
country group upon PI's disclosure or provision of technical information.
(b) Other Restrictions. In exercising its rights under this
------------------
Agreement, each party agrees to comply strictly and fully with all export
controls imposed on Wafers, by any country or organization or nations within
whose jurisdiction each party operates or does business. Each party agrees not
to export or permit export of Wafers or any related technical data or complying
with the export control laws in the relevant jurisdiction.
(c) Each party shall not export the Product to any country designated
as "Countries against which the sanctions should be taken" by certain
resolutions of the Security Council of the United Nations regarding the
sanctions against certain countries, as long as such resolutions remain valid
and effective. For purposes of this Agreement, any re-export in violation of
such resolutions by a customer of either MEC or PI will not be considered to be
an export in violation of such resolutions by MEC or PI, as the case may be, so
long as MEC or PI, as the case may be, did not knowingly participate in such re-
export.
(d) During and after the term of this Agreement, to the extent the
same practically is within its control, each party shall not sell, lease or
otherwise dispose of, directly or indirectly, any Product to customers whom such
party knows intend to make use of the Product for Military Purposes (defined
hereinbelow). For the purpose of this Agreement, "Military Purposes" means the
design, development, manufacture or use of any weapons, including without
limitation nuclear weapons, biological weapons, chemical weapons and missiles.
(e) In the event either party violates the provision of this Section
7, the non-violating party shall have the right to require reasonable written
assurances from the violating party that such violation, whether or not past
incidents of violation can be cured, will not continue in the future, and if the
violating party does not deliver such assurances to the non-violating party
promptly after its request, the non-violating party may suspend the performance
of its obligations under this Agreement until such time as it receives such
assurances, without any prejudice to the rights and remedies which the non-
violating party may have under this Agreement. In the event that such assurance
is not delivered to the non-violating party within three (3) months after
request, the non-violating party shall the right to terminate forthwith,
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without any prejudice to the rights and remedies which it may have hereunder,
this Agreement, by giving a written notice to the violating party.
ARTICLE V
---------
EXPIRATION AND TERMINATION
--------------------------
5.1 Term of Agreement. This Agreement shall become effective as of June
-----------------
29, 1995 and continue in full force and effect until June 29, 2000.
5.2 Renewal. If this Agreement has not earlier terminated, the parties
-------
agree to negotiate in good faith, beginning on the [*] anniversary of the date
of this Agreement, for the continuation on mutually agreeable terms and
conditions of this Agreement.
5.3 Termination.
-----------
(a) Except as otherwise set forth in this section, if either party
shall at any time default, without any material causative fault on the part of
the other party, by failing to substantially perform any material provision of
this Agreement, and such default shall not be cured within sixty (60) days after
written notice to it from the other party specifying the nature of the default,
the non-defaulting party shall have the right to terminate this Agreement at any
time thereafter by giving written notice of termination to the other party, and
upon the giving of such notice of termination, this Agreement shall terminate
immediately. The party receiving notice shall have the right to cure any such
default up to the date of termination.
(b) Each party shall have the right to terminate this Agreement by
giving written notice of termination to the other at any time upon or after, (i)
the filing by the other party of a petition in bankruptcy or insolvency, or (ii)
upon or after the filing of any voluntary or involuntary petition or answer
seeking reorganization, readjustment or arrangement of the other party's
business under any law relating to bankruptcy or insolvency, or (iii) upon or
after the appointment of a receiver for all or substantially all of its
property, or (iv) upon or after the making by the other party of any assignment
or attempted assignment for the benefit of creditors, or (v) upon or after the
institution of any proceedings for the liquidation or winding up of the other
party's business or for the termination of its corporate charter; and this
Agreement shall terminate automatically on the thirtieth (30th) day after such
notice of termination is given, without further notice, demand or opportunity to
cure.
5.4 Consequences of Expiration. Upon expiration of this Agreement, all
--------------------------
rights and obligations of the parties hereunder shall cease and determine,
except for rights and obligations which, by the terms of this Agreement,
continue after the expiration or earlier termination of this Agreement and
except that the expiration of
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this Agreement shall not release either party from any of its obligations
accrued hereunder prior to the time expiration becomes effective.
5.5 Consequences of Termination. Upon termination of this Agreement, all
---------------------------
rights and obligations of the parties hereunder shall cease and determine,
except for rights and obligations which, by the terms of this Agreement,
continue after the expiration or earlier termination of this Agreement and
except that no termination of this Agreement shall release either party from any
of its obligations accrued hereunder prior to the time such termination becomes
effective.
ARTICLE VI
----------
MISCELLANEOUS AND GENERAL PROVISIONS
------------------------------------
6.1 Publicity. Neither party shall except as, to the extent, and in the
---------
manner, required by law or regulation, disclose to any third party any of the
specific terms or conditions of this Agreement, without prior written approval
by the other party.
6.2 Successors and Assigns; No Assignment. This Agreement, and rights and
-------------------------------------
obligations herein, shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, provided that except
as set forth below neither party shall assign this Agreement or any of its
rights hereunder without the prior written consent of the other party.
Notwithstanding any other provision of Agreement, PI may without the prior
consent of MEC/MEI assign all of its rights under this Agreement to a purchaser
of all or substantially all of PI's stock or assets or to a third party
participating in a merger or other corporate reorganization in which PI is a
constituent corporation. As a condition of any assignment of this Agreement or
any of the rights granted hereunder, any successor shall expressly assume in
writing the performance of all terms and conditions of this Agreement to be
performed by the assigning party including such party's obligations hereunder
with respect to the protection of Confidential Information. In case of such
assignment, PI or MEC/MEI shall reserve the right to terminate this Agreement on
its sole discretion. Any terminations by MEC/MEI in this situation will become
effective after a reasonable transition period for PI to bring up another
supplier of wafers.
6.3 No Rights to Marks, Etc. Nothing contained in this Agreement shall
-----------------------
confer any rights to use in advertising, publicity, or otherwise, any
trademarks, trade names, or any contraction, abbreviation or simulation thereof,
of either party, provided such restriction shall not apply to identification
numbers and descriptions of devices and software which are the subject matter of
this Agreement.
6.4 No Joint Venture. Nothing contained in this Agreement shall be
----------------
construed as:
10
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(a) creating any partnership, joint venture or other similar
relationship between PI and MEC/MEI; or
(b) obligating either party to commercially produce or to continue to
commercially produce, any solid state device of any type whatsoever, or any
parts or components thereof except otherwise explicitly provided in this
Agreement.
6.5 Force Majeure. Anything contained in this Agreement to the contrary
-------------
notwithstanding, the obligations of the parties hereto shall be subject to all
laws, both present and future, of any government having jurisdiction over the
parties hereto, and to orders, regulations, directions or requests of any such
government, or any department, agency or corporation thereof, and to war, acts
of public enemies, strikes or other labor disturbances, fires, floods,
earthquakes, acts of God, or causes of like or different kind beyond the control
of the parties and the parties hereto shall be excused from any failure to
perform any obligation hereunder to the extent such failure is caused by any
such law, order, regulation, direction, request or contingency, for the period
such cause endures. Notwithstanding the foregoing, in the event any such cause
delays either party's performance of any of its material obligations under this
Agreement, the other party may suspend its performance hereunder for the period
such delay continues and if any such cause renders impossible or delays for a
period of more than six months either party's performance of any of its material
obligations under this Agreement, the other party may terminate this Agreement
pursuant to Section 5.3, as if a material default had occurred hereunder and
shall have the rights and remedies specified in Article V. The party whose
performance is delayed on account of any such cause shall promptly notify the
other party, and shall exert its best efforts to recommence performance as soon
as possible.
6.6 Entire Agreement. This Agreement and the Amended License Agreement
----------------
set forth the entire agreement and understanding between the parties as to the
subject matter hereof and thereof and supersede all prior discussions,
negotiations and agreements, written, oral or implied, between them in respect
of the subject matter of this Agreement. None of the parties shall be bound by
any conditions, definitions, warranties, understandings or representations with
respect to such subject matter other than as expressly provided herein or
therein or as duly set forth on or subsequent to the date hereof or thereof in
writing and signed by a proper and duly authorized officer or representative of
the party to be bound thereby.
6.7 Remedies. Upon the breach by any party to this Agreement of any
--------
provision of this Agreement, the non-breaching party shall have the right to
pursue all available remedies at law or in equity it may elect, in order to
obtain the benefits to have been provided pursuant to this Agreement, or to
obtain adequate recourse or compensation in the event the same are not so
provided.
6.8 Absence of Waivers. Failure or delay on the part of a party hereto to
------------------
enforce any of the provisions of this Agreement or any rights with respect
thereto, or
11
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to exercise any election provided for herein shall in no way be considered to be
a waiver of such provisions, rights or elections or in any way affect the
validity of this Agreement. Failure or delay on the part of a party to exercise
any of the said provisions, rights or elections shall not preclude or prejudice
such party from later enforcing or exercising the same or any other provisions,
rights or elections which it may have under this Agreement.
6.9 Notices. All notices shall be given in writing either by personal
-------
delivery to the party to whom notice is given, or by confirmed telex or
facsimile, or by a commercial overnight courier service, or by registered or
certified mail, return receipt requested. The date upon which any such notice
is so personally delivered, the date of confirmation of telex, facsimile, or
courier delivery, or if the notice is given by registered or certified mail, the
date three (3) days after it is deposited in the U.S. mails, shall be deemed to
be the date of such notice, irrespective of the date appearing therein.
If to PI: POWER INTEGRATIONS, INC.
411 Clyde Avenue
Mountain View, California 94043
Attn: President
If to MEC: MATSUSHITA ELECTRONICS CORPORATION
1 Kotariyakemachi, Nagaokakyo, Kyoto
617 JAPAN
Attn: Director, Sales & Marketing Division
If to MEI: MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD.
Industrial Sales Office for the Americas
Twin 21 National Tower
1-61 Shiromi 2-chome, Chuo-ku
Osaka 540 JAPAN
6.10 Headings. All paragraph captions are for reference only and shall
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not be considered in construing this Agreement.
6.11 Severability. Any provision or provisions of this Agreement which
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in any way contravenes a law of any state or country in which the Agreement is
in effect shall, in such state or country and to the extent of such
contravention of local law, be deemed separable and shall not affect any other
provision or provisions of this Agreement.
6.12 Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereunder shall be governed by, and construed in accordance with, the
laws of the United States and the State of California as applied to agreements
entered into and to be performed entirely within California between California
residents.
12
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6.13 Arbitration. Disputes arising out of or in connection with the
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validity, interpretation, application, or enforcement of this Agreement or the
performance of either party will be discussed and settled amicably by good faith
negotiations between PI and MEC/MEI. Any such disputes which cannot be settled
amicably and by such good faith negotiations within sixty (60) days after
written notice by one party to the other of such inability to amicably settle
shall thereafter be settled by binding arbitration. The arbitration shall be
conducted in English pursuant to the Rules of Arbitration of the International
Chamber of Commerce, which shall be held in San Francisco, California. Any
judgement or award rendered in these arbitrations may be entered and enforced by
any court of competent jurisdiction and may include, when appropriate, equitable
relief.
6.14 Time of Essence. Time is of the essence in the performance of each
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and every obligation of the parties under this Agreement.
6.15 Originals. This Agreement shall be executed in triplicate, each of
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which shall be an original, and shall be kept by PI, MEC and MEI, respectively.
6.16 Prior Foundry Agreement; Amended Foundry Agreement. Except as
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expressly provided otherwise in this Agreement, the rights and obligations of
the parties prior to June 30, 1995 are as stated in the Prior License Agreement,
the Prior Foundry Agreement and the Distribution Agreement between the parties,
and the rights and obligations of the parties after June 29, 1995 are as stated
in this Agreement and the Amended License Agreement.
IN WITNESS WHEREOF, PI, MEC and MEI have caused this Agreement to be
executed in their names by the duly authorized officers or representatives as of
the date first above written.
POWER INTEGRATIONS, INC. MATSUSHITA ELECTRONICS
CORPORATION
By: ____________________________ By: ___________________________________
Name: __________________________ Name: _________________________________
MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD.
By: ___________________________________
Name: _________________________________
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Exhibit 10.8
LICENSING AND WAFER SUPPLY AGREEMENT
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THIS AGREEMENT, made and entered into as of this 17th day of June, 1993 by and
between:
(1) OKI ELECTRIC INDUSTRY CO., LTD., a Japanese corporation having its
registered head office at 7-12, Toranomon 1-chome, Minato-ku, Tokyo 105,
Japan ("OKI"); and
(2) Power Integrations, Inc., a California corporation having its principal
place of business at 411 Clyde Avenue, Mountain View, California 94043,
U.S.A. ("PI")
WHEREAS, both OKI and PI are engaged in the development, design, manufacture and
sale of various LSI products, and according to each party, it has acquired
valuable technical knowledge and experience, particularly in the field of the
Power IC products;
WHEREAS, PI is willing to grant to OKI licenses of certain Power MOS IC
technology and OKI is willing to obtain such licenses from PI;
WHEREAS, PI has granted another company certain exclusive rights to manufacture
products using PI's N-Channel Process (as defined below) through June 29, 1995;
WHEREAS, PI and OKI desire that PI's license to OKI of PI's P-Channel Process
(as defined blow) be effective as of the Effective Date (as defined below) and
that PI's license to OKI of the PI N-channel Process be effective as of June 30,
1995;
WHEREAS, PI has granted another company certain exclusive rights with respect to
applications of PI's technology to energizing lights;
WHEREAS, PI and OKI desire that PI's license to OKI of the PI Processes (as
defined below) exclude all applications of PI's technology to energizing lights;
WHEREAS, PI and OKI desire that OKI license PI to make, have made, use, lease
and sell products using certain OKI's integrated circuit process related to
OKI's improvements to the PI Process;
WHEREAS, PI desires to acquire from OKI fabrication and supply of wafers of
certain Power IC products, and OKI is willing to supply such wafers to PI;
NOW, THEREFORE, in consideration fo the mutual premises, covenants and
agreements of the parties contained herein, the parties agree as follows;
CHAPTER 1 DEFINITIONS
Article 1. (Definitions)
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When used throughout this Agreement, each of the following terms shall have the
meaning indicated below:
1.1 "PI Products" shall mean Power IC products which are developed by PI using
PI Technology and OKI's improvements to the PI Processes.
1.2 "PI Technology" shall mean technical information involved in the
Intellectual Property Rights and/or Know-How of PI.
1.3 "Fab" shall mean OKI's wafer fabrication facility in [*]. Any change in
facility location will only be with the prior written consent of PI.
1.4 "Qualification" shall mean the qualification of the PI Processes at the Fab
as demonstrated by the achievement of milestones agreed to by the parties.
1.5 "Additional Wafers" shall mean all Wafers supplied during the term of the
Agreement after all Initial Wafers have been supplied.
1.6 "Foundry Credit" shall mean [*] worth of Wafers, valuing Wafers at
[*] per 4 inch Wafer (except quick turn wafers, which will be valued at
[*] per wafer) deducting any applicable Japanese withholding tax.
Actually, OKI will provide PI with [*] pcs of 4 inch Wafer (subject to
adjustment for quick turn wafers) as Foundry Credit after deduction of
applicable Japanese withholding tax.
1.7 "Initial Wafers" shall mean 4-inch wafers supplied to PI free of charge
pursuant to Section 5.2 below.
1.8 "Volume Production" shall mean production of wafers and PI Products after
Qualification.
1.9 "OKI Products" shall mean a family of Power IC products which are developed
and manufactured by OKI using PI Technology.
1.10 "Technical Information" shall mean technical information in existence on or
before the date of expiration or termination of this Agreement regarding PI
Technology which is used in the design, manufacture, use, test or operation
of PI Products and OKI Products.
1.11 "Technical Cooperation" shall mean technical advice, consulting services
and other technical cooperation provided by PI for OKI's overall
development and production of the PI Products and OKI Products.
1.12 "Subsidiary" shall mean any corporation, company or other entity in which
OKI or PI, as the case may be, owns and/or controls, directly or
indirectly, now or hereafter, more than fifty percent (50%) of the
outstanding shares of stock entitled to vote for the election of directors
or their equivalents regardless of the form thereof (other than any shares
of stock whose voting rights are subject to substantial restriction);
provided, however, that
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any entity which would be a Subsidiary by reason of the foregoing shall be
considered a Subsidiary only so long as such ownership or control exists.
1.13 "Confidential Information" shall mean the database tapes referred to in
Article 8 below and Technical Information, Know-How or other non-public
information which is designated in writing, by appropriate legend, as
confidential and, if disclosed orally or in any recorded form, its summary
shall be reduced to writing within thirty (30) days after disclosure and
designated, by appropriate legend, as confidential.
1.14 "Intellectual Property Rights" shall mean all classes or types of patents,
utility models, design rights, copyrights, mask work rights, trade secrets
and applications thereof recognized under the laws of any country of the
world, which claims or is otherwise directed to an invention relating to
semiconductor processing and/or semiconductor device structure and/or
circuit design which have been reduced to practice or have a first
effective filing or registration date in any country prior to the date of
expiration or earlier termination of this Agreement, and which arise out
of inventions made by PI, which PI (i) has as of the date hereof or (ii)
acquires during the term of this Agreement, and under which, and to the
extent to which and subject to the conditions under which PI may have, as
of the Effective Date of this Agreement, or at the date of acquisition by
PI of such rights, or after the Effective Date of this Agreement, the
right to grant licenses of the scope granted herein without the payment of
royalty or other consideration to third persons except for payment of
third persons for inventions made by said persons while employed by PI.
1.15 "Know-How" shall mean any and all technical, industrial and engineering
information, knowledge and experience with respect to the PI Technology
known by or to PI, as of the date hereof and which PI may acquire or
develop during the term of this Agreement, represented in any document,
method, process, design, design technology, manufacturing technology,
machinery, instrument or other equipment used or owned by PI or with
respect to which and to the extent to which and subject to the conditions
under which PI has the right to grant licenses of the scope granted herein
without the payment of royalty or other consideration to third persons
except for payment to third persons for inventions made by said persons
while employed by PI.
1.16 "Effective Date" shall mean the date when this Agreement is fully executed
by both parties hereto.
1.17 "OKI Process Technology" shall mean the three (3) micron single
polysilicon, single metal process technology of OKI which shall be capable
to produce PI Products under this Agreement.
1.18 "PI N-Channel Process" shall mean (a) the specific n-chanel power
technology (nominally [*]) of PI and (b) extensions of the foregoing to
higher voltages, that is more fully described in Exhibit A attached
hereto, and in the documents identified in Exhibit B attached hereto.
Reference to PI N-Channel Process covers device structures that fit within
(a) and (b) above, but does not include other device structures.
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TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
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1.19 "PI P-Channel Process" shall mean (a) the specific p-channel power
technology (nominally [*]) of PI and (b) extensions of the foregoing to
higher voltages, that is more fully described in Exhibit A attached
hereto, and in the documents identified in Exhibit B attached hereto.
Reference to PI P-Channel Process covers device structures that fit within
(a) and (b) above, but does not include other device structures.
1.20 "PI Processes" shall mean the PI N-Channel Process and the PI P-Channel
Process.
1.21 "Wafer" shall mean non-probed silicon wafer which contains chips or
circuits of PI Product which meets the Common Specifications as defined
below.
1.22 "Common Specifications" shall mean the specifications for the Wafer
mutually agreed upon.
CHAPTER 2 LICENSING OF PI TECHNOLOGY
Article 2. (Grant of Licenses)
2.1 (a) License to PI P-Channel Process.
PI hereby grants to OKI a non-exclusive, non-transferable, perpetual,
and worldwide license, under PI's Intellectual Property Rights and
Know-How relating to the PI P-channel Process or to products
manufactured, or designed or developed for manufacture, using the PI
P-channel Process, to design, modify, make, use, sell, distribute,
develop any OKI Products, and to make Wafers for, and to sell or
otherwise transfer Wafers to, PI, under the terms and conditions
contained in this Agreement.
(b) License to PI N-Channel Process.
PI hereby grants to OKI, effective June 30, 1995, a non-exclusive,
non-transferable, perpetual, and worldwide license under PI's
Intellectual Property Rights and Know-How relating to the PI N-channel
Process or to products manufactured, or designed or developed for
manufacture, using the PI N-Channel Process, to design, modify, make,
use, sell, distribute, develop any OKI Products, and to make Wafers
for, and to sell otherwise transfer Wafers to, PI, under the terms and
conditions contained in this Agreement.
2.2 Limitations on Lighting Products.
OKI shall not have any right under this Agreement or the licenses granted
herein to design, develop, manufacture, or sell any products for any
application for energizing lights.
2.3 No Private Labeling Rights.
OKI shall not have any right to sell, lease or otherwise dispose of any
products manufactured using any PI Technology for purposes of resale by
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TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
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any third party as die, wafers or packaged units under any third party's
own brand label or marking.
2.4 The licenses for the PI Technology granted to OKI under Paragraph 2.1 above
shall be royalty-free, fully paid-up upon expiration of OKI's running
royalty payment period pursuant to Paragraph 5.3 below.
2.5 In addition to the rights under Paragraph 2.1, without any consent of PI,
OKI may sublicense the manufacturing right to Subsidiaries of OKI so long
as the sublicense provides for the protection of PI's Confidential
Information on terms not less protective of PI's rights than those set
forth in this Agreement. Any such sublicense may be made effective
retroactively, but not prior to the Effective Date hereof, nor prior to the
sublicensee's becoming a Subsidiary of such company.
2.6 In addition to the rights under Paragraph 2.1, without any consent of PI,
OKI may have any third party assemble and test the Products.
2.7 License to OKI Improvements.
OKI hereby grants to PI a non-exclusive, perpetual, royalty-free,
nontransferable, worldwide, right and license to use OKI improvements to
the PI Processes to design, make and have made PI Products, and to use,
sell, lease or otherwise dispose of PI Products worldwide, under the terms
and conditions contained in this Agreement. Without any consent of OKI, PI
may sublicense the manufacturing rights to Subsidiaries of PI so long as
the sublicense provides for the protection of OKI's Confidential
Information on terms not less protective of OKI's rights than those set
forth in this Agreement. Any such sublicense may be made effective
retroactively, not prior to the Effective Date hereof, nor prior to the
sublicensee's becoming a Subsidiary of such party. Any foundry agreement PI
enters into in order to exercise its have made rights under this Agreement
must contain provisions for the protection of OKI's improvements regarding
the PI Processes which are not less protective of OKI's rights than the
corresponding provisions of this Agreement.
2.8 Functionally Equivalent Products. Neither party will have any rights under
the licenses granted in this Agreement to design, make, have made, or use,
sell or otherwise dispose of pin-for-pin replacements of products already
introduced by the other party.
Article 3. (Technology Transfer)
3.1 Unless otherwise agreed in writing, within fourteen (14) days after PI's
receipt of the first [*] installment payable pursuant to Section 5.1 below,
PI shall transfer to OKI all Technical Information related to the PI
Technology. The Technical Information to be transferred from PI to OKI
hereunder shall be described in Exhibit A attached hereto.
3.2 Information Transfer.
Information relating to the PI Technology will be transferred from PI to
OKI, and information relating to OKI's improvements will be transferred
from OKI to PI, for purposes of prototype development fabrication and
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production fabrication by OKI at the Fab pursuant to the terms of this
Article 3 and for the parties to exercise their rights under the licenses
granted in the Agreement. PI and OKI shall use their reasonable efforts to
complete the transfer of the necessary technology to the Fab and to
commence production of PI Products to meet PI's Product requirements
stating no later than a date to be agreed by the parties. PI agrees to
reimburse OKI for the reasonable expenses incurred in providing OKI's
improvement to PI, if so requested by OKI.
3.3 Bring-Up of PI Process
(a) OKI shall use its reasonable efforts to bring-up the PI Processes at the
Fab in order to supply PI prototype wafers and production wafers as
contemplated by this Agreement. OKI an PI shall use reasonable efforts to
perform or fulfill the development milestones of which each is responsible
and to perform and fulfill such milestones for which each is responsible
and to perform and fulfill such milestones according to the schedule agreed
on.
(b) During the period of prototype development, the OKI team and the PI team
shall jointly issue to both OKI and PI monthly progress reports.
3.4 Expenses During Bring-Up
(a) Except as otherwise provided in this section 3.4, each party shall pay all
of its own expenses incurred in order to perform its obligations under this
Agreement.
(b) OKI shall provide and pay for all (i) development wafer processing as
needed in order to permit the milestones agreed upon by the parties to be
timely accomplished (with the actual number of wafers and the frequency of
their production to be determined by mutual agreement of PI and OKI), (ii)
mask tooling for one test vehicle PI Product, (iii) process test chip
tooling costs and (iv) other production related costs associated with one
test vehicle PI Products.
3.5 Process Bring-Up Wafers. During the period of prototype development, all
processed die generated from development runs and which relate to PI
Products or the PI Processes shall be divided 33-1/3% for team diagnostics,
evaluation and life test, 33-1/3% for PI and 33-1/3% for OKI. PI's
allocable portion of such processed die shall be sent to PI at no cost to
PI at the earliest possible time.
3.6 Notwithstanding anything to the contrary set forth in this Agreement,
neither party shall have any obligation under this Agreement to disclose
and provide any confidential information of third parties, or which such
party owns jointly with third parties, and which such party is not
entitled to disclose pursuant to the terms of any agreement: (a) entered
into prior to the date of this Agreement, or (b) entered into on or after
the date of this Agreement, so long as the party hereunder which
withholds disclosure pursuant to this provision has exercised reasonable
efforts to negotiate the right to provide such information to the other
party hereunder.
<PAGE>
Article 4. (Technical Cooperation)
4.1 If OKI encounters any technical difficulties on design, modification, use,
development or application of PI Technology, PI shall provide necessary
Technical Cooperation to OKI for smooth start-up of its design work and
production as follows:
(a) One PI employee for one visit to the Fab, consisting of five consecutive
days, at PI's expense.
(b) At OKI's request, up to two additional visits to the Fab, consisting of two
consecutive days each, by one PI employee. OKI shall reimburse PI for all
reasonable travel and living expenses incurred by PI's employees in
providing this assistance, and shall pay PI [*] per day for each such day
of assistance.
(c) Reasonable access by fax and phone to PI's employees to average not more
than two days per month, at no charge.
(d) At OKI's request, up to an additional two days per month of access by fax
and phone to PI's employees. OKI shall pay PI [*] per day for each such day
of assistance.
(e) Not more than two visits during the first six months after the date of this
Agreement, and one visit during the next six months, by up to three OKI
employees to PI's offices, at no charge. Each such visit will be for not
more than three days and require the full-time assistance during normal
working hours of not more than two PI employees.
4.2 Upon OKI's request, PI agrees to provide OKI with consultation services
including regarding OKI's Products design work upon detailed terms and
conditions to be mutually agreed upon.
4.3 PI shall have no obligation to provide technical assistance under this
Agreement at any OKI facility other than the Fab. PI shall have no
obligation to provide Technical Cooperation or other information or
assistance to OKI except as expressly provided in this Agreement.
4.4 PI shall provide to OKI the Technical Cooperation in accordance with
reasonable professional standards and exert its reasonable efforts to
ensure the accuracy and efficacy of the Technical Cooperation.
4.5 Technical transfer pursuant to Article 3 and the meeting under this Article
shall be made or conducted in the English language and the Technical
Information in writing shall be provided in the English language.
Article 5 (Compensation)
5.1 In partial consideration of the licenses granted by PI to OKI under Article
2 above and of the technology transfer from PI to OKI under Article 3
above, OKI will pay PI the initial license fee in the amount of [*]
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[*] United States dollars (U.S. [*]) and in the following installments:
Upon the Effective Date of this Agreement: U.S. [*]
Upon completion of technology transfer pursuant to Paragraph 3.1:
U.S. [*]
All payment shall be in United States Dollars by telegraphic transfer to
such bank account of PI as may be designated by PI within 30 days after the
date each such installment becomes payable as provided above.
5.2 In addition to the initial license fee, OKI shall supply 4-inch Wafers to
PI free of charge up to the value of the Foundry Credit.
5.3 Also, in addition to the initial license fee, OKI will pay PI a running
royalty for the license granted and technology transfer made by PI, at
[*] of OKI's Net Selling Price (defined in Paragraph 5.4) of each unit of
OKI Product used, leased, sold or otherwise disposed of by OKI for a period
of, and in no event longer than, [*] from the date OKI first ships full
production OKI Products to customers.
OKI Product shall be considered as used, sold, leased or disposed of, as
the case may be, when billed out, delivered, shipped or mailed to a
customer or lessee, or when first used or first set aside for future use by
OKI, whichever shall first occur. Product disposed of as scrap shall not be
considered as OKI Product manufactured under this Agreement.
5.4 The term "Net Selling Price(s)" as used in this Agreement shall be
determined as follows:
(a) In respect of OKI Product in the form of packaged, tested product or as die
or wafers sold in normal, arm's length, commercial transactions between
parties which are not in affiliation, the Net Selling Price(s) shall be the
aggregate of the genuine selling prices at which customers are billed in
the usual course of business for such OKI Product, without any deductions
or credits other than those determined as provided below, if any.
(b) In respect of OKI Product in the form of packaged, tested product or as die
or wafers used, leased or otherwise disposed of, or sold otherwise than in
normal, arm's length, commercial transactions between parties which are not
in affiliation, the Net Selling Price(s) shall be the aggregate of the
genuine selling prices of the same quantities of similar or substantially
similar OKI Product which are sold in normal, arm's length, commercial
transactions between parties which are not in affiliation, or, if there be
no similar or substantially similar OKI Product so sold, then the fair
market value thereof, without any deductions other than those determined as
provided below, if any.
(c) In determining its Net Selling Price(s), OKI may deduct from the genuine
selling price, equivalent thereof or fair market value, as the case may be,
of OKI Product:
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(i) transportation charges, packing fees and insurance fees;
(ii) sales taxes, import duties and other excise taxes imposed or paid
directly with respect to the sale of such product;
(iii) quantity and cash discounts actually allowed and allowances or
credits to customers on account of product rejection or returned sales.
5.5 Within one (1) month after the end of each March and September OKI shall
furnish to PI a written report certified by an officer of OKI showing (i)
the number of the OKI Products sold or otherwise disposed of by OKI during
the six-month period then ended, (ii) the aggregate of the Net Selling
Price(s) of each kind of OKI Product, (iii) all deductions and credits
claimed by OKI pursuant to the prior paragraph in determining such Net
Selling Price(s), and (iv) the total net compensation payable for each
kind of OKI Product pursuant to this Agreement.
5.6 With each report required by Paragraph 5.5 above, OKI shall remit to PI,
in United States Dollars, the total amount shown thereby to be due by
telegraphic transfer to such bank account of PI as may be designated by
PI.
5.7 OKI agrees to keep accurate records showing the number of the OKI Products
sold by OKI and the Net Selling Prices thereof. Such records shall be
available for inspection by an independent certified public accountant,
acceptable to OKI, selected and paid by PI during reasonable business
hours for the purpose of verifying the amounts due under Paragraph 5.3
hereof. Such inspection shall not be made more than once annually. Such
accountant shall disclose to PI only the figure representing the correct
amount and shall not disclose any other information of OKI except that
which should properly have been contained in any report required
hereunder. OKI shall not be required to retain said records for more than
three (3) years after the end of the year to which said records pertain.
5.8 All payment made by OKI to PI pursuant to this Article shall be made after
deduction of any applicable Japanese withholding tax from such payments.
OKI shall promptly furnish PI with official receipts issued by the tax
authorities.
5.9 No royalty shall be payable for any such Wafers and/or PI Products that
are supplied to PI and/or its Subsidiaries by OKI.
Article 6. (Improvements)
PI shall promptly disclose to OKI any improvements to PI Technology made or
developed after the Effective Date of and during the term of this Agreement and
thereupon PI shall be deemed to have granted OKI a license to use such
improvements on the same terms as set forth in Article 2 with respect to PI's
Intellectual Property Rights and Know-How.
<PAGE>
CHAPTER 3. SUPPLY OF WAFERS
Article 7. (Sale and Purchase of Wafers)
7.1 OKI hereby agrees to sell to PI the Wafers and PI shall purchase the
Wafers pursuant to the terms and conditions of this Agreement.
Reserved Capacity.
OKI shall make available to PI, from the production capacity of the Fab,
Wafers at the rate (measured monthly) of: [*] Wafers per week during the
[*] after Qualification, and [*] Wafers per [*] thereafter throughout
the Term. At PI's request, the parties shall negotiate in good faith the
provision by OKI of more than the above capacity commitment.
Minimum Purchase.
PI shall purchase from OKI Wafers at minimum in the quantity of [*] of
the production capacity of the Fab reserved for PI under this Article
7.1.
7.2 The production and sale of the Wafers may be made by any Subsidiary of
OKI.
7.3 PI may resell the PI Products only in the form of finished products or
dies, but shall not resell any of them in the form of a wafer except to
manufacturers of hybrid circuits.
7.4 OKI will manufacture Wafers for PI using all improvements to the PI
Processes that OKI uses for its own similar wafers.
Article 8. (Mask Sets and Prototype Wafers for PI Products)
8.1 PI shall supply the data-base tape, free of charge, for mask making for
PI Products to OKI in a mutually agreed data-base format.
8.2 OKI may examine the data-base upon receipt of the data-base tape. If
upon such examination the data-base is found to be defective or not in
conformity with the Common Specifications, OKI shall immediately notify
PI in detail as to such defects or nonconformity, and PI will either
provide a corrected data-base tape and/or request a return of the
defective data-base tape at PI's expense for correction.
8.3 After Qualification, simultaneously with the supply of the data-base
tape referred to in Section 8.1 above, PI shall place purchase orders
with OKI for the mask sets and prototype wafers for the Wafers of the PI
Products in written form which shall state model name (number). The cost
of such mask sets and prototype wafers ordered by PI to OKI shall be
paid by PI in accordance with the price schedule to mask sets as
described in Exhibit C attached hereto. PI shall place an order with OKI
for a minimum of ten (10) prototype wafers per one mask set.
8.4 After Qualification, OKI shall make mask sets based on the data-base
tape supplied by PI and shall process the Wafers of the PI Products
using such mask sets according to the schedule as agreed upon by the
parties.
8.5 After Qualification, payment for the mask sets and prototype wafers
payable by PI under Section 8.3 above shall be made by an irrevocable
and confirmed letter of credit payable at sight to be opened by PI at a
first class bank acceptable to OKI. The opening of all letters of credit
shall be
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advised to OKI by the time PI places an order for such mask set or
prototype wafers.
Article 9. (Volume Production)
9.1 For the Volume Production, PI shall order Wafers in lots, each of which
will contain a minimum of 50 Wafer starts. PI may use the reserved
capacity for any mix of Wafer lots for any PI Products.
9.2 The orders of PI for the volume production shall be subject to written
acknowledgment of OKI (which will not be unreasonably withheld or
delayed) and based on and subject to the forecasts provided in Article
10 below. For purposes of such acknowledgment, it shall be unreasonable
for OKI to withhold or delay such acknowledgement due to allocation of
production capacity at the Fab or preferential treatment of other OKI
customers.
9.3 Production Leadtimes After Qualification:
(a) PI will notify OKI 20 calendar days in advance of a new mask set
request. OKI will complete masks sets for any PI Product within eighteen
(18) working days after OKI's receipt of a final database tape for such
PI Product.
(b) OKI will deliver production Wafers of any PI Product within forty-two
(42) calendar days after delivery of PI's purchase order for such PI
Product, unless PI's purchase order specifies a later delivery date.
9.4 Quick Turn Lots.
During the Term, PI may order [*] quick-turn lot per month for new
product designs. OKI agrees to start each quick-turn lot in the Fab
within five (5) days after receipt of a PI purchase order therefor, and
to complete wafer processing within twenty-five (25) calendar days from
the start date or the OKI standard fast-turn-cycle time at the start
time, if longer. OKI will deliver the lot without other conditions
beyond those stated in this Agreement. OKI will deliver the lot subject
to OKI's reasonable capacity constraints, and the lot will be charged at
twice PI's usual Wafer price. During the period of Initial Wafer supply,
charges will be against the Foundry Credit, rather than for payment
pursuant to Article 14 below.
9.5 Nonconforming Deliveries.
If any delivery of Wafers by OKI to PI does not conform in any material respect
to PI's order for such Wafers, PI and OKI shall negotiate is good faith to
resolve the problem quickly.
Article 10. (Forecasts)
10.1 Orders and Forecasts.
PI shall deliver to OKI monthly a binding purchase order covering two
(2) months of deliveries of Wafers and a nonbinding forecast of Wafer
requirements for the following four (4) months. PI also may deliver
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<PAGE>
additional orders to OKI at such times and as often as PI elects, which
orders shall conform to the requirements of this Agreement. So long as
PI's orders are within the maximum reserved quantities of Wafers
provided for in Section 7.1 above and are in accordance with the lead
times provided for in Sections 9.3 or 9.4 above, OKI shall have no right
to refuse to accept or to reject any such order, and all such orders
shall be deemed automatically accepted by OKI. OKI shall acknowledge
PI's orders in writing, confirming quantities and delivery dates of
ordered Wafers; provided, however, that any failure on the part of OKI
to deliver such an acknowledgment shall not release OKI from its
obligation to deliver Wafers in accordance with PI's valid orders.
10.2 Termination of Orders.
Should PI terminate any order hereunder, in whole or in part, other than
with respect to defective Wafers or nonconforming deliveries, PI shall
compensate OKI according to the following schedule:
Day -- Time between date of cancellation and agreed upon delivery date
Liability -- Liability is percentage of aggregate purchase price of
canceled portion of order
Days 0 to 42 Days 42 to 60
Liability [*] [*]
Article 11. (Delivery)
The terms of delivery of the Wafers shall be FCA (Free Carrier) Tokyo (Incoterms
1990).
Article 12. (Test and Inspection)
12.1 OKI shall conduct E-test and visual inspection according to the Common
Specification before the delivery of the Wafers of the PI Products.
12.2 PI shall conduct incoming inspection according to the Common
Specifications. This inspection shall be regarded as final in terms of
quality, quantity and other conditions of the Wafers supplied to PI.
12.3 PI shall notify OKI of the result of the inspection within forty (40)
days after the date of the relevant air way bill regarding shipment from
OKI. Should PI fail to so notify within said forty (40) day period, the
shipment lot shall be deemed to have been acceptable by PI.
12.4 If the Wafers failed the incoming inspection described in Section 12.2
above, PI shall notify OKI in writing the reason of such failure with
the result as provided in Section 12.3 above. Both parties shall discuss
to agree upon resolution thereof, including without limitation,
replacement of the Wafers, and any other reasonable means.
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<PAGE>
12.5 OKI shall not be held responsible for the defects and failures which are
attributable to PI, including without limitation, the design, test or
assembly by PI of the Wafers.
Article 13. (Packing)
OKI shall pack the Wafers in accordance with packing standards which shall be
set forth in the Common Specifications.
Article 14. (Price and Charge)
14.1 After all Initial Wafers have been supplied, OKI will provide PI with
all Additional Wafers at the prices set forth in Exhibit C, which shall
be reviewed by OKI and PI, if requested by OKI or PI. Unless the parties
otherwise agree, such review will occur not more often than once every
six month and any changes to such prices will only be made by mutual
agreement.
14.2 In the event of any direct or indirect intervention of the Japanese,
the United States and/or any other relevant Governments, including the
legislative, administrative and judicial branches thereof, which may
legally disallow a price at which Wafers shall be supplied, then OKI
shall not be obligated to abide by such price without any liability to
PI, and OKI and PI shall promptly discuss to agree upon an alternative
permissible price.
Article 15. (Payment)
Payment for the Wafers shall be made by an irrevocable and confirmed letter of
credit payable at sight to be opened by PI at a first class bank acceptable to
OKI. The opening of all letters of credit shall be advised to OKI not later than
thirty (30) days prior to the scheduled shipment of the relevant Wafers.
Article 16. (Warranty)
16.1 OKI warrants that the Wafers sold to PI under this Agreement will be
free from defects in material and workmanship and conform to their
Common Specifications. OKI's sole obligation under this warranty is
limited to replacing, any said Wafers which shall, within three (3)
months after the date of the relevant air way bill, be found to be
defective and which, at OKI's instruction, are returned to OKI's
manufacturing facility with transportation charges prepaid. This
warranty set forth herein shall not extend to any defects attributable
to PI, including without limitation, a defect of design of or misuse by
PI or its customers. OKI shall keep records for three (3) years of each
processed lot manufactured and summaries of process monitors for one (1)
year for warranty traceability. Notwithstanding anything to the contrary
set forth in this Agreement, if any customer of PI claims any
inconvenience in any products resulting from OKI's diffusion of Wafers
and PI decides to deal with such inconvenience, OKI shall give necessary
support to PI, upon PI's request, up until one year after the expiration
or earlier termination of the Agreement. PI will consult with OKI
regarding any such diffusion problem and provided to OKI information
available to PI regarding such problem.
<PAGE>
16.2 EXCEPT AS OTHERWISE EXPLICITLY PROVIDED IN THIS AGREEMENT, THE WAFERS
ARE SUPPLIED WITHOUT WARRANTY OF ANY KIND, WHETHER EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE.
Article 17. (Finished PI Products)
17.1 At PI's request, OKI may undertake to assemble and/or test for finished
products incorporating the PI Products, if OKI's production and test
capacity will be deemed to be available at the reasonable discretion of
OKI. Detail terms and conditions shall be agreed upon by the parties. In
such case, if PI requests and OKI agrees that OKI manufacture and/or
test any PI Product with a package tooling which is not OKI's standard
tooling, PI shall bear all the costs and expenses relating to
manufacture of the relevant tools and development of the relevant
computer software programs.
17.2 The total number of (i) the Wafers the dies of which are used in the
finished products provided in Section 17.1 above and (ii) the Wafers
supplied by OKI pursuant to this Chapter shall not exceed the number of
Wafers provided in Section 7.1.
CHAPTER 4. GENERAL PROVISIONS
Article 18. (Confidentiality)
18.1 Neither party shall use any Confidential Information or any other
information acquired from the other party in connection with this
Agreement except solely for the purposes of, and as permitted by, this
Agreement. For a period of [*] after receipt of the other party's
Confidential Information, PI and OKI shall use such care as each party
uses to protect its own confidential information not to use or disclose
to any third party, except as otherwise provided herein, any of the
other party's Confidential Information.
18.2 Notwithstanding the other provisions of this Article or of this
Agreement, nothing received by one party to this Agreement shall be
subject to the confidentiality obligation provided in Paragraph 18.1
above which is:
18.2.1 Published or otherwise made available to the public other than by a
breach of this Agreement by the receiving party: or
18.2.2 Rightfully received by the receiving party from a third party not
obligated under this Agreement and without confidentiality limitation:
or
18.2.3 Approved in writing for release by the disclosing party: or
18.2.4 Independently developed by the receiving party: or
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18.2.5 Known to the receiving party prior to its first receipt of the same from
the disclosing party: or
18.2.6 Hereafter disclosed by the disclosing party to a third party
intentionally without restriction on disclosure.
18.3 If any Confidential Information is disclosed by the receiving party
pursuant to the requirement or request of a governmental or judicial
agency or if the disclosure is required by operation of law, such
disclosure will not constitute a breach of this Agreement, provided that
the receiving party shall promptly notify the disclosing party.
18.4 Information Already Know. If a party receives information that the
disclosing party is treating as Confidential Information and which is
already known to the receiving party, such information shall nonetheless
be Confidential Information for the purposes of this Agreement unless
the receiving party demonstrates by reasonable evidence within a
reasonable time after the information is disclosed that such information
was already known to it before it was disclosed by the disclosing party.
18.5 Disclosure of OKI Improvements. PI may disclose information with respect
to any OKI improvement to the PI Processes to one or more third parties
for the sole purpose of having such third parties provide PI with
design, layout, foundry, assembly and testing services.
Article 19 (Infringement of Third Parties' Intellectual Property Rights)
19.1 PI warrants that the PI Technology licensed to OKI shall be free from
infringement of any third party's rights including, but not limited to,
patents, copyrights or other intellectual property rights of a third
party. PI hereby agrees to indemnify and hold harmless OKI and its
Subsidiary, from and against any and all liabilities, damages, costs and
expenses (including reasonable attorney's fees) incurred by OKI and/or
its Subsidiary as a result of any claim that the Products and/or PI
Technology licensed to OKI violate any third party's rights.
19.2 PI shall have the right to defend, or at its option to settle, any such
claim subject to the aforementioned Paragraph. PI shall not, without
OKI's prior written consent, which will not be unreasonably withheld or
delayed agree to any settlement which imposes any obligation or
liability on OKI and/or its Subsidiary. OKI shall at its own expense, be
entitled to participate in any such defense or settlement to the extent
that such participation does not interfere with PI's sole control
thereof. PI may, at its sole option, be relieved of the foregoing
obligations to indemnify OKI unless OKI notifies PI promptly in writing
of any such claim of which OKI becomes aware and gives PI authority to
proceed in the settlement and/or defense thereof as provided herein.
Upon PI's request, OKI and its Subsidiary shall at their own expense,
furnish reasonable assistance and provide appropriate documentation, if
available, to PI in connection with any claim under this Article 19.
<PAGE>
19.3 Indemnity LImitation. PI's total liability under this Article 19 shall
not exceed an amount equal to [*] of all license fees actually
received by PI from OKI pursuant to Section 5.1 above.
19.4 If (a) a bona fide lawsuit is filed against OKI alleging that PI
Products or OKI Products infringe any patent of a third party, (b) such
infringement arises from the PI Technology and not any combination of
the PI Technology with OKI's technology, and (c) the indemnity
limitation set forth in Section 19.3 has been reached, OKI may terminate
its obligation to provide and PI's obligation to purchase Wafers under
this Agreement by giving written notice to PI.
19.5 OKI warrants that the OKI improvements licensed to PI shall be free from
infringement of any third party's rights including, but not limited to,
patents, copyrights or other intellectual property rights of a third
party. OKI hereby agrees to indemnify and hold harmless PI and its
Subsidiary, from and against any and all liabilities, damages, costs and
expenses (including reasonable attorneys' fees) incurred by PI and/or
its Subsidiary as a result of any claim that the Products and/or OKI
improvement licensed to PI violate any third party's rights.
19.6 OKI shall have the right to defend, or at its option to settle, any such
claim subject to the aforementioned Paragraph. OKI shall not, without
PI's prior written consent, which will not be unreasonably withheld or
delayed agree to any settlement which imposes any obligation or
liability on PI and/or its Subsidiary. PI shall at its own expense, be
entitled to participate in any such defense or settlement to the extent
that such participation does not interfere with OKI's sole control
thereof. PI may, at its sole option, be relieved of the foregoing
obligations to indemnify PI unless PI notifies OKI promptly in writing
of any such claim of which PI becomes aware and gives OKI authority to
proceed in the settlement and/or defense thereof as provided herein.
Upon OKI's request, PI and its Subsidiary shall at their own expense,
furnish reasonable assistance and provide appropriate documentation, if
available, to OKI in connection with any claim under this Article 19.
19.7 Indemnity Limitation. OKI's total liability under this Article 19 shall
not exceed an amount equal to [*] of all license fees actually received
by PI from OKI pursuant to Section 5.1 above.
19.8 If (a) a bona fide lawsuit is filed against PI alleging that OKI
Products or PI Products infringe any patent of a third party, (b) such
infringement arises from OKI's technology and not any combination of the
PI Technology with OKI's technology, and (c) the indemnity limitation
set forth in Section 19.7 has been reached, PI may terminate its
obligation to purchase and OKI's obligation to supply Wafers under this
Agreement by giving written notice to OKI.
Article 20. (Term and Termination)
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TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
<PAGE>
20.1 The term of this Agreement shall commence on the Effective Date and
shall continue in full force and effect for a period of five (5) years
from the Effective Date, unless sooner terminated as provided herein.
20.2 Remedies for Qualification Failures.
(a) If Qualification is not accomplished within ninety (90) days after the
date by which Qualification is scheduled to be accomplished according
to the agreement of the parties, and the failure to accomplish
Qualification within such extended period is not caused by a material
default on the part of PI of its obligations to provide Confidential
Information, Technical Cooperation as required under this Agreement,
PI may, upon giving OKI prior written notice, elect the following
remedy for such failure, which shall be effective thirty (30) days
after such notice is given. PI shall not give such notice unless PI
has first consulted with OKI, OKI has had a reasonable opportunity to
cure the default, and the default has not been cured. Such remedy
shall be PI's exclusive remedy for the non-occurrence of
Qualification:
(1) All licenses granted by PI to OKI under this Agreement shall
terminate.
(2) OKI shall return to PI all of PI's Confidential Information delivered
to OKI, and shall destroy all reports and compilations which include
or are based on PI's Confidential Information.
(3) PI shall retain the [*] licensing fee payable by OKI pursuant to Section
5.1 of this Agreement.
(4) This Agreement shall terminate.
(5) All licenses granted by OKI to PI under this Agreement shall
terminate.
(b) If Qualification is not accomplished within ninety (90) days after the
date by which Qualification is scheduled to be accomplished according
to the agreement of the parties, and the failure to accomplish
Qualification within such extended period is caused by a material
default on the part of PI of its obligations to provide Confidential
Information and Technical Cooperation as required under this
Agreement, and is not caused by a materials default on the part of OKI
of its obligations under this Agreement, OKI may, upon giving PI prior
written notice, elect the following remedy for such failure, which
shall be effective thirty (30) days after such notice is given. OKI
shall not give such notice unless OKI has first consulted with PI, PI
has had a reasonable opportunity to cure the default, and the default
has not been cured. Such remedy shall be OKI's exclusive remedy for
the non-occurrence of Qualification:
(1) All licenses granted by OKI to PI under this Agreement shall
terminate.
(2) PI shall return to OKI all of OKI's Confidential Information delivered
to PI, and shall destroy all reports and compilations which include or
are based on OKI's Confidential Information.
[*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
<PAGE>
(3) This Agreement shall terminate.
(4) All licenses granted by PI to OKI under this Agreement shall be
retained by OKI, subject to OKI's payment of royalties as provided in
Section 5.3.
20.3 Except as otherwise expressly provided in this Article 20, in the
event that either party has committed a material breach of this
Agreement, without any material causative fault on the part of the
other party, the other party shall have the right to terminate this
Agreement by giving sixty (60) days' written notice of termination
specifying any alleged material breach, such termination to become
effective at the end of said period unless during said period all
material breaches specified have been remedied or waived.
20.4 Either party shall also have the right to terminate this Agreement
with immediate effect by giving wriiten notice of termination to the
other party at any time upon or after the occurrence of any of the
following events with respect to such other party:
20.4.1 Insolvency, bankruptcy or liquidation or filing of any application
therefor;
20.4.2 Attachment, execution or seizure of substantially all of the assets or
filing of any application therefore;
20.4.3 Assignment or transfer of that portion of the business to which this
Agreement pertains to a trustee for the benefit of creditors;
20.4.4 Disposition of that portion of the business or the material assets to
which this Agreement pertains; or
20.4.5 Termination of its business or dissolution.
20.5 No failure or delay on the part of either party in exercising its
right of termination hereunder for any one or more causes shall be
construed to prejudice its rights of termination for such cause or any
other or subsequent cause.
20.6 In the event of termination of this Agreement pursuant to Section 20.3
or 20.4 above, the party terminating this Agreement may continue to
use the Intellectual Property Rights and Know-How of the other party
for the purpose stated in this Agreement without any obligation to the
other party except for those obligations under this Agreement which
are expressly provided in this Agreement to survive such termination
of this Agreement.
20.7 The termination or expiration of this Agreement shall not release
either party from any liability which at said date of termination has
already accrued to the other party.
20.8 Notwithstanding any termination of this Agreement, the provisions of
Article 5 (Compensation), Article 18 (Confidentiality), Article 19
(Infringement of Third Party's Intellectual Property Rights), Article
20 (Termination), Section 23.5 (Notice), Section 23.9 (Force Majeure),
23.13
<PAGE>
(Remedies), 23.14 (Injunctive Relief), 23.15 (Attorneys' Fees), and
Section 25.11 (Arbitration) shall survive this Agreement.
20.9 The remedies provided in this Article are cumulative with each other
and with other remedies available under law.
Article 21. (Announcement)
The parties will agree on the content of a press announcement related to the
relationship contemplated by this Agreement. Neither of the parties shall
unilaterally make any announcement of the formation and existence of this
Agreement without prior written consent of the other party. This provision
shall not affect the rights of the parties to disclose under confidentiality
and use restrictions, such terms of the Agreements as are reasonably necessary
to disclose for purpose of: providing information of the type customarily
requested by customers and prospective customers in the ordinary course of
business, seeking debt or equity financing, bank credit or the like, and, in
the case of the PI, pursuing discussions with other strategic partners. Both
parties shall remain free to disclose the existence of this Agreement, that
OKI is a foundry for the PI's products, and the origin of products produced
under this Agreement.
Article 22. (Export Control)
Unless prior approval is obtained from the competent governmental agency, each
party shall not knowingly export or re-export, directly or indirectly, any PI
Technology, improvements on PI Technology, products using PI Technology or
improvements on PI Technology or Wafers, to any country or countries to which
export or re-export will violate any laws or regulations of either the United
States of America or Japan.
Article 23. (Miscellaneous Provisions)
23.1 Waiver. Should either PI or OKI fail to enforce any provision of this
Agreement or to exercise any right in respect thereto, such failure
shall not be construed as constituting a waiver or a continuing waiver
of its rights to enforce such provision or right or any other
provision or right.
23.2 No Other License. Nothing contained in this Agreement shall be
construed as conferring by implication, estoppel or otherwise upon
either party hereunder any license or other right except the licenses
and rights expressly granted hereunder.
23.3 English Language. This Agreement is in the English language only,
which language shall be controlling in all respects, and all versions
hereof in any other language shall be for accommodation only and shall
not be binding upon the parties.
23.4 No Agency. Nothing contained herein or done in pursuance of this
Agreement shall constitute either party the agent of the other party
for any purpose or in any sense whatsoever.
<PAGE>
23.5 Notices. Any notice required or permitted to be given by either party
under this Agreement shall be deemed to have been given at the time it
is delivered in person or sent by registered airmail letter or by
telegram or telex or telefax (provided that in the case of telegram,
telex or telefax, a copy of the notice will promptly be delivered by
registered airmail letter) to the other party at the following
respective addresses or such new addresses as may from time to time be
supplied hereunder.
To: OKI Electric Industry Co., Ltd.
550-1 Higashiasakawa-cho,
Hachioji-shi, Tokyo 193, Japan
Attention: General Manager, Logic LSI Division
Fax: 81-426-66-7213
Telex: 2862681 OKIEDH J
Phone: 81-426-63-1111
To: Power Integrations, Inc.
411 Clyde Avenue, Mountain View,
California 94043, U.S.A.
Attention: President
Fax: 1-415-940-1226
Phone: 1-415-960-3572
23.6 Invalidity. If any provision of this Agreement, or the application
thereof to any situation or circumstance, shall be invalid or
unenforceable, the remainder of this Agreement or the application of
such provision to situations or circumstances other than those as to
which it is invalid or unenforceable, shall not be affected; and each
remaining provision of this Agreement shall be valid and enforceable
to the fullest extent permitted by applicable law. In the event of
such partial invalidity, the parties shall seek in good faith to agree
on replacing any such legally invalid provisions with provisions which,
in effect, will, from an economic viewpoint, most nearly and fairly
approach the effect of the invalid provision.
23.7 Assignment. This Agreement and any rights or licenses granted herein
shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns. Neither party shall
assign any of its rights or privileges hereunder without the prior
written consent of the other party. Notwithstanding any other provision
of Agreement, PI may without the prior consent of OKI assign all of
its rights under this Agreement to a purchaser of all or substantially
all of PI's stock or assets or to a third party participating in a
merger or other corporate reorganization in which PI is constituent
corporation.
If PI assigns its rights in connection with such a transaction, OKI
may:
(a) cease to provide information regarding OKI's improvements to the PI
Processes immediately upon the occurrence of such assignment.
(b) terminate its obligation to provide and PI's obligation to purchase
wafers under this Agreement by giving written notice to PI, such
termination to be effective one year after such notice is given.
<PAGE>
Such cessation to provide information regarding OKI's improvement to
PI and termination of the obligation regarding wafer supply shall not
affect the license granted by PI to OKI hereunder subject to the
royalty payment in accordance with Article 5.3.
23.8 Amendments. This Agreement may not be extended, supplemented or amended
in any manner except by an instrument in writing expressly referring
to this Agreement and duly executed by authorized officers of both
parties.
23.9 Force Majeure. Either party shall be excused for failures and delays
in performance caused by war, declared or not, any laws, proclamations,
ordinances or regulations of the government of any country or of any
political subdivision of any country, or strikes, lockouts, floods,
fires, explosions or such catastrophes as are beyond the control or
without the material fault of such party ("Causes"). Any party
claiming any such excuse for failure or delay in performance due to
such Causes shall give prompt notice thereof to the other party, and
neither party shall be required to perform hereunder during the period
of such excused failure or delay in performance except as otherwise
provided herein. This provision shall not, however, release such party
from using its best efforts to avoid or remove all such Causes and
such party shall continue performance hereunder with the utmost
dispatch whenever such causes are removed. Notwithstanding the
foregoing, in the event any such cause delays either party's
performance of any of its material obligations under this Agreement,
the other party may suspend its performance under this Agreement for
the period such delay continues and if any such cause renders
impossible or delays for a period of more than six months either
party's performance of any of its material obligations under this
Agreement, the parties will hold good faith discussion to find any
other mutually agreeable countermeasures.
23.10 Indemnity. Both parties agree that neither party shall assume any
responsibility or be liable for death or any injury or accident which
may occur to any personnel of the other party or the property of such
personnel during any visits to its facility, or otherwise. Each party
agrees to indemnify the other and to hold such other party harmless
from and against all liabilities, claims and demands on account of
personal injuries (including death), or loss or damage to property,
arising out of or in any manner connected with the visits of its
personnel to such other party's offices or facilities and occasioned
by the negligence of such personnel, and it shall defend at its own
expense any and all actions based thereon and shall pay all charges
of attorneys and all costs and other expenses arising therefrom.
Notwithstanding the foregoing, neither party shall be liable to the
other for incidental or consequential damages arising from any action
or inaction of such party or from any breach of this Agreement.
23.11 Arbitration. All disputes and differences between OKI an PI arising
out of or under this Agreement shall be settled amicably through
negotiations. In case such dispute or difference cannot be settled
<PAGE>
amicably through negotiations, it shall be finally settled by
arbitration in San Francisco, California, USA pursuant to Rules of
Arbitration of the International Chamber of Commerce. The arbitration
shall be conducted in the English language. The award rendered by
arbitrator(s) shall be final and binding upon the parties hereto, may
be enforced by any court of competent jurisdiction, and may include,
when appropriate, equitable relief. Notwithstanding the foregoing, the
parties hereto may apply to any court of competent jurisdiction for
injunctive relief without breach of this arbitration provision.
23.12 Entire Agreement. This Agreement sets forth the entire agreement and
understanding between the parties as to the subject matter hereof and
supersedes all prior discussions, negotiations and agreements,
written, oral or implied, between them in respect of the subject
matter of this Agreement. Neither of the parties shall be bound by any
conditions, definitions, warranties, understandings or representations
with respect to such subject matter other than as expressly provided
herein.
23.13 Remedies. Upon the breach by either party of any provision of this
Agreement, the non-breaching party shall have the right to pursue all
available remedies at law or in equity it may elect, in order to
obtain the benefits to have been provided pursuant to the Agreements,
or to obtain adequate recourse or compensation in the event the same
are not so provided.
23.14 Injunctive Relief. Unauthorized use or disclosure of Confidential
Information will diminish the value to the parties of the trade
secrets and other intellectual property rights which are the subject
of this Agreement. Therefore, if either party breaches any of its
obligations hereunder, the other party shall be entitled to equitable
relief to protect its intellectual property rights, including but not
limited to injunctive relief, as well as monetary damages.
23.15 Attorneys' Fees. In the event of any action, suit or proceeding,
including arbitration, between the parties hereto, the prevailing
party shall be entitled to recover its costs, including those for
expert witnesses, and reasonable attorneys' fees therein.
23.16 Governing Law. This Agreement and the rights and obligations of the
parties thereunder shall be governed by, and construed in accordance
with, the laws of the United States of California as applied to
agreements entered into and to be performed entirely within California
between California residents. The parties agree that the United
Nations Convention on Contracts for the International Sale of Goods
(1980) is specifically excluded from application to this Agreement.
23.17 Time of Essence. Time is of the essence in the performance of each and
every obligation of the parties under this Agreement.
23.18 Counterparts. This Agreement may be executed in counterparts, each of
which shall be an original, and all of which together shall constitute
one and the same instrument.
<PAGE>
Article 24. (Future Project)
In case the technology transfer is completed to the satisfaction of OKI, the
parties will discuss with each other in good faith feasibility of future
projects, for example possibility of the joint development of new product.
IN WITNESS WHEREOF, the parties have caused this Agreement executed by their
duly authorized representatives.
OKI ELECTRIC INDUSTRY CO., LTD POWER INTEGRATIONS, INC.
By: /s/ Tadao Higashi By: /s/ Edward C. Ross
------------------------------ ------------------------------
Name: Tadao Higashi Name: Edward C. Ross
Title: Managing Director Title: President and CEO
Date: June 17, 1993 Date: June 17, 1993
---------------------------- ----------------------------
<PAGE>
EXHIBIT A
---------
Technical Information
---------------------
(1) Process Flowchart
This document includes a detailed process summary which specifies the
[*] and [*] of the PI p-channel process. [*] and other necessary
information required to install the "PI Process" in Oki's wafer
fabrication facility.
(2) Acceptance Criteria
This document specifies the detailed set of [*] parameters [*]
[*]
(3) [*] Specifications
(4) a. [*]
b. [*]
c. [*]
d. [*]
e. [*]
(5) Wafer Acceptance [*]
(6) Test
(a) [*]
(b) [*]
(c) [*]
(7) Assembly
(a) [*]
(8) QA
(a) [*]
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<PAGE>
(9) [*]
[*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL
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<PAGE>
EXHIBIT B
Detailed Technical Information
------------------------------
The following information will be included as part of the technology transfer
process between Power Integrations, Inc. and Oki.
Wafer Processing Infromation
[*]
[*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
<PAGE>
EXHIBIT C
(SECTION 8.3, 14.1)
PRICE FOR MASK TOOLING & WAFER
Price/Wafer Price/Wafer
Wafer Type From [*] Wafers More than [*] wafers
- ---------- ---------------- --------------------
P-Channel [*] [*]
N-Channel [*] [*]
Masks
- -----
[*] per mask layer
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<PAGE>
AMENDMENT NUMBER ONE TO LICENSING
AND WAFER SUPPLY AGREEMENT
This Amendment Number One to Licensing and Wafer Supply Agreement (the
"Amendment") is being entered into as of this 21 day of September, 1995 by and
between OKI Electric Industry Co., Ltd ("OKI"), a Japanese corporation and Power
Integrations, Inc. ("PI"), a California corporation.
WHEREAS, OKI and PI entered into the Licensing and Wafer Supply Agreement
dated as of June 17, 1993 (the "Agreement"); and
WHEREAS, OKI now desires to expand its rights to use PI technology; and
WHEREAS, PI is willing to grant OKI certain rights to its TOPSwitch
technology subject to certain restrictions; and
WHEREAS, OKI and PI desire to modify the terms of their wafer supply
agreement; and
WHEREAS, the parties desire to amend the Agreement to reflect these
understandings;
NOW, THEREFORE, in consideration for the mutual promises, covenants and
agreements of the parties contained herein, the parties hereby agree to amend
the Agreement as follows:
1. Article 1. Article 1 (Definitions) shall be amended and restated to read
---------
in full as follows:
Article 1. (Definitions)
When used throughout this Agreement, each of the following terms shall have
the meaning indicated below:
1.1 "Acceptance Criteria" shall mean the acceptance criteria for the
Wafers to be mutually agreed upon by OKI and PI.
1.2 "Additional Wafers" shall mean all Wafers supplied during the term of
the Agreement after all Initial Wafers have been supplied.
1.3 "Asian Territory" means the [*].
[*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL
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1
<PAGE>
1.4 "Confidential Information" shall mean the database tapes referred to
in Article 8 below, Process Technical Information, TOPSwitch Technical
Information, Process Know-How, TOPSwitch Know-How or other non-public
information which is designated in writing, by appropriate legend, as
confidential and, if disclosed orally or in any recorded form, its
summary shall be reduced to writing within thirty (30) days after
disclosure and designated by appropriate legend as confidential.
1.5 "Effective Date" shall mean the date when the Agreement is fully
executed by both parties hereto.
1.6 "Existing Circuit Intellectual Property Rights" shall mean (i) all PI
circuit design patents issued on or prior to [*] (the "Existing
Circuit Patents") and (ii) utility models, design rights, copyrights,
mask work rights and trade secrets related to the Existing Circuit
Patents in existence on the date of this Amendment. Existing Circuit
Intellectual Property Rights shall not include any TOPSwitch Related
Intellectual Property.
1.7 "Existing Circuit Related Know How" shall mean any and all technical,
industrial and engineering information, knowledge and experience with
respect to the Existing Circuit Related Intellectual Property Rights
known by PI, as of the date of this Amendment, represented in any
document, method, process, design, design technology, manufacturing
technology, machinery, instrument or other equipment used or owned by
PI, or with respect to which and to the extent to which and subject to
the conditions under which PI has the right to grant licenses of the
scope granted herein without the payment of royalty or other
consideration to third persons except for payment to third persons for
inventions made by said persons while employed by PI. Existing
Circuit Related Know How shall not include any TOPSwitch Related Know
How.
1.7 "Existing Circuit Technical Information" shall mean technical
information in existence on the date of this Amendment regarding PI
Existing Circuit Technology which is used in the design, manufacture,
use, test or operation of PI Products and OKI Products. Existing
Circuit Technical Information shall not include any TOPSwitch
Technical Information.
1.8 "Fab" shall mean OKI's wafer fabrication facility in Miyazaki, Japan.
Any change in facility location will only be with the prior written
consent of PI.
1.9 "Foundry Credit" shall mean [*] worth of Wafers, valuing Wafers
at [*] per 4 inch Wafer deducting any applicable Japanese withholding
tax.
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2
<PAGE>
1.10 "Initial Wafers" shall mean 4-inch wafers supplied to PI free of
charge pursuant to Section 5.3 below.
1.11 "Licensed TOPSwitch Improvements" shall mean any of the following
improvements to the TOPSwitch Related Intellectual Property Rights
made by PI during the term of the Agreement: [*].
1.12 "OKI Improvement" shall mean any modification or improvement to the
PI Technology made by OKI during the term of the Agreement.
1.13 "OKI Process Technology" shall mean the [*] of OKI which shall be
capable to produce PI Products under this Agreement.
1.14 "OKI Products" shall mean a family of Power IC products which are
developed and manufactured by OKI using PI Technology.
1.15 "OKI TOPSwitch Products" shall mean any Power IC products which are
developed and manufactured by OKI using TOPSwitch Technology.
1.16 "PI Existing Circuit Technology" shall mean the Existing Circuit
Related Intellectual Property Rights and the Existing Circuit Know
How.
1.17 "PI N-Channel Process" shall mean (a) the specific n-channel power
technology (nominally [*]) of PI and (b) extensions of the foregoing
to higher voltages, that is more fully described in Exhibit A to the
---------
Agreement, and in the documents identified in Exhibit B to the
---------
Agreement. Reference to PI N-Channel Process covers device structures
that fit within (a) and (b) above, but does not include other device
structures.
1.18 "PI P-Channel Process" shall mean (a) the specific p-channel power
technology (nominally [*]) of PI and (b) extensions of the foregoing
to higher voltages, that is more fully described in Exhibit A to the
---------
Agreement, and in the documents identified in Exhibit B to the
---------
Agreement. Reference to PI P-Channel Process covers device structures
that fit within (a) and (b) above, but does not include other device
structures.
1.19 "PI Processes" shall mean the PI N-Channel Process and the PI P-
Channel Process.
1.20 "PI Process Technology" shall mean the Process Related Intellectual
Property Rights and the Process Related Know-How.
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3
<PAGE>
1.21 "PI Products" shall mean Power IC products which are developed by PI
using PI Technology either alone or with OKI Improvements.
1.22 "PI Technology" shall mean the Process Related Intellectual Property
Rights, the TOPSwitch Related Intellectual Property Rights, the
Process Related Know-How, the TOPSwitch Related Know-How of PI, the
Existing Circuit Related Intellectual Property Rights and the Existing
Circuit Related Know How.
1.23 "PI TOPSwitch Products" shall mean Power IC products which are
developed by PI using the TOPSwitch Technology.
1.24 "Process Related Intellectual Property Rights" shall mean all classes
or types of patents, utility models, design rights, copyrights, mask
work rights, trade secrets and applications thereof recognized under
the laws of any country of the world, which claims or is otherwise
directed to an invention relating to semiconductor processing and/or
semiconductor device structure which have been reduced to practice or
have a first effective filing or registration date in any country
prior to the date of expiration or earlier termination of the
Agreement, and which arise out of inventions made by PI, which PI (i)
has as of the date of the Agreement or (ii) acquires during the term
of the Agreement, and under which, and to the extent to which and
subject to the conditions under which PI may have, as of the Effective
Date of the Agreement, or at the date of acquisition by PI of such
rights, or after the Effective Date of the Agreement, the right to
grant licenses of the scope granted herein without the payment of
royalty or other consideration to third persons except for payment to
third persons for inventions made by said persons while employed by
PI.
1.25 "Process Related Know-How" shall mean any and all technical,
industrial and engineering information, knowledge and experience with
respect to the Process Related Intellectual Property Rights known by
PI, as of the date hereof and which PI may acquire or develop during
the term of the Agreement, represented in any document, method,
process, design, design technology, manufacturing technology,
machinery, instrument or other equipment used or owned by PI, or with
respect to which and to the extent to which and subject to the
conditions under which PI has the right to grant licenses of the scope
granted herein without the payment of royalty or other consideration
to third persons except for payment to third persons for inventions
made by said persons while employed by PI.
1.26 "Process Technical Information" shall mean technical information in
existence on or before the date of expiration or termination of this
Agreement regarding PI Process Technology which is used in the design,
manufacture, use, test or operation of PI Products and OKI Products.
4
<PAGE>
1.27 "Qualification" shall mean the qualification of the PI Processes at
the Fab as demonstrated by the achievement of milestones agreed to by
the parties.
1.28 "Subsidiary" shall mean any corporation, company or other entity in
which OKI or PI, as the case may be, owns and/or controls, directly or
indirectly, now or hereafter, more than fifty percent (50%) of the
outstanding shares of stock entitled to vote for the election of
directors or their equivalents regardless of the form thereof (other
than any shares of stock whose voting rights are subject to
substantial restriction); provided, however, that any entity which
would be a Subsidiary by reason of the foregoing shall be considered a
Subsidiary only so long as such ownership or control exists.
1.29 "Technical Cooperation" shall mean technical advice, consulting
services and other technical cooperation provided by PI for OKI's
overall development and production of the PI Products and OKI
Products.
1.30 "Technical Information" shall mean the Process Technical Information,
the Existing Circuit Technical Information and the TOPSwitch Technical
Information.
1.31 [*].
1.32 "TOPSwitch Related Know-How" shall mean any and all technical,
industrial and engineering information, knowledge and experience with
respect to the TOPSwitch Related Intellectual Property Rights known by
PI, as of the date of this Amendment (or, as to the Licensed TOPSwitch
Improvements only, which PI may acquire or develop during the term of
the Agreement), represented in any document, method, process, design,
design technology, manufacturing technology, machinery, instrument or
other equipment used or owned by PI, or with respect to which and to
the extent to which and subject to the conditions under which PI has
the right to grant licenses of the scope granted herein without the
payment of royalty or other consideration to third persons except for
payment to third persons for inventions made by said persons while
employed by PI.
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5
<PAGE>
1.33 "TOPSwitch Technical Information" shall mean technical information in
existence on the date of this Amendment (or, as to the Licensed
TOPSwitch Improvements only, which PI may acquire or develop during
the term of the Agreement) which is used in the design, manufacture,
use, test or operation of PI TOPSwitch Products and OKI TOPSwitch
Products.
1.34 "TOPSwitch Technology" shall mean the TOPSwitch Related Intellectual
Property and the TOPSwitch Know-How.
1.35 "Volume Production" shall mean production of Wafers and PI Products
after Qualification.
1.36 "Wafer" shall mean a non-probed silicon wafer which contains chips or
circuits of PI Product which meets the Acceptance Criteria as defined
above.
2. Article 2. Article 2 (Grant of Licenses) is hereby amended and restated to
---------
read in full as follows:
Article 2. (Grant of Licenses)
2.1 License to Process Technology and Existing Circuit Technology.
Subject to the terms and conditions of the Agreement, PI hereby grants
to OKI a non-exclusive, non-transferable, perpetual, and worldwide
license, under (i) PI's Existing Circuit Technology and (ii) PI's
Process Technology relating to the PI P-Channel Process and the PI N-
Channel Process or to products manufactured, or designed or developed
for manufacture, using the PI P-Channel Process or the PI N-Channel
Process, to design, modify, make, use, sell, distribute or develop any
OKI Products, and to make Wafers for, and to sell or otherwise
transfer Wafers to, PI, under the terms and conditions contained in
the Agreement.
2.2 License to TOPSwitch Technology.
(a) Subject to the terms and conditions of the Agreement, PI hereby
grants to OKI a non-exclusive, non-transferable, perpetual, worldwide
license under PI's TOPSwitch Intellectual Property Rights and
TOPSwitch Know-How to design, modify, make, use or develop any OKI
TOPSwitch Products, and to make Wafers for, and to sell or otherwise
transfer Wafers to, PI, under the terms and conditions contained in
this Agreement.
6
<PAGE>
(b) Subject to the terms and conditions of the Agreement, PI hereby
grants OKI a non-exclusive, non-transferable, perpetual license to
sell, distribute or otherwise transfer OKI TOPSwitch Products to: (i)
companies established or to be established under the laws of Japan
(other than subsidiaries of companies organized under the laws of a
country other than Japan) (a "Japanese Company") and (ii) subsidiaries
of Japanese Companies located in the Asian Territory. OKI may also
sell, distribute or otherwise transfer OKI TOPSwitch Products to any
Subsidiary of OKI worldwide provided that any such Subsidiary may not
resell, redistribute or otherwise transfer any OKI TOPSwitch Product
other in accordance with the same restrictions on transfer as are
applicable to OKI under this paragraph.
(c) OKI shall not sell, distribute or otherwise transfer any OKI
TOPSwitch Product to any company or other entity which OKI has reason
to believe will resell or distribute the OKI TOPSwitch Products
without incorporation into a larger device unless such transfer is
made pursuant to an agreement that requires OKI's customer to comply
with the same restrictions on transfer as are applicable to OKI under
paragraph (b) above.
(d) OKI shall not sell, distribute or otherwise transfer any OKI
TOPSwitch Products to any international procurement office located in
Japan unless OKI is advised by the customer and reasonably believes
that the final destination of such product is to a Japanese Company in
Japan, a subsidiary of a Japanese Company in Japan or a subsidiary of
a Japanese Company in the Asian Territory.
2.3 Limitations on Lighting Products.
OKI shall not have any right under the Agreement or the licenses
granted herein to design, develop, manufacture, or sell any products
for any application for energizing lights.
2.4 No Private Labeling Rights.
OKI shall not have any right to sell, lease or otherwise dispose of
any products manufactured using any PI Technology for purposes of
resale by any third party as die, wafers or packaged units under any
third party's own brand label or marking.
2.5 The licenses for the PI Technology granted to OKI under Section 2.1
above shall be royalty-free, fully paid-up upon expiration of OKI's
running royalty payment period pursuant to Section 5.4 below.
7
<PAGE>
2.6 In addition to the rights under Section 2.1, without any consent of
PI, OKI may sublicense the manufacturing right to Subsidiaries of OKI
so long as the sublicense provides for the protection of PI's
Confidential Information on terms not less protective of PI's rights
than those set forth in the Agreement. Any such sublicense may be
made effective retroactively, but not prior to the Effective Date of
the Agreement, nor prior to the sublicensee's becoming a Subsidiary of
OKI.
2.7 In addition to the rights under Section 2.1, without any consent of
PI, OKI may have any third party assemble and test the OKI Products.
2.8 License to OKI Improvements.
OKI hereby grants to PI a non-exclusive, perpetual, royalty-free, non-
transferable, worldwide right and license to use OKI Improvements to
design, make and have made PI Products, and to use, sell, lease or
otherwise dispose of PI Products worldwide. OKI shall promptly
disclose to PI any OKI Improvements made or developed during the term
of the Agreement. Without any consent of OKI, PI may sublicense the
manufacturing rights to Subsidiaries of PI so long as the sublicense
provides for the protection of OKI's Confidential Information on terms
not less protective of OKI's rights than those set forth in the
Agreement. Any such sublicense may be made effective retroactively,
but not prior to the Effective Date of the Agreement, nor prior to the
sublicensee's becoming a Subsidiary of PI. Any foundry agreement PI
enters into in order to exercise its have made rights under the
Agreement must contain provisions for the protection of the OKI's
Improvements which are not less protective of OKI's rights than the
corresponding provisions of the Agreement.
2.9 Functionally Equivalent Products.
Neither party will have any rights under the license granted in this
Agreement to design, make, have made, or use, sell or otherwise
dispose of pin-for-pin replacements or products already introduced by
the other party; provided, however, that the provisions of this
Section 2.9 shall not apply to OKI TOPSwitch Products.
3. Section 3.1. The following paragraph shall be added to Section 3.1 of
-----------
Article 3 (Technology Transfer) as the second paragraph.
Unless otherwise agreed in writing, within fourteen (14) days after
the execution of this Amendment, PI shall transfer to OKI all
TOPSwitch Technical Information. The TOPSwitch Technical Information
to be transferred is more fully described on Exhibit 3.1 attached to
this Amendment.
8
<PAGE>
4. Section 5.3. The first paragraph of Section 5.3 shall be amended and
-----------
restated to read in full as follows:
5.3 Also, in addition to the initial license fee, OKI will pay PI (i) a
running royalty for the license and transfer of the PI Process
Technology, at [*] of OKI's Net Selling Price (as defined in paragraph
5.4) of each unit of OKI Product (other than OKI TOPSwitch Product)
used, leased, sold, distributed or otherwise transferred by OKI for a
period of, and in no event longer than, [*] from the date OKI first
ships full production quantities of OKI Product to customers and (ii)
a running royalty for the license and transfer of the PI TOPSwitch
Technology, at [*] of OKI's Net Selling Price (as defined in paragraph
5.4) of each unit of OKI TOPSwitch Product used, leased, sold,
distributed or otherwise transferred by OKI for a period of, and in no
event longer than, [*] from the date OKI first ships full production
quantities of OKI TOPSwitch Product to customers.
5. Article 6. Article 6 (Improvements) shall be amended and restated to read
---------
in full as follows:
Article 6. (Improvements).
PI shall promptly disclose to OKI any Licensed TOPSwitch Improvements and
any improvements to the PI Process Technology made or developed after the
Effective Date of and during the term of the Agreement and thereupon PI
shall be deemed to have granted OKI a license to use such improvements on
the same terms as set forth in Section 2.1 with respect to improvements to
PI Process Technology and as set forth in Section 2.2 with respect to
Licensed TOPSwitch Improvements.
6. Article 7. Article 7 (Sale and Purchase of Wafers) shall be amended and
---------
restated to read in full as follows:
Article 7. (Sale and Purchase of Wafers)
7.1 OKI hereby agrees to sell to PI the Wafers and PI shall purchase the
Wafers pursuant to the terms and conditions of the Agreement.
Reserved Capacity.
OKI shall make available to PI, from the production capacity of the
Fab not less than the quantities of Wafers set forth on Exhibit 7.1
for delivery to PI and PI shall purchase from OKI not less than [*] of
such quantities in 1996, not less than [*] of such quantities in 1997
and not less than [*] of such quantities in 1998.
7.2 The production and sale of the Wafers to PI may be made by any
Subsidiary of OKI.
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9
<PAGE>
7.3 PI may sell the PI Products other than PI TOPSwitch Products in the
form of finished products or dies, but shall not resell any of them in
the form of a wafer except to manufacturers of hybrid circuits. PI may
sell the PI TOPSwitch Products in the form of finished products, dies
or wafers.
7. Section 8.3. The following sentence shall be added as the last sentence in
-----------
Section 8.3: If the masks are used by OKI to produce Wafers other than for sale
to PI, then the costs of the masks will be shared equally between OKI and PI.
8. Section 9.2. Section 9.2 shall be amended by the addition of the following
-----------
language:
Upon receiving PI's monthly purchase order, OKI will provide a written
acknowledgement of the purchase order acceptance (not later than three (3)
business days after receipt of the purchase order if such order does not
exceed PI's forecast). OKI will inform PI of the scheduled Wafer starting,
completion and delivery dates within a reasonable period after accepting
the purchase order (not later than five (5) business days if such order
does not exceed PI's forecast). OKI will provide a weekly status report on
the Wafers in progress and the anticipated delivery date.
9. Section 14.1 Section 14.1 shall be amended and restated to read in full as
------------
follows:
14.1 From and after the date of this Amendment OKI will provide PI with
all Wafers at the following prices, subject to adjustment as provided
below:
P-Channel N-Channel
--------- ---------
Up to [*] units [*] [*]
[*] units and above [*] [*]
PI and OKI agree that this pricing is based upon [*] per U.S. Dollar.
In the event of any currency fluctuation during the term of the
Agreement resulting in an exchange rate of less than [*] per U.S.
Dollar or more than [*] per U.S. Dollar, the prices set forth above
shall be adjusted such that OKI and PI each bear [*] of the impact of
the currency fluctuation. For example, in the event that the exchange
rate is [*] per dollar, the price for up to [*] units of P-Channel
Wafers would be [*]. The exchange rate shall be determined monthly as
of the date PI initiates the letter of credit for product shipment
from OKI to PI. The prices in this Section 14.1 shall be reviewed by
OKI and PI, if requested by either OKI or PI. Unless the parties
otherwise agree, such review will occur not more often than once every
six months and any changes to such prices will be made by mutual
agreement.
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10
<PAGE>
10. Article 21. Article 21 (Announcement) shall be amended by the addition of
----------
the following sentence: Notwithstanding anything to the contrary in this
Article 21, PI shall have the right to make whatever disclosure of or regarding
this Agreement and its contents as is required by the Securities and Exchange
Commission in connection with a public offering of PI's securities.
11. Exhibit C. Exhibit C shall be amended to decrease the price per mask layer
---------
from [*] to [*].
12. All provisions of the Agreement not specifically amended herein shall
remain in full force and effect.
IN WITNESS WHEREOF, the undersigned parties have caused this Amendment to
be executed by their duly authorized representatives.
OKI ELECTRIC INDUSTRY CO., LTD. POWER INTEGRATIONS, INC.
By: _____________________________ By: _________________________________
Howard Earhart, President
Title: __________________________
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11
<PAGE>
EXHIBIT 3.1
TOPSwitch Technical Information
(1) Process Flowchart
This document includes a detailed process summary which specifies
the [*] and [*], and other necessary information required to install
to N-Channel process related to TOPSwitch in OKI's wafer fabrication
facility.
(2) Acceptance Criteria
This document specifies the detailed set of [*]
parameters [*].
(3) [*] Specifications.
(4) Design
a. [*]
b. [*]
C. [*]
(5) Wafer Acceptance [*]
(6) Test
a. [*]
b. [*]
C. [*]
(7) Assembly
a. [*]
(8) QA
a. [*]
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<PAGE>
Sheet 1
EXHIBIT 7.1
OKI WAFER FOUNDRY FORECAST
MONTHLY REQUIREMENTS IN '000 WAFERS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
-------------------------------------------------------
1995 1995 1995 1995 1995 1995 1995
-------------------------------------------------------
------------------- -------------------------------------------------------
JULY AUG SEPT OCTOB NOV DEC
<S> <C> <C> <C> <C> <C> <C>
P-CHANNEL [*] [*] [*] [*] [*] [*]
N-CHANNEL
Total 4" WAFERS [*] [*] [*] [*] [*] [*]
------------------- -------------------------------------------------------
- ------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
1996 1996 1996 1996 1996 1996 1996 1996 1996 1996 1996 1996 1996
-----------------------------------------------------------------------------------------------------
------------------- -----------------------------------------------------------------------------------------------------
JAN FEBR MARCH APRIL MAY JUNE JULY AUG SEPT OCTOB NOV DEC
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
P-CHANNEL [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
N-CHANNEL [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
Total 4" WAFERS [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
------------------- -----------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------
-------------------------------- -------------------
1997 1998 1997 1997 1997 1997 1998 1998
-------------------------------- -------------------
-------------------- -------------------------------- -------------------
Q1 Q2 Q3 Q4 Q1 Q2
<S> <C> <C> <C> <C> <C> <C>
P-CHANNEL [*] [*] [*] [*] [*] [*]
N-CHANNEL [*] [*] [*] [*] [*] [*]
Total 4" WAFERS [*] [*] [*] [*] [*] [*]
-------------------- -------------------------------- -------------------
- ------------------------------------------------------------------------------------------
</TABLE>
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Page 1
<PAGE>
EXHIBIT 10.9
MASTER EQUIPMENT LEASE AGREEMENT
DATED AS OF
FEBRUARY 11, 1997
BETWEEN
FINOVA TECHNOLOGY FINANCE, INC.
(LESSOR)
AND
POWER INTEGRATIONS, INC.
(LESSEE)
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
1. Agreement for Lease of Equipment........................................ 1
2. Delivery and Acceptance of Equipment.................................... 1
3. Disclaimer of Warranties................................................ 2
4. Primary Term............................................................ 2
5. Rent.................................................................... 2
6. Lessee's Representations and Warranties................................. 3
7. Identification Marks.................................................... 4
8. Fees and Taxes.......................................................... 5
9. General Indemnity...................................................... 5
10. Use of Equipment; Location; Liens....................................... 6
11. Maintenance and Repairs; Additions to Equipment......................... 6
12. Loss, Damage or Destruction of Equipment................................ 7
13. Reports; Inspections.................................................... 8
14. Confidentiality......................................................... 8
15. Insurance............................................................... 8
16. Return of Equipment..................................................... 9
17. Lessor's Ownership; Equipment To Be and Remain Personal Property........ 10
18. Other Covenants......................................................... 11
19. Events of Default....................................................... 12
20. Assignment and Transfer by Lessor....................................... 14
21. Recording and Filing; Expenses.......................................... 15
22. Option to Renew......................................................... 15
23. Quiet Enjoyment......................................................... 16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
24. Failure or Indulgence Not Waiver;
Additional Rights of Lessor............................................. 16
25. Sublease................................................................ 16
26. Commitment Fee.......................................................... 16
27. Lessee Purchase Option During Lease Term................................ 16
28. Purchase and Sale Options of Lessor and Lessee.......................... 17
29. Notices................................................................. 17
30. Entire Agreement; Severability; Amendment or
Cancellation of Lease................................................... 17
31. Waiver of Jury.......................................................... 17
32. Restriction of Limitation Periods and Damages........................... 17
33. Governing Law; Consent to Jurisdictio and Service....................... 17
34. Lessor's Right to Perform for Lessee................................... 19
35. Agreement for Lease Only................................................ 19
36. Binding Effect.......................................................... 19
37. General................................................................. 19
38. Definitions............................................................. 19
</TABLE>
<PAGE>
MASTER EQUIPMENT LEASE AGREEMENT
--------------------------------
MASTER EQUIPMENT LEASE AGREEMENT dated as of February 11, 1997, between
POWER INTEGRATIONS, INC. (hereinafter called "Lessee"), a California corporation
that has its executive office and principal place of business at 477 North
Mathilda Avenue, Sunnyvale, California 94086 and FINOVA TECHNOLOGY FINANCE, INC.
(hereinafter called "Lessor"), a Delaware corporation with its principal place
of business at 10 Waterside Drive, Farmington, Connecticut 06032-3065.
In consideration of the mutual covenants hereinafter contained, Lessee and
Lessor agree as follows:
1. Agreement for Lease of Equipment. Lessor shall lease to Lessee and
--------------------------------
Lessee shall lease from Lessor, upon the terms and conditions specified in this
Master Lease and the applicable Rental Schedule, the Equipment as described in
the applicable Rental Schedule including Schedule A of such Rental Schedule and
this Master Lease. Each Rental Schedule shall incorporate the terms of this
Master Lease and shall constitute a separate lease (the term "this Lease" shall
refer collectively to the applicable Rental Schedule and this Master Lease).
Only the signed copy of each Rental Schedule and not this Master Lease shall
constitute chattel paper the possession of which can perfect a security
interest. In the event of a conflict between the provisions of this Master
Lease and the provisions of any Rental Schedule, the provisions of the Rental
Schedule shall prevail.
2. Delivery and Acceptance of Equipment. (a) Lessor and Lessee agree that
------------------------------------
the vendor of the Equipment to Lessor or, as to any Equipment to be sold by
Lessee to Lessor and leased back, the vendor of the Equipment to Lessee (in
either case, the "Vendor") will be responsible to deliver the Equipment to
Lessee at the location specified in the applicable Rental Schedule. Such
delivery shall be delivery of the Equipment by Lessor to Lessee under this Lease
unless such Equipment is to be sold by Lessee to Lessor and leased back.
Provided that no Event of Default has occurred, no event which with the passage
of time or giving of notice would be an Event of Default has occurred, and is
continuing, and the conditions set forth in the next following paragraph have
been met and the Equipment is not to be sold by Lessee to Lessor and leased
back, Lessor hereby authorizes Lessee, acting as Lessor's agent, to accept for
Lessor, and in Lessor's name, the Equipment from the Vendor upon delivery
pursuant to the purchase contract for the Equipment. Such acceptance shall be
acceptance of the Equipment by Lessee under this Lease. Nevertheless, if within
20 days after Lessee has received delivery of an item of the Equipment, Lessee
has not given Lessor written notice of a defect therein and Lessor has not
notified Lessee not to accept the Equipment, Lessee shall be deemed to have (a)
acknowledged receipt of such item of the Equipment in good condition and repair
and (b) accepted such item of the Equipment under this Lease. Lessee agrees to
confirm any acceptance of the Equipment by Lessee by executing a Certificate of
Inspection and Acceptance and providing the same to Lessor in accordance with
the notice provision hereof on or about the Lease Commencement Date, but no
later than the date for payment to the Vendor.
(b) Conditions precedent to every progress payment and Lease Term
Commencement are that (i) no payment shall be past due to Lessor or any assign
of Lessor from Lessee or any Guarantor (as hereinafter defined), whether as a
lessee, a guarantor or in some other capacity; (ii) Lessee shall be in
compliance with the provisions of this Lease; (iii) all documentation then
required by Lessor's counsel shall have been received by Lessor; (iv) a default
shall not then exist under any agreement for borrowed monies or any finance
lease to which Lessee is a party or by which Lessee or the property of Lessee is
bound which would permit the lender or lessor, as applicable, to accelerate
payment of the obligations thereunder; and (v) there shall not have been any
material adverse change or threatened material adverse change in the financial
or other condition, business, operations, properties or assets of Lessee, since
December 31, 1996, or from the written information that has been supplied to
Lessor as of January 29, 1997 by Lessee.
<PAGE>
3. Disclaimer of Warranties. LESSEE ACKNOWLEDGES THAT IT HAS SELECTED
------------------------
BOTH THE EQUIPMENT AND EVERY MANUFACTURER AND OTHER VENDOR OF THE EQUIPMENT,
THAT LESSEE HAS NOT RELIED UPON LESSOR FOR SUCH SELECTION AND THAT LESSEE HAS A
COPY OF THE PURCHASE CONTRACT(S) FOR LESSOR'S PURCHASE OF THE EQUIPMENT. LESSOR
------
HAS NOT MADE AND SHALL NOT BE DEEMED TO HAVE MADE ANY REPRESENTATION OR
- ------------ ---------------------
WARRANTY, EXPRESS OR IMPLIED, AS TO THE MERCHANTABILITY, FITNESS FOR USE,
- -------- ----------------------------------------------------------------
FITNESS FOR A PARTICULAR PURPOSE OR TITLE OF THE EQUIPMENT (OR ANY PART THEREOF)
- --------------------------------------------------------------------------------
OR AS TO COMPLIANCE WITH SPECIFICATIONS, COMPLIANCE WITH GOVERNMENTAL
REGULATIONS, QUALITY, SELECTION, INSTALLATION, SUITABILITY, PERFORMANCE,
CONDITION, DESIGN, ABSENCE OF DEFECTS, OPERATION, OR NON-INFRINGEMENT OF PATENT,
COPYRIGHT, TRADEMARK OR OTHER INTELLECTUAL PROPERTY RIGHTS OF THE EQUIPMENT (OR
ANY PART THEREOF). LESSEE SHALL LEASE THE EQUIPMENT "AS IS, WHERE IS". LESSOR
---------------------------------------------------
HEREBY DISCLAIMS ANY AND ALL SUCH WARRANTIES OR REPRESENTATIONS, EXPRESS OR
IMPLIED. LESSEE AND LESSOR AGREE THAT ALL RISKS INCIDENT TO THE MATTERS
REFERRED TO IN THIS SECTION ARE TO BE BORNE BY LESSEE. Lessor has and shall
have no responsibility for the installation, adjustment or servicing of the
Equipment. The provisions of this Section have been negotiated and are intended
to be a complete exclusion and negation of any representations or warranties by
Lessor, express or implied, with respect to the Equipment that may arise
pursuant to any law now or hereafter in effect, or otherwise. In no event shall
defect in, or unfitness of, any or all of the Equipment, or any breach of
warranty or representation by any or every Manufacturer or other Vendor relieve
Lessee of the obligation to pay rent or to make any other payments required
hereunder or to perform any other obligation hereunder. Without limiting the
generality of the foregoing, Lessor shall not be responsible or liable for any
-------------------------------------------------
(i) defect, either latent or patent, in any of the Equipment or for any direct
- ------------------------------------------------------------------------------
or consequential damages therefrom, (ii) loss of use of any of the Equipment or
- ------------------------------------------------------------------------------
for any loss of profits or any interruption in Lessee's business occasioned by
- ------------------------------------------------------------------------------
Lessee's inability to use any or all of the Equipment for any reason whatsoever,
- -------------------------------------------------------------------------------
or (iii) in the event that any Vendor delays or fails to make delivery of any or
- --------------------------------------------------------------------------------
all of the Equipment or fails to fulfill or comply with any purchase contract or
- --------------------------------------------------------------------------------
order. For as long as this Lease is not declared in default by Lessor following
- -----
an Event of Default, Lessor hereby transfers and assigns to Lessee during the
Lease Term (as hereinafter defined) all right and interest of Lessor in any
Manufacturer's and other Vendor's warranties with respect to any and all of the
Equipment, and agrees to execute all documents reasonably necessary to effect
such transfer and assignment, except that to the extent any rights of Lessor
with respect to the Equipment may not be assigned or otherwise be available to
Lessee, Lessor shall instead use reasonable efforts to enforce such rights
against such Manufacturers or other Vendors but only upon the request and at the
expense of Lessee.
4. Primary Term. The Primary Term for each item of the Equipment shall
------------
commence on the Lease Commencement Date provided for by the Rental Schedule for
such Equipment, and unless sooner terminated pursuant to the provisions of this
Lease, shall be for the number of calendar months set forth in such Rental
Schedule, plus the number of days remaining in any partial calendar month if the
Lease Commencement Date occurs on other than the first day of a month.
Notwithstanding the foregoing, the provisions of this Master Lease on
indemnification of Lessor by Lessee shall apply between Lessor and Lessee with
respect to any Equipment from the time that any order for the Equipment is
placed by Lessor.
5. Rent. (a) Lessee shall pay to Lessor in cash or by check as rent for
----
the Equipment during the Lease Term, the amounts provided for in the Rental
Schedule ("Basic Rent") for such Equipment on the dates designated therein
("Payment Dates"), at the location of Lessor set forth therein, or at such other
address or to such other person or entity as Lessor, from time to time, may
designate.
(b) Lessee shall also pay to Lessor, upon notice by Lessor to Lessee that
payment is due, any sums other than for Basic Rent that Lessee at any time shall
be required to pay Lessor pursuant to the provisions of this Lease, together
with every additional charge, interest and cost which may be added for non-
payment or late payment of any such sums or of Basic Rent. All such sums shall
be additional rent ("Additional Rent") and Lessor shall provide Lessee with
notification as to the amount of any Additional
<PAGE>
Rent. If Lessee shall fail to pay any Additional Rent, Lessor shall have all
rights, powers and remedies with respect thereto as are provided herein or by
law in the case of non-payment of Basic Rent.
(c) With respect to any amount of Basic Rent or Additional Rent not
received by Lessor when due and continuing to be unpaid five days after written
notice to Lessee that such amount is past due, Lessee shall pay to Lessor
interest within five days of notice of the amount of interest accrued as of the
date specified in the notice. If payable such interest shall accrue from the due
date of such Basic Rent or Additional Rent until payment of such Basic Rent or
Additional Rent is received by Lessor at one and one-half percent per month or
the highest rate of interest on amounts past due that is not unlawful, whichever
is lower (the "Default Interest Rate"). Additionally, with respect to each such
instance of late payment for one or more rental schedules, Lessee shall pay to
Lessor, within five days of written notice to Lessee that such payment has been
five or more days past due and continued to be unpaid five days after written
notice that such payment was past due, a collection fee of $500, which fee
approximates Lessor's administrative costs, at minimum, to collect such unpaid
Basic Rent or Additional Rent.
(d) SUBJECT TO GRACE PERIODS GRANTED TO LESSEE HEREUNDER, LESSEE AGREES
THAT TIME IS OF THE ESSENCE TO LESSOR IN LESSEE'S MAKING PAYMENTS OF BASIC RENT
AND ADDITIONAL RENT WHEN SUCH PAYMENTS BECOME DUE.
(e) This Lease is a net-net-net lease and, notwithstanding any other
provisions of this Lease, it is intended that Basic Rent and Additional Rent
shall be paid without notice, demand, counterclaim, setoff, deduction or defense
and without abatement, suspension, deferment, diminution or reduction. Lessee
shall perform all its obligations under this Lease at its sole cost and expense.
Except to the extent otherwise expressly specified herein, the obligations and
liabilities of Lessee hereunder shall in no way be released, discharged or
otherwise affected for any reason, including, without limitation: (i) any
defect in the condition, quality or fitness for use of the Equipment or any part
thereof; (ii) any damage to, removal, abandonment, salvage, loss, scrapping or
destruction of or any requisition or taking of the Equipment or any part
thereof; (iii) any restriction, prevention or curtailment of or interference
with any use of the Equipment or any part thereof; (iv) any defect in title or
rights to the Equipment or any lien on such title or rights or on the Equipment;
(v) any change, waiver, extension, indulgence or other action or omission in
respect of any obligation or liability of Lessor; (vi) any bankruptcy,
insolvency, reorganization, composition, adjustment, dissolution, liquidation or
other like proceedings relating to Lessee or any action taken with respect to
this Lease by any trustee or receiver of Lessee or by any court, in any such
proceeding; (vii) any claim that Lessee has or might have against any Person (as
hereinafter defined), including without limitation Lessor; (viii) any failure on
the part of Lessor to perform or comply with any of the terms hereof or of any
other agreement; (ix) any invalidity, unenforceability or disaffirmance of this
Lease or any provision hereof against or by Lessee; or (x) any other occurrence
whatsoever, whether similar or dissimilar to the foregoing, whether or not
Lessee or Lessor shall have notice or knowledge of any of the foregoing. To the
extent permitted by law, Lessee waives all rights now or hereafter conferred by
statute or otherwise to quit, terminate, cancel, rescind or surrender this
Lease, or to any diminution or reduction of Basic Rent or Additional Rent
payable by Lessee hereunder.
6. Lessee's Representations and Warranties. Lessee represents and
---------------------------------------
warrants (and if requested by Lessor, promptly will provide supporting documents
to the effect and an opinion of counsel substantially in the form requested by
Lessor) that as of the date that Lessee signs this Master Lease, as of any date
that Lessor makes a payment to a Vendor prior to the date all Equipment has been
accepted for lease hereunder, as of each date that any Equipment is accepted for
lease hereunder and as of each Lease Commencement Date pursuant to a Rental
Schedule hereunder: (i) all items of the Equipment are new and unused as of the
Lease Commencement Date, unless otherwise specified in the applicable Rental
Schedule in which event the specified items of the Equipment shall have been
delivered new to Lessee by their suppliers not more than 90 days prior to their
Lease Term Commencement; (ii) Lessee is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization, and is
qualified and in good standing to do business wherever necessary to carry on its
present business and operations, including the jurisdictions where the Equipment
is or will be located except where the failure
<PAGE>
to qualify would not have a material adverse effect on Lessee, its business
operations or financial condition; (iii) Lessee has the power to enter into this
Lease and the other instruments and documents executed by Lessee in connection
herewith (together with this Lease, the "Transactional Documents") and to pay
and perform its obligations under this Lease and the other Transactional
Documents; (iv) this Lease and the other Transactional Documents have been duly
authorized, executed and delivered by Lessee, and constitute the valid, legal
and binding obligations of Lessee enforceable in accordance with their terms;
(v) no vote or consent of, or notice to, the holders of any class of stock of
Lessee is required, or if required, such vote or consent has been obtained or
given, to authorize the execution, delivery and performance of this Lease and
the other Transactional Documents by Lessee; (vi) subject to Lessee's obtaining
certain waivers and consents prior to the first Lease Commencement Date for any
of the Equipment from the holders of the subordinated notes of Lessee and the
primary line of credit of Lessee, neither the execution and delivery by Lessee
of this Lease or the other Transactional Documents, nor the consummation by
Lessee of the transactions contemplated hereby or thereby, nor compliance by
Lessee with the provisions hereof or thereof, conflicts with or results in a
breach of any of the provisions of any Certificate of Incorporation or By-laws
or partnership or trust agreement or certificate of Lessee, or of any applicable
law, judgment, order, writ, injunction, decree, award, rule or regulation of any
court, administrative agency or other governmental authority, or of any
indenture, mortgage, deed of trust, other agreement or instrument of any nature
to which Lessee is a party or by which it or its property is bound or affected
or pursuant to which it is constituted, or constitutes a default under any
thereof or will result in the creation of any lien, charge, security interest or
other encumbrance upon any of the Equipment, other than the interests therein of
Lessor or any Assignee (as hereinafter defined), or upon any other right or
property of Lessee or will in any manner adversely affect Lessor's or any
Assignee's right, title and interest in any of the Equipment; (vii) no consent,
approval, withholding of objection or other authorization of or by any court,
administrative agency, other governmental authority or any other Person is
required, except such consents, approvals or other authorizations which have
been duly obtained and are in full force and effect and copies of which have
been furnished Lessor, in connection with the execution, delivery or performance
by Lessee, or the consummation by Lessee, of the transactions contemplated by
this Lease and the other Transactional Documents; (viii) there are no actions,
suits or proceedings pending, or, to the knowledge of Lessee, threatened, in any
court or before any administrative agency or other governmental authority
against or affecting Lessee, which, if adversely decided would or could,
individually or in the aggregate, materially and adversely affect the financial
or other condition, business, operations, properties, assets or prospects of
Lessee or the ability of Lessee to perform any of its obligations under this
Lease or under the other Transactional Documents, except for any such actions,
suits or proceedings that Lessee has described in writing to Lessor; (ix) no
Event of Default or event or condition which upon the passage of time, the
giving of notice, or both, would constitute an Event of Default, exists or is
continuing; (x) there has been no material adverse change or threatened change
in Lessee's, financial or other condition, business, operations, properties,
assets or prospects since the date of Lessee's most recent financial statements
reported on by an independent public accounting firm prior to the date of this
Master Lease, since the dates of each such Person's interim and annual financial
statements, if any, subsequent to such prior statements, or from the written
information that has been supplied to Lessor by Lessee; (xi) Lessee possesses
any and all authorizations, certifications and licenses which are or may be
required to use and operate the Equipment; (xii) the actual Acquisition Cost
pursuant to the applicable Rental Schedule of each item of the Equipment
reflects all discounts, rebates and allowances for the Equipment given to Lessee
or any affiliate of Lessee by any Vendor or other Person including, without
limitation, discounts for advertising, prompt payment, testing or other
services; (xiii) all information supplied to Lessor by Lessee is correct and
does not omit any statement necessary to make the information supplied not
materially misleading; and (xiv) the financial statements of Lessee have been
prepared in accordance with generally accepted accounting principles
consistently applied and accurately and completely present the financial
condition and the results of operations of Lessee at the dates of and for the
periods covered by such statements.
7. Identification Marks. To the extent requested by Lessor or if
--------------------
required by applicable law, Lessee shall affix to the Equipment at Lessee's
expense signs, labels, or other forms of notice to disclose Lessor's ownership
of, and the interest of any Assignee in, the Equipment. Lessee shall keep and
main-
<PAGE>
tain such signs, labels or other forms of notice affixed to the Equipment
throughout the Lease Term. Lessor may furnish such signs, labels or other forms
of notice to Lessee. Except as otherwise directed by Lessor, Lessee shall not
allow the name of any person other than Lessor to be placed on any part of the
Equipment as a designation that might reasonably be interpreted as a claim of
ownership.
8. Fees and Taxes. Lessee agrees to pay promptly when due, and to
--------------
indemnify and hold Lessor harmless from, all license, title, registration and
recording fees whatsoever, all taxes including, without limitation, sales, use,
franchise, personal property, excise, import, export and stamp taxes and customs
duties, and all charges together with any penalties, fines or interest thereon
which are assessed, levied or imposed by any governmental or taxing authority
against Lessor with respect to any or all of the Equipment or the purchase,
acquisition, ownership, construction, installation, shipment, delivery, lease,
possession, use, maintenance, condition, operation, control, return or other
disposition thereof or the rents, receipts or earnings arising therefrom which
accrue or are payable with respect to the Equipment or this Lease or which are
assessed, are based on a valuation date, or are due during or with respect to
the Lease Term or any subsequent period until the Equipment has been returned to
Lessor pursuant to the provisions of this Lease or until the Equipment has been
purchased by Lessee pursuant to any purchase option provisions of this Lease,
excluding, however, any taxes solely measured by Lessor's net income from the
general operation of Lessor's business and any penalties, fines and interest
resulting from the actual negligence or willful misconduct of Lessor. In the
event any fees, taxes or charges payable by Lessee pursuant to the next
preceding sentence are paid by Lessor, or if Lessor is required to collect or
pay any thereof, Lessee shall reimburse Lessor therefor (plus any penalties,
fines or interest thereon) promptly upon demand. Unless and until Lessor
notifies Lessee in writing to the contrary, Lessee shall file and pay any
personal property taxes levied or assessed on the Equipment directly to the
levying authority. Upon Lessor's written request, Lessee shall submit to Lessor
satisfactory evidence of payment by Lessee of any or all amounts for which
Lessee is required to make payment or to indemnify Lessor hereunder that are
paid by Lessee, and of the filing of any and all reports, returns and other
documentation required in connection with any such payment. In the event Lessor
elects to pay the personal property taxes directly to a levying authority,
Lessor shall submit to Lessee a copy of its personal property tax return and its
receipt for the full amount of such personal property taxes so paid by Lessor.
All of the obligations of Lessee under this Section shall continue in full force
and effect notwithstanding any expiration, termination, rescission or
cancellation of this Lease. Lessee acknowledges that Lessor may not be exempt
from the payment of any of the amounts referred to herein, even though Lessee
might have been exempt therefrom if it were the owner or purchaser of the
Equipment, and Lessee agrees that this Section shall apply, and the amounts due
from it hereunder shall be due, whether or not Lessee might itself have
otherwise been exempt from any such payments. Subject to the foregoing, Lessee
shall have the right to contest in good faith any such taxes levied or imposed
by any governmental or taxing authority, provided that Lessee shall have given
Lessor not less than ten days prior notice of its intention to contest and full
particulars of the proposed contest, in the opinion of Lessor the proposed
contest will not adversely affect the interests of Lessor or any Assignee, and
Lessee either shall have paid the taxes or provided for a bond or other security
so that none of the Equipment will be subject to seizure, confiscation or
forfeiture. For purposes of this Section, the term "Lessor" shall include each
member of Lessor's affiliated group, if any.
9. General Indemnity. (a) Lessee shall indemnify Lessor and any Assignee
-----------------
(as hereinafter defined), and their respective agents and servants, against, and
agrees to defend, protect, save and keep them harmless from, any and all
liabilities, obligations, losses, damages, penalties, claims, actions, suits,
costs, expenses and disbursements, including attorneys' fees and expenses and
costs for customs, completion, performance and appeal bonds, of whatsoever kind
and nature (including, without limitation, for negligence, tort liability,
damages by reason of strict or absolute liability, punitive damages, and
indirect and consequential damages, but excluding any such amounts imposed or
incurred as a result of Lessor's gross negligence or willful misconduct),
imposed on or incurred by or assessed against Lessor and/or any Assignee, in any
way relating to or arising out of (i) the failure of Lessee to provide or obtain
any certificates, documents, consents, authorizations, clearances, licenses,
permits or instruments required hereunder or under any of the other
Transactional Documents, or (ii) the ordering, construction, installation,
delivery, testing, ownership, lease, possession, use, maintenance, operation,
control, movement, import,
<PAGE>
export, shipment, condition, or return of the Equipment (including but not
limited to latent and other defects, whether or not discoverable by Lessor or
Lessee, and any claim for patent, trademark, copyright, software or other
intellectual property infringement) until such time as the Equipment shall have
been returned to Lessor pursuant to the provisions of this Lease or until the
Equipment shall have been purchased by Lessee pursuant to any purchase option
provisions of this Lease.
(b) The obligations of Lessee under this Section shall survive the payment
of all known obligations under and any expiration, termination, rescission or
cancellation of this Lease, and are expressly made for the benefit of and shall
be enforceable by Lessor, its successors and any Assignee.
10. Use of Equipment; Location; Liens. (a) During the Lease Term, Lessee
---------------------------------
warrants and agrees that the Equipment shall be used and operated and otherwise
be in compliance with any established operating procedures therefor of any
Manufacturer and all statutes, regulations and orders of any governmental body
having power to regulate the Equipment or its use. Lessee shall bear and pay
all costs of such compliance. Lessee shall not permit the Equipment to be used
or maintained in any manner or condition that would violate, or could result in
the termination of, the insurance policies carried by Lessee pursuant to the
provisions of this Lease on insurance, or in any manner or condition or for any
purpose for which, in the opinion of any Manufacturer, the Equipment is not
designed or suited.
(b) Lessee agrees that without Lessor's prior written consent, it will not
remove any of the Equipment from the location or locations specified in the
Rental Schedule for such Equipment or permit any of the Equipment to be used by
anyone other than Lessee, Lessee's employees or a responsible independent
contractor engaged by Lessee. The locations specified in Rental Schedules for
personal computers may be the base locations for the employees of Lessee using
the computers and if so indicated on the applicable Rental Schedules,
wheresoever from time to time accompanying such employees.
(c) During the Lease Term and until the Equipment has been returned to
Lessor pursuant to the provisions of this Lease or until the Equipment is
purchased by Lessee pursuant to any purchase option provisions of this Lease,
Lessee will not directly or indirectly create, incur, assume or suffer to exist
any mortgage, security interest, lien or encumbrance on the Equipment or
Lessor's or any Assignee's title thereto or interest therein, except in the name
of Lessor and its successor(s) and any Assignee or for any Permitted Liens.
Lessee, at its own expense, will promptly take such action as may be necessary
to keep the Equipment free and clear of, and to duly discharge, any such
mortgage, security interest, lien or encumbrance not excepted above.
(d) Lessee agrees to procure and maintain in effect all licenses,
certificates, permits and other approvals and consents required by federal,
state and local laws and regulations in connection with Lessee's possession,
use, operation and maintenance of the Equipment. During the Lease Term, Lessee
agrees that 100 percent of the use of the Equipment shall be "qualified business
use" as that term is and shall be from time to time defined by the Internal
Revenue Code of 1986, as amended.
(e) Lessee shall cooperate fully with Lessor or any Assignee to perfect
and record their respective interests in connection with the Transactional
Documents including, without limitation, the filing of financing statements and
will pay such Persons their reasonable costs related thereto. Lessee authorizes
Lessor to file financing statements that are signed only by Lessor or that are
signed for Lessee by Lessor in any jurisdiction when permitted by law or local
authority. Lessee hereby grants to Lessor power-of-attorney to act as Lessee's
attorney-in-fact to sign Lessee's name on financing statements as "Debtor".
11. Maintenance and Repairs; Additions to Equipment. (a) Lessee shall,
-----------------------------------------------
for the entire Lease Term, at its sole expense, maintain all of the Equipment in
good, safe and efficient operating repair, appearance and condition, will keep
all components of the Equipment properly calibrated and aligned, and will make
all required adjustments, replacements and repairs (collectively, "maintenance
and repairs"). Such maintenance and repairs shall include, but not be limited
to, all recommended or advised by a Manufacturer, all required or advised by
cognizant governmental agencies or regulatory bodies and all
<PAGE>
commonly performed by prudent business and/or professional practice. All
maintenance and repairs to any item of the Equipment shall be made by the
Manufacturer or, those of substantially equal skill or knowledge in maintaining
and repairing the Equipment.
(b) Lessee shall not modify the Equipment without the prior written
consent of Lessor except for any modifications which do not impair the
usefulness and the Fair Market Value of the Equipment and do not change the
description of the Equipment set forth in the applicable Rental Schedule and
financing statements. Any replacements, substitutions, additions, parts,
fittings, accessories, modifications, enhancements, maintenance and repairs and
other upgrades to the Equipment whenever made shall be considered accessions to
the Equipment and shall automatically become the property of Lessor.
(c) All instruction manuals, published statements of capabilities and
technical specifications, service, maintenance and repair records, installation,
qualification, certification and calibration reports, usage logs, and printed
material relating to the Equipment shall be deemed part of the Equipment.
12. Loss, Damage or Destruction of Equipment. (a) Lessee shall bear all
----------------------------------------
risks of damage to, taking of, or theft, loss or destruction of, any or all of
the Equipment commencing as of the date of this Master Lease and continuing
throughout the Lease Term and until such Equipment has been returned to Lessor
or purchased by Lessee pursuant to any purchase option provisions of this Lease.
Except as otherwise herein expressly provided, no damage to, taking of or theft,
loss or destruction of any Equipment shall impair any obligation of Lessee to
Lessor under this Lease, including, without limitation, the obligation to pay
Basic Rent.
(b) In the event that any item of Equipment shall become damaged from any
cause whatsoever, Lessee agrees to promptly notify Lessor in writing of such
fact, fully informing Lessor of the details thereof. If any item of Equipment
is damaged (unless the same, in the reasonable opinion of Lessor is irreparably
damaged, in which case the provisions of this Lease with respect to a Casualty
Occurrence shall apply), Lessee shall, at its sole cost and expense, place the
same in good repair, condition and working order or replace the same with "like
property" having the same value and operating capabilities and useful life at
least equal to the damaged Equipment prior to the date of such damage, which
property shall thereupon become subject to this Lease with title thereto in
Lessor. In the event that an item of Equipment has been damaged, but not
irreparably, if no Event of Default has occurred and is continuing hereunder,
upon receipt by Lessor of evidence, satisfactory to Lessor, that such repair,
restoration or replacement has been completed, and an invoice therefor, Lessor
shall release to Lessee or its supplier the proceeds of any insurance received
by Lessor as a result of such damage for the purpose of reimbursing Lessee for
the costs of repairing, restoring or replacing such item.
(c) In the event that any item of Equipment shall become lost, stolen,
destroyed or irreparably damaged from any cause whatsoever, or if any item of
Equipment or Lessor's title thereto shall be requisitioned or seized by any
governmental authority (each such occurrence being herein called a "Casualty
Occurrence") during the Lease Term and until it has been returned to Lessor
pursuant to the provisions of this Lease or until the Equipment is purchased by
Lessee pursuant to any purchase option provisions of this Lease, Lessee shall
promptly notify Lessor in writing of such fact, fully informing Lessor of all
details of the Casualty Occurrence in question, and shall pay Lessor in cash the
the "Stipulated Loss Value" as set forth in the Table of Stipulated Loss Values
attached to the Rental Schedule pursuant to which such item of Equipment is
leased hereunder, calculated as of the date of the Casualty Occurrence. This
payment shall be made within 30 days following the Casualty Occurrence, together
with the Basic Rent accrued and unpaid with respect to such Equipment as of the
date of the Casualty Occurrence, plus all Additional Rent or amounts owing with
respect to such Equipment on such date of payment.
(d) Upon the payment of the Stipulated Loss Value of the Equipment in
question in accordance with the terms of this Section, and the payment of all
Basic Rent, Additional Rent and any other sums then due hereunder, this Lease
shall terminate with respect to the Equipment or part thereof suffering the
Casualty Occurrence and all Lessor's rights and title to such Equipment shall
pass to Lessee, "as is" and
-----
<PAGE>
"where is", without any representation or warranty by, or recourse to, Lessor,
- --------------------------------------------------
as provided by the provisions of this Master Lease on disclaimer of warranties
and as evidenced by a duly executed bill of sale naming Lessor as the seller and
Lessee as the buyer.
(e) Provided that no Event of Default has occurred and no event that with
the passage of time or giving of notice, or both, would be an Event of Default
has occurred and is continuing, any insurance proceeds received as the result of
a Casualty Occurrence with respect to any or all items of the Equipment shall be
applied first in reduction of any other then unpaid obligation of Lessee to
Lessor hereunder and second in reduction of Lessee's obligation to pay the
Stipulated Loss Value for such item if not already paid by Lessee to Lessor, or,
if already paid by Lessee, to the reimbursement of Lessee therefor, and the
balance of the insurance proceeds, if any, shall be paid to Lessee.
13. Reports; Inspections. Lessee will cause to be furnished to Lessor, if
--------------------
requested, from time-to-time a statement showing the condition and such other
information regarding the Equipment as Lessor may reasonably request. Lessor
and any Assignee shall have the right, upon reasonable notice to Lessee and
during normal business hours, to inspect the Equipment including Lessee's
records with respect to the Equipment, to copy such records, and to inspect and
copy Lessee's records with respect to the financial statements Lessee is
required to furnish Lessor or has warranted to Lessor pursuant to this Lease.
Any inspection by Lessor or any Assignee shall not be deemed to be approval or
acknowledgment by Lessor or such Assignee of the safety, freedom from defects,
performance or compliance with specifications or governmental requirements of
the Equipment or of the conformity of the Equipment or such financial statements
to the requirements or warranties of this Lease, and the disclaimers set forth
in the provisions of this Master Lease on disclaimer of warranties shall apply
to any such inspection. Lessee shall pay or reimburse Lessor for Lessor's
costs, travel expenses and salaries and the charges and such expenses of
Lessor's advisers for the inspection following an inspection which encountered a
breach of the requirements of this Lease or the warranties of Lessee pursuant to
this Lease.
14. Confidentiality. Lessor agrees to hold in confidence any confidential
---------------
information it receives from Lessee pursuant hereto, except for disclosure: (a)
to legal counsel and accountants for Lessor or any assignee; (b) to other
professional advisors to Lessor or any assignee; (c ) to regulatory officials
having jurisdiction over Lessor or any assignee; (d) as required by law or legal
process or in connection with any legal proceeding to which Lessor (or any
assignee) and Lessee are adverse parties, or in which confidential information
is subject to subpoena duces tucem served upon Lessor provided Lessor shall
notify Lessee of such impending disclosure to enable Lessee to move for a
protective order or to quash the process or subpoena.
15. Insurance. During the Lease Term and until all Equipment has been
---------
returned to Lessor pursuant to the provisions of this Lease or until the
Equipment is purchased by Lessee pursuant to any purchase option provisions of
this Lease, Lessee shall procure and maintain at its expense with reputable
insurers acceptable to Lessor (i) insurance on all of the Equipment in an amount
not less than the the Equipment's Stipulated Loss Value insuring against all
risks of loss or damage to the Equipment and against such other risks as Lessee
would, in the prudent management of its properties, maintain with respect to
similar equipment owned by it, and (ii) comprehensive public liability and
property damage insurance, in such amounts as shall be satisfactory to Lessor
but for not less than $3,000,000, insuring Lessor and any Assignees, as their
interests may appear, against liability for death, bodily injury, and property
damage arising out of or resulting from the design, construction, manufacture,
ownership, use, operation, lease or maintenance of, or otherwise in connection
with, the Equipment. On the policies referred to in clause (i), such insurance
shall name Lessor (and any Assignees) as the loss payee so that (and Lessor and
Lessee hereby agree that) the insurance proceeds payable under such policies
will be payable and paid to Lessor (and to any Assignees). On the policies
referred to in clause (ii), such insurance will name Lessor (and any Assignees)
as an additional insured as its interests may appear. All such policies shall
provide that they may not be invalidated against Lessor (or any Assignees)
because of
<PAGE>
any violation of a condition or a breach of warranty of the policies or
application therefor by Lessee, that they may not be altered or canceled except
after 30 days' prior written notice to Lessor, and that Lessor and any Assignee
have the right but not the obligation to pay the premiums with respect to
coverage required by this Lease in order to continue such insurance in effect or
to obtain like coverage. Under the policies of insurance required to be
maintained by Lessee pursuant to this Master Lease, Lessee agrees to waive any
right of subrogation in each instance as such right may exist against Lessor or
any Assignee and for any and all loss or damage to the Equipment. Lessor is
hereby appointed Lessee's attorney-in-fact to endorse any check or draft which
may be payable to Lessee in order to collect the proceeds of such insurance.
Lessee shall deliver to Lessor, prior to the beginning of the Lease Term with
respect to any of the Equipment and at such other time or times as Lessor may
request, a certificate or other evidence satisfactory to Lessor of the
maintenance of such insurance. Every policy described in (i) or (ii) above in
regard to personal computers and the certificates or evidences of such insurance
delivered to Lessor shall provide worldwide coverage without geographical
limitations.Lessor shall be under no duty to examine such policies, certificates
or other evidence of insurance or to advise Lessee in the event that its
insurance is not in compliance with this Lease. In the event of failure on the
part of Lessee to provide such insurance, Lessor may, at its option, but without
obligation, provide such insurance and add the amount of the premiums to the
rents due hereunder, and Lessee shall, upon Lessor's demand, pay the same as
Additional Rent.
16. Return of Equipment. (a) At the termination, cancellation or end of
-------------------
the Lease Term for any Equipment, if Lessee does not perform any purchase
obligation under Section 28 of this Master Lease and does not purchase the
Equipment under Section 27 of this Master Lease, in addition to damages payable
by Lessee, at its sole expense Lessee shall forthwith return possession of such
Equipment without omissions to Lessor by:
(i) properly preparing, crating and/or assembling such Equipment (in
accordance with the Manufacturer's instructions if such instructions exist) for
shipment by common carrier with all containers and pieces labeled with model,
part and unit numbers and descriptions; and
(ii) shipping such Equipment by common carrier, with insurance and freight
prepaid, to a place designated by Lessor within a 1,000 mile radius of the
specified location under this Lease for such Equipment. Lessor shall pay
additional shipping charges incurred because of distances in excess of such
1,000 miles.
The insurance required by clause (ii) above shall provide that in the event
of loss such insurance shall pay Lessor in cash directly the "Stipulated Loss
Value" as set forth in the Exhibit to the Rental Schedule calculated as of the
Payment Date next preceding the date of loss.
(b) When the Equipment is returned to Lessor it shall be complete. The
condition of the Equipment including Software upon receipt by Lessor shall be
not less than (i) in fully operational condition, (ii) capable of being
installed and operated in the normal course by another user, (iii) for each item
of the Equipment for which the vendor, manufacturer or supplier (collectively,
"Vendor") has a program of maintenance and service including certification for
reinstallation and for qualification under the maintenance and service program
certified in writing by the Vendor that the items of the Equipment are in
compliance with the conditions specified in this paragraph, are accepted by the
Vendor for reinstallation and are qualified for the usual and customary service
and maintenance program of the Vendor, (iv) legally qualified for future use or
operation of the Equipment by another lessee or purchaser of the Equipment, (v)
free of defects, visible or concealed, including, but not limited to, damage or
malfunction of any kind, dents, fractures, chips, scratches, stains,
defacements, discolorations, rust, corrosion, electrical shorts, fluid
restrictions or blockages, disconnections, breakage or the like, other than
normal wear and tear, (vi) safe for routine and usual operation, (vii) in
compliance with any and all pertinent governmental or regulatory rules, laws or
guidelines for its operation or use, (viii) free of Lessee's markings or
labelings, and (ix) free of any advertising or insignia not requested by Lessor
that was placed on the Equipment by Lessee.
<PAGE>
(c) Lessor reserves the right to inspect the Equipment within 30 days of
its return to verify compliance with the provisions of this Master Lease on
Equipment maintenance and repairs and additions and on return of Equipment.
Should there be less than full compliance, Lessor at its option may (i) perform
or cause to be performed through service organizations of its own choosing such
maintenance and repairs, including upgrades, replacements, the obtaining of
paid-up Software licenses and other services, as it deems necessary to effect
such compliance, (ii) require Lessee to perform or cause to be performed such
maintenance and repairs, including upgrades, replacements, the obtaining of
paid-up Software licenses and other services, as Lessor deems necessary to
effect such compliance and/or (iii) reasonably estimate the costs to effect such
compliance. Lessee shall pay to Lessor the costs for performance of (i) or (ii)
above, or the estimated costs under (iii) above, in any such case including the
costs of the inspection(s). If maintenance and repairs, including upgrades,
replacements, and the obtaining of paid-up Software licenses and other services,
are necessary to place any of the Equipment under any Rental Schedule in the
condition required by this Lease, Lessee shall continue to pay to Lessor monthly
Additional Rent at the last prevailing rate during the Lease Term for Basic Rent
on the Equipment under such Rental Schedule for the period of delay until all
such required maintenance and repairs can be performed, or for the period of
time reasonably necessary to accomplish such maintenance and repairs. For any
such period that applies, Lessee shall continue to provide the insurance
required during the Lease Term. However, Lessor's acceptance of such rent and
provision of insurance during such period shall not constitute a renewal of the
Lease Term, a waiver of Lessor's right to prompt return of such Equipment in the
condition required by this Section, or a waiver of Lessor's right to possession
of such Equipment.
(d) Should the inspection reveal any item(s) of the Equipment to be
missing, Lessee shall be responsible for paying to Lessor promptly the
Stipulated Loss Value of such item(s) of the Equipment computed as of the last
Payment Date prior to the end of the Lease Term, plus the amount of any
impairment of the Fair Market Value of the remaining item(s) of the Equipment
due to the absence of such missing item(s) of the Equipment provided that Lessee
shall not receive payment under this paragraph (d) of more than the Stipulated
Loss Value for all of the Equipment (both missing and returned).
(e) In the event that Lessee fails to return any of the Equipment when
required, at the election of Lessor effected by notice to Lessee, the Lease Term
for such Equipment shall be extended on a month-to-month basis on the same terms
as previously in effect, and Lessee shall pay to Lessor monthly in advance Basic
Rent for such Equipment at the last prevailing rate during the unextended Lease
Term, until such Equipment has been returned to Lessor pursuant to the
provisions of this Lease. Notwithstanding any month-to-month continuance of
this Lease, Lessor may resort to any remedies available to it under this Lease,
at law or in equity, to recover such Equipment at any time following the end of
such extended Lease Term.
17. Lessor's Ownership; Equipment To Be and Remain Personal Property.
----------------------------------------------------------------
(a) Lessee acknowledges and agrees that it does not have, and by execution
of this Lease and/or payments and performance hereunder it shall not have or
obtain, any title to the Equipment, nor any property right or interest, legal or
equitable, therein, except its rights as Lessee hereunder and subject to the
terms hereof. Lessee shall not have or claim a security interest and shall not
seek or obtain replevin, detinue, specific performance, sequestration, claim and
delivery, or like remedies in or for this Lease, any rents under this Lease, any
or all of the Equipment, any items of personal property identified to become
items of the Equipment, or any proceeds of any or all of the foregoing.
(b) All of the Equipment shall be and remain personal property
notwithstanding the manner in which the Equipment may be attached or affixed to
realty. Upon the expiration, cancellation or termination of the Lease Term of
any or all of the Equipment, Lessee shall have the obligation, and Lessor shall
have the right, to remove, or cause the removal of, such Equipment from the
premises where the same is then located, for return to Lessor pursuant to the
provisions of this Master Lease on return of Equipment and, if applicable, on
Events of Default, whether or not any of the Equipment is affixed or attached to
realty or to any building. In the exercise of its rights, Lessor shall not be
liable for any damage
<PAGE>
to the realty or any such building or other real or personal property occasioned
by any removal of the Equipment by Lessee or Lessor or the agents of Lessee or
Lessor. Lessee further covenants and agrees that Lessee will, at the request of
Lessor, obtain and deliver to Lessor prior to the execution and delivery of the
first Rental Schedule for Equipment that will be at a specified location or
locations, a waiver, in recordable form, from the owner and any landlord, tenant
or holder of any lien or encumbrance on the realty or building(s) on or in which
any of the Equipment described in such Rental Schedule shall be located, under
which such owner, landlord, tenant and holder (i) agree and consent that such
Equipment is and shall be personal property, owned by and removable by Lessor
upon the expiration, cancellation or termination of the Lease Term thereof, and
(ii) waive any rights of distraint or similar rights with respect to such
Equipment.
(c) If Lessee is unable to return, or is prevented from returning, any of
the Equipment to Lessor upon the expiration, cancellation or termination of the
Lease Term as required under the provisions of this Master Lease on return of
Equipment, for any reason whatsoever, including, but not limited to, the
assertion by any third party of any claim against such Equipment, or of any
right with respect thereto, whether or not resulting from the manner in which
such Equipment is affixed or attached to, or installed in, the realty or any
building(s) thereon or any other personal or real property, or from the failure
of any owner, landlord or tenant of said realty (or the building(s) thereon) or
the holder of any lien or encumbrance to execute the waiver in writing of such
fact, for all purposes of this Lease such Equipment shall be deemed to have been
the subject of a Casualty Occurrence. Thereupon, Lessee shall pay to Lessor the
amounts provided for by the provisions of this Master Lease on loss, damage or
destruction of Equipment, with respect to such Equipment, at the time, in the
manner, and with the consequences provided by such provisions.
(d) Notwithstanding the foregoing provisions of this Section, without
----------------------------------------------------------------------
Lessor's prior written consent, Lessee shall not permit any of the Equipment to
- -------------------------------------------------------------------------------
be attached or affixed to, imbedded in or incorporated into any building,
- -------------------------------------------------------------------------
structure, real estate or other personal or real property.
- ---------------------------------------------------------
18. Other Covenants. (a) Lessee agrees to furnish, upon Lessor's
---------------
request, such financial, business and operational information concerning Lessee
and any or all Guarantors, including copies of its and their tax returns, as
Lessor or its assigns may reasonably request during the Lease Term.
Additionally, Lessee shall furnish to Lessor and its assigns without notice or
demand therefor two complete copies of its and of every Guarantor's (i)
quarterly interim financial statements within 45 days of the close of each of
the first three fiscal quarters of every year, certified by the chief financial
officer of, respectively, Lessee or such Guarantor and (ii) annual financial
statements within 90 days of the close of each fiscal year reported on by
independent accountants without material adverse qualification. All such
financial statements shall be prepared in accordance with generally accepted
accounting principles consistently applied, and shall accurately and completely
present Lessee's and every Guarantor's financial condition and results of
operations at the dates of and for the periods covered by such statements.
(b) Lessee shall promptly furnish to Lessor copies of (i) filings that
Lessee or any Guarantor makes with the SEC or other government agencies under
the securities laws including but not limited to definitive proxy statements,
registration statements, prospectuses and tender offer filings, and reports on
holdings or acquisitions of securities, relating to proxy solicitations, and on
Form 10-K, 10-Q, 8-K or similar forms, and any amendments to such filings and
(ii) press releases of Lessee or any Guarantor.
(c) If Lessee shall become a public company, Lessee shall give Lessor
notice of all meetings of its stockholders and copies of all materials that are
furnished to the stockholders for the meetings at the same time that the notice
or materials are sent to the stockholders and Lessor shall have the right to
have its representative attend such meetings.
(d) There shall be no actual or threatened conflict with, or violation of,
any statute, regulation, standard or rule relating to Lessee, its present or
future operations, or the Equipment.
<PAGE>
(e) All financial information supplied to Lessor or its assigns by Lessee
shall be correct and shall not omit any statement necessary to make the
information supplied not be materially misleading. There shall be no material
breach of the representations and warranties made by Lessee in connection with
this Lease.
(f) Lessee shall give Lessor notice of any change in the address of the
executive office or principal place of business of Lessee not less than 15 days
prior to the change.
(g) The senior management of Lessee shall not be changed as a result of a
change in control of Lessee without the consent of Lessor which shall not be
unreasonably withheld.
(h) Lessee shall not make any payment or distribution of money, checks,
securities or property to any Person in contravention of the provisions of any
Guaranty or subordination that such Person has made in favor of Lessor or its
assigns of which Lessee shall have notice or knowledge.
19. Events of Default. If one or more of the following events
-----------------
(hereinafter called "Events of Default" or an "Event of Default") shall occur:
(i) default shall be made in the payment of any Basic Rent or Additional
Rent due under this Master Lease or under any Rental Schedule hereto, and any
such default shall continue for more than 10 days after the due date thereof;
(ii) any representation or warranty by Lessee made in this Master Lease or
in any Guaranty or other Transactional Document or certificate furnished to
Lessor in connection with this Lease or pursuant hereto shall at any time prove
to be incorrect in any material respect as of the date made;
(iii) Lessee shall make or permit any unauthorized assignment or transfer
of this Master Lease or any Rental Schedule to this Master Lease or of any of
Lessee's rights and obligations hereunder or thereunder, or Lessee shall make or
permit any unauthorized sublease or transfer of any Equipment or the possession
of any Equipment;
(iv) Lessee shall default in the observance and/or performance of any
other covenant, condition or agreement on the part of Lessee to be observed
and/or performed under this Master Lease, under any Rental Schedule hereto, or
under any other Transactional Document, which default is not governed by
paragraphs (i), (ii) or (iii) above, and such default shall continue for 30 days
after written notice from Lessor to Lessee specifying the default and demanding
the same to be remedied;
(v) Lessee or any Guarantor shall make an assignment for the benefit of
creditors or generally fail to pay its debts as they become due, or become
insolvent or commence a voluntary case under the federal Bankruptcy Code as now
or hereafter constituted or any other applicable federal or state bankruptcy,
insolvency or similar law, or admit in writing its inability to pay its debts as
they mature, or consent to the appointment of a trustee or receiver, or a
trustee or a receiver shall be appointed for Lessee or any Guarantor or for a
substantial part of Lessee's or any Guarantor's property without such party's
consent and such appointment shall be not dismissed for a period of 60 days;
there shall have been entered a decree or order for relief by a court having
jurisdiction in respect of Lessee or any Guarantor, or approving as properly
filed a petition seeking a reorganization, arrangement, adjustment or
composition of or in respect of Lessee or any Guarantor in an involuntary
proceeding or case under any applicable federal or state bankruptcy, insolvency
or other similar law, or appointing a receiver, liquidator, assignee, custodian,
trustee or similar official of Lessee or any Guarantor or of any substantial
part of its property, or ordering the winding-up or liquidation of its affairs,
and the continuance of any such decree or order unstayed and in effect for a
period of 60 days, or there shall have been filed a petition by or against
Lessee or any Guarantor under any bankruptcy law or other insolvency law and, if
petition is filed against Lessee or such Guarantor, the petition is not
withdrawn or dismissed within 60 days after the date of filing; or Lessee or any
Guarantor shall cease doing business as a going concern or shall liquidate or be
dissolved;
<PAGE>
(vi) Lessee or any Guarantor shall, without the prior written consent of
Lessor, enter into a merger, consolidation or division, effect a share exchange
of its outstanding stock for the stock of another corporation, or sell or
otherwise dispose of all or a major part of its assets or of assets that produce
all or a major part of its revenues or profits; provided, however, that Lessee
or any Guarantor, without violating the provisions of this clause, may
consolidate with or merge with a corporation or other entity organized under the
laws of one of the states of the United States (the surviving entity, a
"successor"), or sell (except by means of a sale and leaseback arrangement) all
or substantially all of its business and assets to such a successor, on the
condition that any successor expressly assume in writing all of the obligations
of Lessee pursuant to this Lease or of such Guarantor pursuant to its Guaranty,
and that the net tangible assets and the net worth (determined in accordance
with generally accepted accounting principles) of the successor after the
consolidation, merger or sale shall be at least equal to the net tangible assets
and the net worth of Lessee or such Guarantor, as the case may be, immediately
prior to the consolidation, merger or sale;
(vii) there shall occur under any other lease, contract or agreement
between Lessee and Lessor, an Event of Default, as defined in such lease,
contract or agreement;
(viii) any of the Equipment shall be attached, levied upon, encumbered,
pledged, seized or taken under any judicial process (except for any attachment,
levy, encumbrance or pledge caused to be placed on the Equipment by Lessor) and
such proceedings shall not be vacated, or fully stayed, within 30 days thereof;
(ix) at any time there shall occur under (A) any lease between Lessee and
a party other than Lessor as lessor or (B) under any lease wholly or partially
guaranteed by Lessee, the exercise by the lessor of its possessory remedies or
commencement of legal proceedings by the lessor for default under the lease;
provided that the aggregate future payments remaining to be made or guaranteed
by Lessee exceed $10,000, and that under a lease described in (B) above within
ten days of notice to Lessee of such exercise of remedies and demand for payment
by Lessee any such amount guaranteed by Lessee remains unpaid; or
(x) any obligation of Lessee or any Guarantor for the payment of borrowed
money or the acquisition of assets by purchase, conditional sale or other
arrangement is not paid or refinanced at maturity, whether by acceleration or
otherwise, or is declared due and payable prior to the stated maturity thereof
by reason of default or other violation of the terms of any promissory note or
agreement evidencing or governing such obligation, and Lessor has given Lessee
an opportunity to either cure the purported Event of Default or supply
information satisfactory to Lessor that it does not, in fact, exist;
this Lease shall be declared in default, immediately and without notice upon the
occurrence of an Event of Default specified in clause (v) above, and in the case
of any other Event of Default, upon Lessor at any time at its option subsequent
to such Event of Default giving notice to Lessee that this Lease is declared in
default. At any time after this Lease has been declared in default, Lessor may
exercise one or more of the following remedies, to the extent not then
prohibited by law, as Lessor in its sole discretion may elect:
(I) to proceed by appropriate court action or actions at law or in equity
or in bankruptcy to enforce performance by Lessee of the covenants and terms of
this Lease and/or to recover damages for the breach thereof;
(II) to terminate or cancel this Lease upon written notice to Lessee
whereupon all rights of Lessee to use the Equipment shall immediately terminate,
but Lessee shall not be relieved of any obligations under this Lease;
(III) whether or not this Lease be so terminated or canceled, and without
notice to Lessee, to repossess and/or to render inoperable the Equipment
wherever found, with or without legal process, and for this purpose Lessor
and/or its agents may enter upon any premises of or under the control or
jurisdiction of Lessee or any agent of Lessee without liability for suit, action
or other proceeding by Lessee and remove the Equipment therefrom; Lessee hereby
expressly waives any claims for damages occasioned by
<PAGE>
such repossession; LESSEE HEREBY EXPRESSLY WAIVES ANY AND ALL RIGHTS, INCLUDING
RIGHTS TO NOTICE OR A JUDICIAL HEARING, WITH RESPECT TO REPOSSESSION OF THE
EQUIPMENT AFTER AN EVENT OF DEFAULT;
(IV) to hold or to use any Equipment returned to Lessor or repossessed by
Lessor for any purpose whatsoever, to sell any Equipment at a private or public,
cash or credit sale, to re-lease any Equipment, in all the foregoing events free
and clear of any rights of Lessee and without any duty to account to Lessee with
respect to such action or inaction, provided that prior to sale or lease of the
Equipment, or actual use of the Equipment, by Lessor after its return or
repossession, Lessor shall provide to Lessee the opportunity to remove from the
Equipment confidential information, data and software attached thereto or loaded
or present thereon or therein that are not a part of the Equipment.
(V) whether or not Lessor shall have exercised, or shall hereafter at any
time exercise, any of its other rights with respect to an item of the Equipment,
upon written notice to Lessee, to demand that Lessee pay to Lessor, and Lessee
shall pay to Lessor on the date specified in such notice, as liquidated damages
for loss of a bargain and not as a penalty (in lieu of the Basic Rent for such
Equipment that prior to the Event of Default was to have been paid on Payment
Dates subsequent to the date specified in such notice), the sum equal to the
---
excess, if any, of 125% of the Stipulated Loss Value for such item of Equipment
computed as of the latest Payment Date when all Basic Rent and Additional Rent
------------
then due and payable has been fully paid over whichever of the following three
amounts Lessor, in its reasonable discretion, shall designate in such notice:
(A) the present value of the fair market rental value (determined as
hereafter provided in this Section) of such item of the Equipment for
the remainder of the Lease Term as of the date specified in such notice
plus its projected residual value at the end of the Lease Term as of
such date, the present value to be computed on the basis of a seven
percent per annum rate of discount from the respective dates upon which
such rent would be paid,
(B) the fair market sales value (determined as hereafter provided in this
Section) of such item of Equipment as of the date specified in such
notice,or
(C) if Lessor shall have sold or re-leased any item of Equipment pursuant
to clause (IV) above, the net proceeds of such sale or re-lease,
plus interest at the Default Interest Rate (a) on such sum from the such Payment
--- -------
Date until paid and (b) on whichever of such three amounts is so designated by
- ----
Lessor from such Payment Date until whichever one of the following shall be
------------
applicable to the designated amount: the time when the fair market rental or
sales value shall have been so determined or the time when the Equipment shall
have been sold or re-leased; and
(VI) to forthwith recover from Lessee, and Lessee shall be fully liable
for, all Basic Rent that shall accrue until the date that the Equipment is
returned to or repossessed by Lessor and any Additional Rent including
collection fees, whenever accrued, and interest at the Default Interest Rate.
In addition to the foregoing, Lessor may also recover from Lessee all costs
and expenses arising out of Lessee's default, including, without limitation,
expenses of repossession of the Equipment and the storage, inspection, repair,
reconditioning, sale and re-leasing thereof, and reasonable attorneys' fees
incurred by Lessor in exercising any of its rights or remedies hereunder. For
the purposes of this Section only, "fair market rental value", "fair market
sales value" and "residual value" shall be determined by an appraisal of an
independent appraiser chosen by Lessor, and the cost of any such appraisal shall
be borne by Lessee. No remedy referred to in this Section is intended to be
exclusive, but each shall be cumulative and in addition to any other remedy
referred to above or otherwise available to Lessor at law or in equity or in
bankruptcy. The exercise by Lessor of any one or more remedies shall not be
deemed to preclude the simultaneous or later exercise by Lessor of any or all
such previously exercised remedies and any and all
<PAGE>
other remedies; provided, however, that Lessor's total recovery upon exercise of
its rights and remedies with respect to any Equipment shall not exceed the
Stipulated Loss Value thereof and any such excess, after payment of all other
obligations of Lessee hereunder, shall be delivered to Lessee.
20. Assignment and Transfer by Lessor. (a) Lessor may at any time and
---------------------------------
from time to time assign to one or more security assignees (all herein called
the "Secured Party" and also called an "Assignee") for the purpose of securing a
loan to Lessor or for any other purpose, and at its sole discretion, may also
sell or transfer to one or more Persons (herein called the "Transferee" and also
called an "Assignee"), in any case subject to the rights of Lessee under this
Lease but without notice to or consent of Lessee, this Lease, any other
Transactional Documents, any or all of the Equipment, and all sums at any time
due and to become due or at any time owing or payable by Lessee to Lessor under
this Lease or pursuant to any or all of the Transaction Documents. The Secured
Party shall not be obligated to perform any duty, covenant or condition required
to be performed by Lessor under this Lease or any other Transactional Documents.
(b) Lessee agrees that notwithstanding any assignment to a Secured Party,
each and every covenant, agreement, representation and warranty of Lessor under
this Lease shall be and remain the sole liability of Lessor and of every
successor in interest of Lessor (excluding any Secured Party) or, in the case of
assignment to a Transferee, shall become and remain the sole liability of the
Transferee if so agreed to by the Transferee and if not so agreed to shall be
and remain the sole liability of Lessor. Lessee further agrees and acknowledges
that any assignment, sale or transfer by Lessor could not and shall not
materially change any duty or obligation of Lessee or materially increase any
burden or risk of Lessee.
(c) Lessee further acknowledges and agrees that from and after the receipt
by Lessee of written notice of an assignment from Lessor, Lessee shall comply
with the directions or demands given in writing by the Secured Party or (to the
extent not inconsistent with the directions or demands of the Secured Party) by
the Transferee, and the Secured Party or Transferee shall have the right to
exercise (either in its own name or in the name of Lessor) all rights,
privileges, and remedies of Lessor provided for herein. Lessee agrees that any
obligation to a Secured Party as a result of the assignment of this Lease to a
Secured Party as aforesaid shall not be reduced or minimized by reason of any
claim, defense, counterclaim, set-off, abatement, reduction or recoupment or
other right that Lessee might otherwise have been able to assert against Lessor,
any prior Assignee or any Transferee. After any assignment to a Secured Party
and unless and until Lessee is otherwise notified by the Secured Party, this
Lease may not be amended or modified, and no consent or waiver hereunder shall
be effective, without the prior written consent of the Secured Party. Lessee
agrees to execute and Lessor or any Transferee or Secured Party may record any
instruments and documents relating to such assignment, mortgage or security
interest desired by Lessor or any Transferee or Secured Party. Lessee shall
promptly provide any such instruments and documents that are requested by Lessor
or any Assignee including certificates indicating any claim, defense,
counterclaim, set-off, abatement, reduction, recoupment or other right that
Lessee may have against Lessor or any Assignee, the date to which Basic Rent has
been paid under each Rental Schedule hereunder and that this Lease is in effect
without default or amendment, or the extent of such default or amendment, as the
case may be.
21. Recording and Filing; Expenses. Lessee will, upon demand of Lessor,
------------------------------
at Lessee's cost and expense, do and perform any other act and will execute,
acknowledge, deliver, file, register, record and deposit (and will re-file, re-
register, re-record or re-deposit whenever required) any and all instruments
required by law or requested by Lessor (or any Assignee) including, without
limitation, financing statements under the Uniform Commercial Code (which,
notwithstanding the intent of Lessor and Lessee that this is a true lease,
Lessor shall have the right to file wherever and whenever Lessor requires), for
the purpose of providing proper protection to the satisfaction of Lessor (and/or
any Assignee) of Lessor's title to any Equipment (and/or of any Assignee's
security interest in the Equipment) or for the purpose of carrying out the
intention of this Lease. Lessee will also pay, or will upon demand reimburse
Lessor for, all reasonable costs and expenses incurred by Lessor in connection
with this Lease, any other Transactional Documents, and any related
transactions, closings, assignments, sales and transfers to any Secured
<PAGE>
Party or Transferee, enforcement of Lessor's rights under this Lease and the
other Transactional Documents, proceedings involving Lessee or any Guarantor as
a debtor under any chapter of the Bankruptcy Code, filings, the documentation of
this and any related transactions, and fees and costs of attorneys for Lessor in
connection therewith.
22. Option to Renew. (a) Upon the expiration of the Primary Term
---------------
provided for under any Rental Schedule, and provided that the financial
condition of Lessee then meets the criteria of Lessor and that no Event of
Default or event which with the giving of notice or lapse of time, or both,
would constitute an Event of Default, has occurred and then remains unremedied
to Lessor's satisfaction, Lessee shall have the option, exercisable on at least
120 days' prior written notice to Lessor, to renew this Lease with respect to
all, but not less than all (except for items that have been destroyed and for
which Lessor has received payment of the greater of the Stipulated Loss Value or
the Fair Market Value with respect thereto) of the Equipment then subject to
such Rental Schedule, for up to two successive additional renewal terms (each a
"Renewal Term") of one year at a rate of Basic Rent for each Renewal Term that
would be obtained in an arm's-length transaction at the end of the Primary Term
between an informed and willing prospective lessee and an informed and willing
lessor, each under no compulsion to lease (said rate being herein called the
"Fair Rental Rate").
(b) If, on or before a date 60 days prior to the expiration of the Primary
Term or any Renewal Term with respect to such Rental Schedule, Lessor and Lessee
are unable to agree upon a determination of the Fair Rental Rate of the
Equipment, Lessee shall have no obligation to renew this Lease and shall either
give the notice required by the provisions of this Master Lease of intention to
return such Equipment and on the condition of such Equipment or a written notice
that Lessee wishes to proceed with its option. If Lessee gives such notice that
it will proceed with its option, such Equipment shall be leased during the
Renewal Term at the Fair Rental Rate determined in accordance with the procedure
for Appraisal (as hereinafter defined).
23. Quiet Enjoyment. So long as no Event of Default has occurred and is
---------------
continuing hereunder, Lessee shall have peaceful and quiet use and enjoyment of
the Equipment during the Lease Term as against acts of Lessor or anyone claiming
solely by, through or under Lessor including any Secured Party or Transferee.
24. Failure or Indulgence not Waiver; Additional Rights of Lessor. (a)
-------------------------------------------------------------
No failure to exercise, and no delay in exercising, any right, power or remedy
hereunder on the part of Lessor shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
Any waiver, to be effective, must be in writing. A waiver of any covenant, term
or condition contained herein shall not be construed as a waiver of any
subsequent breach of the same covenant, term or condition. Receipt by Lessor of
any Basic Rent or Additional Rent with knowledge of the breach of any provision
hereof shall not constitute a waiver of such breach.
(b) Lessor shall be entitled to injunctive relief in case of the violation
or attempted or threatened violation of any of the provisions hereof, to a
decree compelling performance of any of the provisions hereof, and to any other
remedy allowed in law or in equity.
25. Sublease. Lessee shall not sublease the Equipment, relinquish
--------------------------------------------------------------
possession of the Equipment, or assign, pledge or hypothecate this Lease or any
- -------------------------------------------------------------------------------
of Lessee's rights or obligations hereunder, in whole or in part, without the
- -------------------------------------------
prior written consent of Lessor. Nevertheless, any such sublease and the rents,
profits and proceeds therefrom shall be the property of Lessor and, unless
Lessor has consented to such sublease, Lessor within 30 days after receiving
notice thereof in accordance with the provisions of this Master Lease on notices
shall have the right to declare the sublease void from its purported
commencement, to terminate the sublease or to accept the sublease. Any such
attempted relinquishment of possession, assignment, pledge or hypothecation by
Lessee without such consent shall be null and void.
<PAGE>
26. Commitment Fee. Lessee has paid Lessor a commitment fee of $13,500.00
--------------
(the "Commitment Fee"). The Commitment Fee shall be applied by Lessor until
exhausted proportionally to the last month's Basic Rent due for each Rental
Schedule hereunder upon the Lease Commencement Date of the Rental Schedule in
the proportion the Acquisition Cost of the Equipment leased pursuant to the
Rental Schedule bears to $1,750,000.00. The portion of the Commitment Fee which
is not so applied shall be non-refundable.
27. Lessee Purchase Option During Lease Term. If (i) no Event of Default,
----------------------------------------
and no event which with the giving of notice or lapse of time, or both, would
constitute an Event of Default, has occurred and then remains unremedied to
Lessor's satisfaction, and (ii) this Lease shall not have been earlier
terminated, Lessee shall be entitled, at its option, upon written notice to
Lessor, as hereinafter provided, to purchase, after 24 full calendar months
shall have passed from the last Lease Commencement Date to have occurred under
any Rental Schedule then outstanding, all but not less than all the Equipment
under all Rental Schedules of this Master Lease for the Stipulated Loss Value of
the Equipment on the date of purchase, as determined by the provisions of each
Rental Schedule for the Equipment subject thereto, plus any applicable sales,
excise or other taxes imposed as a result of such sale (other than net income
taxes attributable to such sale). Lessor's sale of any item of the Equipment
shall be on an "as-is", "where-is" basis, without any representation or warranty
by or recourse to Lessor, as provided by the provisions of this Master Lease on
disclaimer of warranties. If Lessee intends to exercise said purchase option in
regard to the Equipment, Lessee shall give written notice to Lessor to such
effect specifying the date of purchase at least 30 days prior to the date of
purchase. If Lessee gives such written notice, Lessee shall be obligated to
buy, and Lessor shall be obligated to sell, all of the Equipment on the terms
herein provided. The purchase price shall be payable in immediately available
funds on the date of purchase.
28. Purchase and Sale Options of Lessor and Lessee. (a) If (i) no Event of
----------------------------------------------
Default, and no event which with the giving of notice or lapse of time, or both,
would constitute an Event of Default, has occurred and then remains unremedied
to Lessor's satisfaction, and (ii) this Lease shall not have been earlier
terminated, Lessee shall be entitled, at its option, upon written notice to
Lessor, as hereinafter provided, to purchase all, but not less than all, items
of the Equipment then subject to a Rental Schedule, at the expiration of the
Primary Term for such items of the Equipment or, as the case may be, at the
expiration of any Renewal Term for such items of the Equipment, for an amount,
with respect to each such item of the Equipment, payable in immediately
available funds, equal to five percent (5%) of its Acquisition Cost, plus any
applicable sales, excise or other taxes imposed as a result of such sale (other
than net income taxes attributable to such sale). Lessor's sale of any item of
the Equipment shall be on an "as-is", "where-is" basis, without any
representation or warranty by or recourse to Lessor, as provided by the
provisions of this Master Lease on disclaimer of warranties, and shall be
subject to such additional terms and conditions as may be specified in the
Rental Schedule. If Lessee intends to exercise said purchase option, Lessee
shall give written notice to Lessor to such effect at least 30 days prior to the
earliest expiration of the Primary Term of the item(s) of the Equipment subject
to the particular Rental Schedule with respect to which Lessee intends to
exercise its purchase option, or, if a Renewal Term is then in effect, at least
30 days prior to the earliest expiration of the then current Renewal Term of the
item(s) of the Equipment subject to the particular Rental Schedule with respect
to which Lessee intends to exercise its purchase option. If Lessee fails to
give such written notice to Lessor as aforesaid, it shall be conclusively
presumed that Lessee has elected not to exercise such purchase option. If
Lessee gives such written notice, Lessee shall be obligated to buy, and Lessor
shall be obligated to sell, such Equipment on the terms herein provided.
(b) Lessor shall be entitled, at its option, upon written notice to Lessee,
as hereinafter provided, to sell all, but not less than all, items of the
Equipment then subject to a Rental Schedule, at the expiration of the Primary
Term for such items of the Equipment or, as the case may be, at the expiration
of any Renewal Term for such items of the Equipment, for an amount, with respect
to each such item of the Equipment, payable in immediately available funds,
equal to five percent (5%) of its Acquisition Cost, plus any
<PAGE>
applicable sales, excise or other taxes imposed as a result of such sale (other
than net income taxes attributable to such sale). Lessor's sale of any item of
-------------
the Equipment shall be on an "as-is", "where-is" basis, without any
-----------------------------------------------------
representation or warranty by or recourse to Lessor, as provided by the
- --------------------------
provisions of this Master Lease on disclaimer of warranties, and shall be
subject to such additional terms and conditions as may be specified in the
Rental Schedule. If Lessor intends to exercise said sale option, Lessor shall
give written notice to Lessee to such effect at least 30 days prior to the
earliest expiration of the Primary Term of the item(s) of the Equipment subject
to the particular Rental Schedule with respect to which Lessor intends to
exercise its sale option, or, if a Renewal Term is then in effect, at least 30
days prior to the earliest expiration of the then current Renewal Term of the
item(s) of the Equipment subject to the particular Rental Schedule with respect
to which Lessor intends to exercise its sale option. If Lessor fails to give
such written notice to Lessee as aforesaid, it shall be conclusively presumed
that Lessor has elected not to exercise such sale option. If Lessor gives such
written notice, Lessee shall be obligated to buy, and Lessor shall be obligated
to sell, such Equipment on the terms herein provided.
(c) Notwithstanding any election by Lessee to purchase or Lessor to sell,
the provisions of this Lease shall continue in full force and effect until the
transfer of ownership of such equipment upon the date of purchase and sale by
the delivery of a Bill of Sale by Lessor.
29. Notices. Any notice or other communication required or permitted to
-------
be given by either party hereto to the other party shall be deemed to have been
given upon its receipt, in writing, by the receiving party at its address set
forth below, or at such other address as the receiving party shall have
furnished to the other party by notice pursuant to this Section.
If to Lessee: Power Integrations, Inc.
477 North Mathilda Avenue
Sunnyvale, CA 94086
If to Lessor: FINOVA Technology Finance, Inc.
10 Waterside Drive
Farmington, CT 06032-3065
30. Entire Agreement; Severability; Amendment or Cancellation of Lease.
------------------------------------------------------------------
This Lease constitutes the complete and exclusive statement of the terms of the
agreement between the parties with respect to the leasing of the Equipment and
any sale of the Equipment by Lessor to Lessee, except that the commitment letter
of Lessor to Lessee dated January 29, 1997, accepted by Lessee February 5, 1997,
covers the commitment of Lessor to enter into Rental Schedules under this Master
Lease. Any provision of this Lease which is prohibited or unenforceable in any
jurisdiction shall be, as to such jurisdiction, ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. LESSEE ACKNOWLEDGES RECEIPT OF A COPY OF THIS MASTER LEASE.
Lessor and Lessee agree that neither this Lease nor Lessee's acceptance or
- --------------------------------------------------------------------------
deemed acceptance of any or all of the Equipment may be canceled, waived,
- ------------------------------------------------------------------------
altered, amended, repudiated, terminated, rescinded, revoked or modified, except
- --------------------------------------------------------------------------------
by a writing signed by Lessee and a duly authorized representative of Lessor
- ----------------------------------------------------------------------------
POWER INTEGRATIONS,INC.
--------------------------------
Signature of Lessee
31. Waiver of Jury. Lessor and Lessee waive any right and all right to
-------------------------------------------------------------------
trial by jury in any action or proceeding relating in any way to this Lease.
- ---------------------------------------------------------------------------
<PAGE>
32. Restriction of Limitation Periods and Damages. Any action for breach
---------------------------------------------------------------------
of warranty or in respect of or relating to the Equipment or this Lease that may
- --------------------------------------------------------------------------------
be brought by Lessee against Lessor or any Assignee must be commenced within one
- --------------------------------------------------------------------------------
year after the cause of action accrues. Lessee shall not make any claim in
- ---------------------------------------------------------------------------
respect of or relating to the Equipment or this Lease against Lessor or any
- ---------------------------------------------------------------------------
Assignee for special consequential or punitive damages.
- ------------------------------------------------------
33. Governing Law; Consent to Jurisdiction and Service. This Lease shall
---------------------------------------------------------------------
be governed by and construed in accordance with the laws of the State of
- ------------------------------------------------------------------------
Connecticut (other than the conflicts of laws provisions). Lessee agrees that
- ------------------------------------------------------------------------------
any legal action or proceeding against Lessee in respect of or relating to this
- -------------------------------------------------------------------------------
Lease or the Equipment may be brought in any state or federal court sitting in
- ------------------------------------------------------------------------------
the city of Hartford in the State of Connecticut. Lessee hereby irrevocably
- ----------------------------------------------------------------------------
consents and submits to the nonexclusive personal jurisdiction of said courts
- -----------------------------------------------------------------------------
and irrevocably agrees that all claims in any such action or proceeding may be
- ------------------------------------------------------------------------------
heard and determined in and enforced by any such court. Lessee irrevocably
- ---------------------------------------------------------------------------
consents to the service of summons, notice, or other process relating to any
- ----------------------------------------------------------------------------
such action or proceeding by delivery thereof to it by hand or by mail in the
- -----------------------------------------------------------------------------
manner set forth in the provisions of this Master Lease on notices.
- ------------------------------------------------------------------
34. Lessor's Right to Perform for Lessee. If Lessee fails to duly and
------------------------------------
promptly perform any of its obligations under this Lease or fails to comply with
any of the covenants or agreements contained herein, Lessor may itself perform
such obligations or comply with such covenants or agreements, for the account of
Lessee, without thereby waiving any default, and any amount paid or expense
(including, without limitation, attorney's fees) reasonably incurred by Lessor
in connection with such performance or compliance shall, together with interest
thereon at the Default Interest Rate, be payable by Lessee to Lessor on demand.
35. Agreement for Lease Only. Lessor and Lessee agree that this Lease is
------------------------
and is intended to be a true lease (and not a lease in the nature of a security
interest) and further agree to treat this Lease as a true lease for all
purposes, including, without limitation, tax purposes.
36. Binding Effect. This Lease shall inure to the benefit of and be
--------------
binding upon the parties hereto and their respective permitted successors and
assigns.
37. General. The captions in this Master Lease and each Rental Schedule
-------
are for convenience of reference only. There shall be only one original
executed copy of this Master Lease and of each Rental Schedule. This Master
Lease is and each Rental Schedule shall be executed in the State of Connecticut
by Lessor's having countersigned the same in the State of Connecticut, and are
to be and shall be performed in the State of Connecticut by reason of the
requirements therein for payment by Lessee to Lessor to be made in the State of
Connecticut.
38. Definitions. The following terms, not elsewhere defined, shall have
-----------
the following meanings for all purposes hereof:
"Acquisition Cost" of any item of the Equipment shall mean an amount equal
to the sum of (i) the purchase price of such item of the Equipment paid by
Lessor pursuant to the purchase order for such item of the Equipment assigned to
or given by Lessor, plus (ii) any excise, sales or use tax, freight,
installation, set-up and other costs that are paid by Lessor on or with respect
to such item of the Equipment on or about the time of Lessor's purchase of the
Equipment or the Lease Commencement Date and that Lessor does not request Lessee
to directly reimburse to Lessor.
"Appraisal" shall mean the following procedure whereby recognized
independent qualified equipment appraisers shall mutually agree upon the amount
in question. The party seeking Appraisal shall deliver a written notice to that
effect to the other party appointing its appraiser, and within 15 days after
receipt of such notice, the other party shall, by written notice, appoint its
appraiser. If within 15 days after appointment of the two appraisers as
described above, the two appraisers are unable to agree upon the amount in
question, a third appraiser shall be chosen within five days thereafter by
mutual agreement
<PAGE>
of the first two appraisers, or if the first two appraisers fail to agree upon
the appointment of a third appraiser, such appointment shall be made by an
authorized representative of the American Arbitration Association. The appraisal
of the third appraiser shall be given within a period of ten days after the
selection of the third appraiser. The average of the three appraisals arrived at
by the three appraisers shall be binding and conclusive on Lessor and Lessee.
Lessor and Lessee each shall pay the fees of the appraiser appointed by it and
shall share equally the fees and expenses of the third appraiser, if any, and
those of the American Arbitration Association, if applicable.
"Certificate of Inspection and Acceptance" shall mean a certificate in the
form designated by Lessor whereby Lessee evidences its acceptance of one or more
items of the Equipment for lease hereunder.
"Fair Market Value" shall mean, with respect to the Equipment in question,
the amount which would be paid for that Equipment in an arm's-length sale
transaction between an informed and willing buyer (not a used equipment or scrap
dealer) who wants the Equipment to be as described in the next following
sentence and is under no compulsion to buy, and an informed and willing seller
under no compulsion to sell. In determining the Fair Market Value, it shall be
assumed (whether or not the same be true) that the Equipment is fully
operational, installed and in economically productive service and that all
maintenance and repairs including upgrades, replacements and other services
required by this Lease have been performed and that the Equipment is in such
condition to comply fully with the requirements of this Lease, including
provisions of this Master Lease governing the return of Equipment. The costs of
removal from the location of current use and installation at another location
for use shall not be a deduction in determining the Fair Market Value.
"Guarantor" shall mean a guarantor of any or all of the obligations of
Lessee pursuant to this Lease.
"Guaranty" shall mean a writing containing a guaranty of any or all of the
obligations of Lessee pursuant to this Lease.
"Lease Commencement Date" with respect to an item of Equipment shall mean
the date of commencement of the Lease Term of the item as provided by the
applicable Rental Schedule.
"Lease Term" with respect to an item of the Equipment shall mean the
Primary Term plus any and all Renewal Terms plus any period during which Lessee
retains the Equipment on a month-to-month basis pursuant to provisions of this
Master Lease governing the return of the Equipment. The Lease Term shall
include the Lease Commencement Date and the date on which the Lease Term ends.
"Manufacturer" shall mean the Person that manufactures the item of the
Equipment in question.
"Master Lease" shall mean this Master Equipment Lease Agreement.
"Permitted Liens" shall mean:
(a) liens for taxes, fees, assessments or other governmental charges or
levies, either not delinquent or being contested in good faith by
appropriate proceedings, provided the same have no priority over the
--------
interests of Lessor;
(b) liens securing claims or demands of materialmen, mechanics, carriers,
warehousemen, landlords and other like persons or entities imposed
without action of such parties, provided that the payment thereof is
--------
not yet required and such claims or demands do not arise from acts or
requests of Lessee prohibited by this Lease; and
<PAGE>
(c) liens arising from judgments, decrees or attachments in circumstances
not constituting immediately or with either or both the passage of
time or the giving of notice an Event of Default hereunder.
"Person" shall mean an individual, a corporation, a partnership, an
association, a joint-stock company, a trust, an estate, any incorporated
organization or similar association, a government or political subdivision, or
any other entity.
"Rental Schedule" shall mean each schedule, executed by Lessor and Lessee
pursuant to this Master Lease, providing for a description of some or all of the
Equipment to be leased hereunder, the place or places where such Equipment shall
be located, its Acquisition Cost, the Basic Rent payable by Lessee with respect
thereto, the Primary Term thereof, the Lease Commencement Date with respect
thereto, and such other matters as Lessor and Lessee may agree upon.
"Stipulated Loss Value" shall mean the amounts specified in the Table of
Stipulated Loss Values applicable to the items of the Equipment subject to a
Rental Schedule, as provided by the Schedule B attached to the Rental Schedule.
Except as otherwise provided in a writing signed by Lessor and Lessee, the
Stipulated Loss Value immediately prior to the end of the Primary Term for any
items of the Equipment shall be the Stipulated Loss Value throughout any Renewal
Term(s) for such items, and thereafter until such items are returned to Lessor
pursuant to the provisions of this Lease or purchased by Lessee pursuant to any
then applicable purchase option provisions of this Lease.
IN WITNESS WHEREOF, the duly authorized representatives of Lessor and
Lessee have executed this Master Lease as of the date first above written.
LESSOR: LESSEE:
FINOVA TECHNOLOGY POWER INTEGRATIONS, INC.
FINANCE, INC.
By: By:
------------------------------- ----------------------------
Title: Title:
---------------------------- -------------------------
ATTEST:
By:
----------------------------
Title:
-------------------------
<PAGE>
EXHIBIT 10.10
MASTER LEASE AGREEMENT
THIS MASTER LEASE AGREEMENT (THE "LEASE") IS MADE THE 3RD DAY OF SEPTEMBER, 1996
BETWEEN LEASING TECHNOLOGIES INTERNATIONAL, INC., WITH ITS PRINCIPAL OFFICE AT
SOUNDVIEW PLAZA, 1266 MAIN STREET, STAMFORD, CT 06902 (THE "LESSOR"), AND POWER
INTEGRATIONS, INC., WITH ITS PRINCIPAL OFFICE AT 477 NORTH MATHILDA AVENUE,
SUNNYVALE, CA 94086 (THE "LESSEE"). THE PARTIES HERETO AGREE AS FOLLOWS:
1. LEASE:
-----
This Lease establishes the general terms and conditions by which Lessor may
lease to Lessee the Equipment (the "Equipment") listed on each Equipment
Schedule executed periodically pursuant to this Lease. Each such Equipment
Schedule shall incorporate by reference the terms of this Lease, and shall be a
separate lease agreement as to the Equipment listed thereon for all purposes,
including default. If the provisions of an Equipment Schedule conflict with the
provisions of this Lease, the provisions of such Equipment Schedule shall
prevail.
2. DEFINITIONS:
-----------
(a) The "Installation Date" means the date determined in accordance with
the applicable Equipment Schedule.
(b) The "Commencement Date" means, as to any item of the Equipment
designated on any Equipment Schedule where the Installation Date for such item
of Equipment falls on the first day of the month, that date, or, in any other
case, the first day of the month following the month in which such Installation
Date falls.
(c) The "Daily Rental" means 1/30th of the amount set forth as the monthly
rental in the applicable Equipment Schedule.
3. TERM OF LEASE:
-------------
The term of this Lease, as to all Equipment designated on any Equipment
Schedule, shall commence on the Installation Date for such Equipment, and shall
continue for an initial period ending that number of months as is specified on
the applicable Equipment Schedule from the Commencement Date for the last item
of Equipment to be installed (the "Initial Term"). The term of this Lease for
all such Equipment shall be automatically extended for successive monthly
periods until terminated in accordance with this Lease. Any termination shall
be effective only on the last day of the Initial Term or the last day of any
such successive period.
4. RENTAL:
------
The monthly rental payable hereunder is as set forth in the Equipment
Schedule(s). Rental shall begin to accrue on the Installation Date for each
item of Equipment and shall be due and payable by Lessee in advance on the first
day of each month. If the Installation Date does not fall on the first day of a
month, the rental for that period of time from the Installation Date until the
Commencement Date shall be an amount equal to the Daily Rental multiplied by the
number of days from (and including) the
1
<PAGE>
Installation Date to (but not including) the Commencement Date and shall be due
and payable on the Installation Date. In addition to the monthly rental set
forth in the Equipment Schedule(s), Lessee shall pay to Lessor an amount equal
to all taxes paid, payable or required to be collected by Lessor, however
designated, which are levied or based on the rental, on the Lease or on the
Equipment or on its purchase for lease hereunder, or on its use, lease,
operation, control or value (including, without limitation, state and local
privilege or excise taxes based on gross revenue), any penalties or interest in
connection therewith which are attributable to Lessee's negligence or taxes or
amounts in lieu thereof paid or payable by Lessor in respect of the foregoing,
but excluding taxes based on Lessor's net income. Personal property taxes
assessed on the Equipment during the term hereof shall be paid by Lessee. Lessee
agrees to file, on behalf of Lessor, all required property tax returns and
reports concerning the Equipment with all appropriate governmental agencies,
and, within not more than thirty (30) days after the due date of such filing to
send Lessor confirmation of such filing. Lessee agrees that Lessor, or Lessor's
agent may file all required property tax returns and reports and pay all taxes
thereon pertaining to the Equipment. In such event, Lessee shall reimburse
Lessor for all costs and expenses incurred in connection therewith, provided
that such costs and expenses (including property taxes) shall not exceed the
property taxes pursuant to statutory tax rates and regulations.
Interest on any past due payments, including but not limited to
administrative charges and any other charges or fees arising out of or related
to this Lease, shall accrue at the rate of 1 1/2% per month, or if such rate
shall exceed the maximum rate allowed by law, then at such maximum rate, and
shall be payable on demand. Charges for taxes, penalties and interest shall be
promptly paid by Lessee when invoiced by Lessor.
As security for the full performance of all of the Lessee's obligations
under each Equipment Schedule, Lessee shall, simultaneously with the execution
and delivery of each Equipment Schedule, deposit with Lessor the amount set
forth on such Equipment Schedule. The security deposit shall be promptly
returned to the Lessee by the Lessor upon the expiration of such Equipment
Schedule and return of all Equipment, provided that all Lessee obligations under
such Equipment Schedule have been fulfilled.
5. INSTALLATION, USE AND QUIET POSSESSION OF EQUIPMENT:
---------------------------------------------------
(a) Lessee, at its own expense, will provide the required suitable electric
current to operate the Equipment and appropriate installation facilities as
specified by the manufacturer.
(b) Any equipment, cards, disks, tapes or other items not specified in the
Equipment Schedule(s) which are used on or in connection with the Equipment must
meet the specifications of the manufacturer and shall be acquired by Lessee at
its own expense.
(c) Lessee shall use the Equipment solely in connection with Lessee's
business and for no other purpose. Subject to the preceding sentence, Lessee
shall be entitled to unlimited usage of the Equipment without extra charge by
Lessor.
(d) Unless otherwise set forth in the applicable Equipment Schedule, Lessee
will at all times keep the Equipment in its sole possession and control. The
Equipment shall not be moved from the location stated in the applicable
Equipment Schedule without the prior written consent of Lessor.
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<PAGE>
(e) After prior notice to Lessor, Lessee may, at its own expense, make
alterations in or add attachments to the Equipment, provided such alterations or
attachments do not interfere with the normal and satisfactory operation or
maintenance of the Equipment or with Lessee's ability to obtain and maintain the
maintenance contract required by Section 5(h) hereof. The manufacturer or other
organization selected by Lessee and approved in writing by Lessor to maintain
the Equipment ("Maintenance Organization") may incorporate engineering changes
or make temporary alterations to the Equipment upon request of Lessee. All such
alterations and attachments shall be and become the property of Lessor or, at
the option of Lessee, shall be removed by Lessee and the Equipment restored, at
Lessee's expense, to its original condition as of the Installation Date thereof,
reasonable wear and tear only excepted, and upon the removal and restoration,
the alteration and/or attachment which was made by Lessee shall become the
property of Lessee.
(f) So long as Lessee is not in default hereunder, neither Lessor nor any
party claiming through or under Lessor shall interfere with Lessee's use or
possession of any Equipment during the term of this Lease.
(g) Lessee shall, during the term of this Lease, at its expense, keep the
Equipment in good working order and condition and make all necessary
adjustments, repairs and replacements and shall not use or permit the Equipment
to be used in any manner or for any purpose for which, in the opinion of the
manufacturer, the Equipment is not designed or reasonably suitable.
(h) Unless otherwise set forth in the applicable Equipment Schedule, Lessee
shall, during the term of this Lease, at its own expense, enter into and
maintain in force a contract with the manufacturer or the Maintenance
Organization covering at least prime shift maintenance of each item of
Equipment. Such contract shall commence upon expiration of the manufacturer's
warranty period, if any, relating to such item. Lessee shall furnish Lessor
with a copy of such contract(s).
(i) At the termination of the applicable Equipment Schedule, Lessee shall,
at its expense, return not less than all the Equipment subject thereto to Lessor
(at the location designated by Lessor within the Continental United States) in
the same operating order, repair, condition and appearance as on the
Installation Date, reasonable wear and tear only excepted, with all engineering
and safety changes prescribed by the manufacturer or Maintenance Organization
incorporated therein. Lessee shall, prior to such termination, arrange and pay
for any repairs, changes and manufacturer's certifications as are necessary for
the manufacturer or Maintenance Organization to accept the Equipment under
contract maintenance at its then standard rates. Lessee shall return all
accessories supplied with the Equipment, including but not limited to all
manuals, cables and software diskettes. Lessee shall promptly pay, after
receipt of an invoice therefore, all costs and expenses pertaining to the
replacement of any missing items and for the repair of any Equipment, together
with any audit, inspection or certification charges reasonably incurred by
Lessor.
6. LEASEHOLD RIGHTS AND INSPECTION:
-------------------------------
(a) Lessee shall have no interest in the Equipment other than the rights
acquired as a lessee hereunder and the Equipment shall remain personalty
regardless of the manner in which it may be installed or attached. Lessee
shall, at Lessor's request, affix to the Equipment, tags, decals or plates
furnished by Lessor, indicating Lessor's ownership and Lessee shall not permit
their removal or concealment. Lessee shall replace any such tag, decal or plate
which may be removed or destroyed or
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<PAGE>
become illegible. Lessee shall keep all Equipment free from any marking or
labeling which might be interpreted as a claim of ownership thereof by Lessee or
any party other than Lessor or anyone claiming through Lessor.
(b) Lessee shall keep the Equipment free and clear of all liens and
encumbrances except liens or encumbrances arising through the actions or
omissions of Lessor. Lessee shall not assign or otherwise encumber this Lease
or any of its rights hereunder or sublease the Equipment without the prior
written consent of Lessor except that Lessee may assign this Lease or sublease
the Equipment to its parent or any subsidiary corporation, or to a corporation
which shall have acquired all or substantially all of the property of Lessee by
merger, consolidation or purchase. No permitted assignment or sublease shall
relieve Lessee of any of its obligations hereunder.
(c) Lessor or its agents shall have free access to the Equipment at all
reasonable times for the purpose of inspection and for any other purpose
contemplated by this Lease.
(d) Lessee shall immediately notify Lessor of all details concerning any
damage to, or loss of, the Equipment arising out of any event or occurrence
whatsoever, including but not limited to, the alleged or apparent improper
manufacture, functioning or operation of the Equipment.
7. NO WARRANTIES BY LESSOR:
-----------------------
Lessee represents that, at the Installation Date thereof, it shall have (a)
thoroughly inspected the Equipment; (b) determined for itself that all items of
Equipment are of a size, design, capacity and manufacture selected by it; and
(c) satisfied itself that the Equipment is suitable for Lessee's purposes.
LESSOR SUPPLIES THE EQUIPMENT AS IS AND NOT BEING THE MANUFACTURER OF THE
EQUIPMENT, THE MANUFACTURER'S AGENT OR THE SELLER'S AGENT, MAKES NO
WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED AS TO THE EQUIPMENT'S
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, DESIGN, CONDITION, QUALITY,
CAPACITY, MATERIAL OR WORKMANSHIP OR AS TO PATENT INFRINGEMENT OR THE LIKE, it
being agreed that all such risks, as between Lessor and Lessee, are to be borne
by Lessee. Lessee agrees to look solely to the manufacturer or to suppliers of
the Equipment for any and all warranty claims and any and all warranties made by
the manufacturer or the supplier of Lessor are, to the extent to which the same
may be assignable, hereby assigned to Lessee for the term of the applicable
Equipment Schedule. Lessee agrees that Lessor shall not be responsible for the
delivery, installation, maintenance, operation or service of the Equipment or
for delay or inadequacy of any or all of the foregoing. Lessor shall not be
responsible for any direct or consequential loss or damage resulting from the
installation, operation or use of the Equipment or otherwise. Lessee will
defend, indemnify and hold Lessor harmless against any and all claims, demands
and liabilities arising out of or in connection with the design, manufacture,
possession or operation of the Equipment.
8. RISK OF LOSS ON LESSEE:
----------------------
(a) Beginning on the Installation Date thereof and continuing until the
Equipment is returned to Lessor as provided in this Lease, Lessee relieves
Lessor of responsibility for all risks of physical damage to or loss or
destruction of the Equipment, howsoever caused. During the term of this Lease
as to any Equipment Schedule, Lessee shall, at its own expense, keep in effect
"all risk" property
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<PAGE>
insurance and public liability insurance policies covering the Equipment
designated in each Equipment Schedule. The public liability insurance policy
shall be in such amount as is reasonably acceptable to Lessor. The "all risk"
property insurance policy shall be for an amount not less than the replacement
cost of the Equipment. Lessor, its successors and assigns and/or such other
party as may be designated by any thereof to Lessee, in writing, shall be named
as additional insureds and loss payees on such policies, which shall be written
by an insurance company of recognized responsibility which is reasonably
acceptable to Lessor. Evidence of such insurance coverage shall be furnished to
Lessor no later than the Installation Date set forth in the Equipment
Schedule(s) and, from time to time, thereafter as Lessor may request. Such
policies shall provide that no less than ten days written notice shall be given
Lessor and any other party named as loss payee prior to cancellation of such
policies for any reason. To the extent of Lessor's interest therein, Lessee
hereby irrevocably appoints Lessor or any other party named as loss payee as
Lessee's attorney-in-fact coupled with an interest to make claim for, receive
payment of, and execute any and all documents that may be required to be
provided to the insurance carrier in substantiation of any such claim for loss
or damage under said insurance policies, and to endorse Lessee's name to any and
all drafts or checks in payment of the loss proceeds.
(b) If any item of Equipment is rendered unusable as a result of any
physical damage to, or destruction of, the Equipment, Lessee shall give to
Lessor immediate notice thereof and this Lease shall continue in full force and
effect without any abatement of rental. Lessee shall determine, within fifteen
(15) days after the date of occurrence of such damage or destruction, whether
such item of Equipment can be repaired. In the event Lessee determines that the
item of Equipment cannot be repaired, Lessee shall either, at its expense,
promptly replace such item of Equipment and convey title to such replacement to
Lessor free and clear of all liens and encumbrances, and this Lease shall
continue in full force and effect as though such damage or destruction had not
occurred, or pay Lessor therefor in cash the Stipulated Loss Value (defined
below) within thirty (30) days of such loss or damage. "Stipulated Loss Value,"
as used herein, shall be an amount as shown on Exhibit A to the applicable
Equipment Schedule. In the event Lessee determines that such item of Equipment
can be repaired, Lessee shall cause such item of Equipment to be promptly
repaired. All proceeds of insurance received by Lessor, the designated loss
payee, or Lessee under the policy referred to in the preceding paragraph of this
Section shall be applied toward the cost of any such repair or replacement so
long as Lessee shall not be in default of its obligations hereunder.
9. EVENTS OF DEFAULT AND REMEDIES:
------------------------------
The occurrence of any one of the following shall constitute an Event of
Default hereunder:
(a) Lessee fails to pay an installment of rent on or before the date when
the same becomes due and payable and such failure continues for a period of five
days after Lessee's receipt of written notice;
(b) Lessee attempts to remove, sell, transfer, encumber, sublet or part
with possession of the Equipment or any items thereof, except as expressly
permitted herein.
(c) Lessee shall fail to observe or perform any of the other obligations
required to be observed or performed by Lessee hereunder and such failure shall
continue uncured for twenty (20) days after written notice thereof to Lessee by
Lessor or the then assignee hereof.
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<PAGE>
(d) Lessee ceases doing business as a going concern, makes an assignment
for the benefit of creditors, admits in writing its inability to pay its debts
as they become due, files a voluntary petition of bankruptcy, is adjudicated a
bankrupt or an insolvent, files a petition seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar arrangement under any present or future statute, law or regulation or
files an answer admitting the material allegations of the petition filed against
it in any such proceeding, consents to or acquiesces in the appointment of a
trustee, receiver, or liquidator of it or of all or any substantial part of its
assets or properties, or if it or its shareholders shall take any action looking
to its dissolution or liquidation.
(e) Within thirty (30) days after the commencement of any proceedings
against Lessee seeking reorganization, arrangement, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such proceedings shall not have been dismissed, or if within thirty
(30) days after the appointment without Lessee's consent or acquiescence of any
trustee, receiver or liquidator of it or of all or any substantial part of its
assets and properties, such appointment shall not be vacated.
(f) Lessee defaults in the performance or observation of any term,
condition or covenant of any loan agreement, indenture, trust agreement, lease
or similar agreement to which Lessee is a party or by which Lessee is bound and
such default continues beyond any applicable cure period;
(g) Lessee enters into any transaction which adversely affects a
significant portion of the business value of Lessee and which affects the
ability of the Lessee to repay the Lessee's obligations under the Lease.
Upon the occurrence of an Event of Default, Lessor may at its option do any
one or more of the following: (i) by notice to Lessee terminate this Lease as
to any or all Equipment Schedules; (ii) whether or not this Lease is terminated
as to any or all Equipment Schedules, take possession on not less than three (3)
days' notice of any or all of the Equipment listed on any or all Equipment
Schedules, wherever situated, and for such purpose, enter upon any premises
without liability for so doing or Lessor may cause Lessee and Lessee hereby
agrees, to return said Equipment to Lessor as provided in this Lease; (iii)
recover from Lessee, as liquidated damages for loss of a bargain and not as a
penalty, all past due amounts as well as an amount equal to the present value of
all monies to be paid by Lessee during the remaining Initial Term or any
successive period then in effect, calculated by discounting at the rate of six
percent (6%) per annum compounded monthly, which payment shall become
immediately due and payable; and (iv) sell, dispose of, hold, use or lease any
Equipment as Lessor in its sole discretion may determine (and Lessor shall not
be obligated to give preference to the sale, lease or other disposition of the
Equipment over the sale, lease or other disposition of similar equipment owned
or leased by Lessor).
In the event that Lessee shall have first paid to Lessor or its assigns the
liquidated damages referred to in (iii) above, Lessee shall thereafter be
entitled to receive all rentals or proceeds received from any reletting of the
Equipment during the balance of the Initial Term (after deduction of Lessor's
expected residual value of the Equipment at the expiration of the Initial Term
or any extension thereof and of all expenses incurred in connection therewith)
said amount never to exceed the amount of the liquidated damages paid by Lessee.
Lessee agrees that Lessor shall have no obligation to sell the Equipment.
Lessee shall in any event remain fully liable for reasonable damages as provided
by law
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<PAGE>
and for all costs and expenses incurred by Lessor or its assigns on account of
such default including but not limited to all court costs and reasonable
attorney's fees. Lessee hereby agrees that, in any event, it will be liable for
any deficiency after any lease or other disposition of the Equipment. The rights
afforded Lessor hereunder shall not be deemed to be exclusive, but shall be in
addition to any rights or remedies provided by law.
10. NET LEASE:
---------
Except as otherwise specifically provided in this Lease, it is understood
and agreed that this is a net lease, and that, as between Lessor and Lessee,
Lessee shall be responsible for all costs and expenses of every nature
whatsoever arising out of or in connection with or related to this Lease or the
Equipment (including, but not limited to, transportation in and out, rigging,
manufacturer's approved packing, installation, certification costs and
disconnect charges). Lessee hereby agrees that in the event that Lessee fails
to pay or perform any obligation under this Lease, Lessor may, at its option,
pay or perform said obligation and any payment made or expense incurred by
Lessor in connection therewith shall become additional rent which shall be due
and payable by Lessee upon demand. Lessee acknowledges that Lessor may, from
time to time, and at Lessee's request, execute and deliver purchase orders
pertaining to the purchase of equipment to be leased pursuant to this Lease.
Lessee agrees that it will indemnify and hold Lessor harmless from and against
any and all loss, cost, liability and expense that Lessor may incur as a result
of the execution and delivery of such purchase orders.
11. ASSIGNMENT:
----------
Lessee agrees that Lessor may transfer or assign all or any part of
Lessor's right, title, and interest in, under or to the Equipment and this Lease
and any or all sums due or to become due pursuant to any of the above, to any
third party (the "Assignee") for any reason and that the Assignee may so re-
assign and transfer. Lessee agrees that upon receipt of written notice from
Lessor or Assignee of such assignment, Lessee shall perform all of its
obligations hereunder for the benefit of Assignee and any successor assignee
and, if so directed, shall pay all sums due or to become due thereunder directly
to the Assignee or to any other party designated by the Assignee. Lessee hereby
covenants, represents and warrants as follows and agrees that the Assignee and
any successor assignee shall be entitled to rely on and shall be considered a
third party beneficiary of the following covenants, representations and
warranties: (i) Lessee's obligations hereunder are absolute and unconditional
and are not subject to any abatement, reduction, recoupment, defense, offset or
counterclaim available to Lessee for any reason whatsoever including operation
of law, defect in the Equipment, failure of Lessor or Assignee to perform any of
its obligations hereunder or for any other cause or reason whatsoever, whether
similar or dissimilar to the foregoing; (ii) Lessee shall not look to Assignee
or any successor assignee to perform any of Lessor's obligations hereunder;
(iii) Lessee will not amend or modify this Agreement without the prior written
consent of the Assignee and any successor assignee; and (iv) Lessee will send a
copy to Assignee and any successor assignee of each notice which Lessee sends to
Lessor.
12. REPRESENTATIONS AND WARRANTIES OF LESSEE:
----------------------------------------
Lessee represents and warrants to Lessor and its assigns, as follows:
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1. The execution, delivery and performance of this Lease has been duly
authorized and, upon execution by Lessor and Lessee, will constitute a valid
obligation binding upon and enforceable against Lessee in accordance with its
terms, subject to laws governing creditors' rights;
2. The performance by Lessee will not result in any breach, default or
violation of, Lessee's certificate of incorporation or by-laws or any agreement
to which Lessee is a party;
3. Lessee is in good standing in its jurisdiction of incorporation and in
any jurisdiction in which any of the Equipment is to be located; and
4. Any and all financial statements or other information with respect to
Lessee heretofore furnished by Lessee to Lessor was, when furnished, and remains
at the time of execution of this Lease, true and complete.
Lessor represents and warrants to Lessee as follows:
1. The execution, delivery and performance of this Lease has been duly
authorized and, upon execution by Lessor and Lessee, will constitute a valid
obligation binding upon and enforceable against Lessor in accordance with its
terms, subject to laws governing creditors' rights; and
2. The performance by Lessor will not result in any breach, default or
violation of, Lessor's certificate of incorporation or by-laws or any agreement
to which Lessor is a party;
The foregoing representations and warranties shall survive the expiration
or termination of this Lease.
13. END OF LEASE:
------------
Provided (i) no Event of Default has occurred and is continuing and (ii)
Lessee has made all payments in accordance with the Lease, upon written notice
furnished by Lessee no later than four (4) months prior to the expiration of the
Initial Term, Lessee may, with respect to each Equipment Schedule (if set forth
in such Equipment Schedule) either:
(a) Extend the Initial Term for not less than all the Equipment (i) for the
additional period set forth on the applicable Equipment Schedule, and (ii) at
the Monthly Rental set forth on the Equipment Schedule. Provided all payments
have been made in accordance with the Lease and there shall be no default under
the Lease by Lessee, title to the Equipment shall pass to Lessee at the
expiration of the 12 month extension and upon payment of $1.00.;
(b) Extend the Initial Term for not less than all the Equipment for an
additional 12 months at Fair Market Value rental;
(c) Purchase not less than all the Equipment at Fair Market Value for a
purchase price equal to the Fair Market Value thereof as of the end of the
Initial Term, plus any taxes applicable at the time of purchase. The purchase
price shall be paid by Lessee to Lessor at least thirty (30) days before the
expiration of the Initial Term;
8
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(d) Terminate the applicable Equipment Schedule and return not less than
all the Equipment, subject to a remarketing charge equal to the percentage set
forth in the applicable Equipment Schedule of Lessor's original Purchase Price
for the Equipment;
(e) Purchase not less than all the Equipment at fifteen percent (15%) of
Lesssor's original Purchase Price, plus any taxes applicable at the time of
purchase; or
(f) Such other alternatives as may be set forth on the Equipment Schedule.
Not less than ninety (90) days prior to the end of the Initial Term, Lessee may
provide written notice to Lessor of Lessee's intention to exercise the purchase
or extension option described above. If, on or before a date sixty (60) days
prior to the expiration of the Initial term Lessor and Lessee are unable to
agree upon a determination of the fair market value of the Equipment, such fair
market value shall be determined in accordance with the procedure for appraisal
as described below. After a determination of the fair market value of the
Equipment has been made in accordance with the procedure described below, Lessee
may exercise its option to purchase the Equipment for the fair market value
thereof by delivering written notice to Lessor not more than ten (10) days after
completion of appraisal as described below.
Appraisal shall mean a procedure whereby two independent appraisers, neither of
whom shall be a manufacturer of such Items of Equipment, one chosen by Lessee
and one by Lessor, shall mutually agree upon the amount in question based upon
the definition set forth below. Each party shall deliver a written notice to
the other party appointing its appraiser on or before a date sixty days prior to
the expiration of the Initial Term. If within fifteen (15) days after
appointment of the two appraisers as described above, the two appraisers are
unable to agree upon the amount in question, a third independent appraiser, who
shall not be a manufacturer of such Items of Equipment, shall be chosen within
five (5) business days thereafter by the mutual consent of such first two
appraisers or, if such first two appraisers fail to agree upon the appointment
of a third appraiser, such appointment shall be made by an authorized
representative of the American Arbitration Association or any organization
successor thereof. The decision of the third appraiser so appointed and chosen
shall be given ten (10) business days after the selection of such third
appraiser. Lessee shall pay the fees and expenses of all appraisers, if any.
For purposes hereof, Fair Market Value shall mean the amount that would obtain
in a retail arm's length transaction between an informed and willing lessee-
buyer in possession and an informed and willing lessor-seller. Rental charges
previously paid pursuant to the applicable Equipment Schedule shall have no
effect on the determination of Fair Market Value. Unless otherwise stated in
the Equipment Schedule: the Fair Market Value for items set forth on the
Equipment Schedule which do not have a readily ascertainable market value,
(including but not limited to software, cabling and certain equipment) shall be
determined by multiplying the Lessor's acquisition cost of such items by a
fraction, the numerator of which shall be the Fair Market Value of the other
items and the denominator of which shall be the Lessor's acquisition cost of
such other items; and the determination of Fair Market Value shall be based upon
the assumption that all items set forth on the Equipment Schedule or included
with the Equipment may be transferred to, and used by, a third party user. In
such determination, all alternative uses in the hands of each buyer or lessee,
including, without limitation, the further leasing of the Equipment shall be
taken into account in making such determination.
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If, for any reason, the parties are unable to agree on the Fair Market Value
with respect to said purchase or rental, then the Lease with respect to the
Equipment shall remain in full force and effect.
14. MISCELLANEOUS:
-------------
(a) During the term of this Lease, Lessee hereby agrees to deliver to
Lessor or Assignee and any successor assignee a copy of Lessee's monthly
unaudited financial statements, and the annual financial budget for the upcoming
year as soon as available and as it may be adjusted during the year. Lessee
shall also furnish, as soon as available and in any event within ninety (90)
days after the last day of Lessee's fiscal year, a copy of Lessee's annual
audited statements and consolidating and consolidated balance sheet, if any,
as of the end of such fiscal year, accompanied by the opinion of an independent
certified public accounting firm of recognized standing. The Lessee shall
furnish such other financial information as may be reasonably requested by
Lessor, including but not limited to any material changes in budgets or
financial reports furnished to the Lessee's Board of Directors or Shareholders.
(b) This Lease constitutes the entire agreement between Lessee and Lessor
with respect to the Equipment, and except as agreed upon in writing no covenant,
condition or other term or provision hereof may be waived or modified orally.
(c) All notices hereunder shall be in writing and shall be delivered in
person or sent by registered or certified mail, postage prepaid, or by facsimile
transmission (confirmed by registered mail as set forth in this section) to the
address of the other party as set forth herein or to such other address as such
party shall have designated by proper notice.
(d) This Lease shall be binding upon and inure to the benefit of Lessor and
Lessee and their respective successors and assigns (including any subsequent
assignee of Assignee).
(e) If any term or provision of this Lease or the application thereof to
any person is, to any extent, invalid or unenforceable, the remainder of this
Lease, or the application of such provision to the person other than those to
which it is invalid or unenforceable, shall not be affected thereby, and each
provision of this Lease shall be valid and be enforced to the fullest extent
permitted by law.
(f) No waiver of any of the terms and conditions hereof shall be effective
unless in writing and signed by the party against whom such waiver is sought to
be enforced. Any waiver of the terms hereof shall be effective only in the
specific instance and for the specific purpose given. The subsequent acceptance
of rental payments hereunder by Lessor shall not be deemed a waiver of any prior
existing breach by Lessee regardless of Lessor's knowledge of such prior
existing breach at the time of acceptance of such rental payments. Where
permitted by law, Lessee authorizes any attorney of record, Clerk of Court or
Prothonotary of any state to appear for and confess judgment (a) against Lessee
for all amounts as to which Lessee is in default under this Agreement and (b)
against Lessee in any action for writ of replevin or possession of the
Equipment. No bond shall be required.
(g) Lessor is hereby authorized by Lessee to cause this Lease or other
instruments, including Uniform Commercial Code Financing Statements to be filed
or recorded for the purpose of showing Lessor's interest in the Equipment and
Lessee agrees that Lessor may execute such instruments for and on behalf of
Lessee. All filing fees reasonably incurred by Lessor in connection therewith
and filing fees incurred by Lessor's assignees in perfecting security interests
shall be paid by Lessee or reimbursed to Lessor by Lessee.
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(h) In the event of any conflict between the terms and conditions of this
Lease and the terms and conditions of any Equipment Schedule(s) or Rider(s)
thereto, the terms and conditions of such Equipment Schedule(s) or Rider(s)
shall prevail.
(i) No consent or approval provided for herein shall be binding upon Lessor
unless signed on its behalf by an officer of Lessor. THIS LEASE SHALL BE DEEMED
TO HAVE BEEN MADE IN THE STATE OF CONNECTICUT AND SHALL BE GOVERNED IN ALL
RESPECTS BY THE LAWS OF SUCH STATE. The Lessee accepts for itself the non-
exclusive jurisdiction of any Federal or State court of competent jurisdiction
in the State of Connecticut in any action, suit or proceeding of any kind
against it which arises out of or by reason of this Lease or any Equipment
Schedule.
(j) Lessee acknowledges that the late payment by Lessee to Lessor of
monthly rental and other sums due hereunder will cause Lessor harm and to incur
costs not contemplated by this Lease, the precise amount and severity of which
will be difficult to ascertain. Such costs include, but are not limited to,
administrative, accounting and legal charges which Lessor may incur due to such
late payment. Accordingly, if any monthly rent or any other sum due from Lessee
shall not be received by Lessor or Lessor's assignee within twenty (20) days
after the same is due, Lessee shall pay to Lessor or Lessor's assignee a late
charge equal to five per cent (5%) of such overdue amount monthly until such
overdue amount is paid. Lessee acknowledges that such late charge represents a
fair and reasonable estimate of the cost Lessor will incur by reason of a late
payment by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's default, if any, with respect to such overdue
amounts, nor prevent Lessor from exercising any of the other rights and remedies
which Lessor may have pursuant to this Lease.
(k) The obligations which Lessee is required to perform during the term of
this Lease shall survive the expiration or other termination of this Lease.
(l) Lessee will promptly execute and deliver to Lessor such further
documents and assurances and take such further action as Lessor may reasonably
request in order to effectuate the intent and purpose of this Lease and to
establish and protect the rights, interests and remedies intended to be created
in favor of Lessor hereunder, including without limitation, the execution and
filing of financing statements and continuation statements with respect to this
Lease, the Equipment and any Equipment Schedule. Lessee authorizes Lessor to
effect any such filing and Lessor's reasonable expenses (together with the
reasonable expenses of Lessor's assignees in this regard) shall be payable by
Lessee on demand.
LESSOR: LESSEE:
Leasing Technologies International, Inc. Power Integrations, Inc.
BY:_____________________________________ BY:_________________________________
NAME:___________________________________ NAME:_______________________________
TITLE:__________________________________ TITLE:______________________________
DATE:___________________________________ DATE:_______________________________
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CERTIFICATE OF INCUMBENCY
-------------------------
Re: Master Lease Agreement dated September 3, 1996
Between Leasing Technologies International, Inc.
and Power Integrations, Inc.
I, *__________________________________________________, hereby certify that
[print name of certifying officer, other than signatory]
I am the duly elected, qualified, and presently serving *_______________________
[office of certifying
_________ of Power Integrations, Inc., (the "Company").
officer]
I further certify that each of the persons listed below was duly elected to
and on the date hereof holds the office set forth opposite his name and that the
signature appearing opposite the name of such officer is the genuine signature
of such officer. Such person has the power and authority to execute any and all
documents on behalf of the Company relating to the above referenced transaction
and to bind the Company to perform in accordance with the terms thereof,
NAME OF SIGNATORY OFFICE SIGNATURE
- ----------------- ------ ---------
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the
Company this____________day of___________________1996.
*BY:__________________________________
[signature of certifying officer]
NAME:________________________________
TITLE:_______________________________
* certifying officer must be other than signatory.
12
<PAGE>
REQUEST FOR INSURANCE
---------------------
LESSOR: LEASING TECHNOLOGIES INTERNATIONAL, INC.
SOUNDVIEW PLAZA
1266 MAIN STREET
STAMFORD, CT 06902
LESSEE: POWER INTEGRATIONS, INC.
477 NORTH MATHILDA AVENUE
SUNNYVALE, CA 94086
Pursuant to Section 8(a) of the Master Lease Agreement dated September 3, 1996
("Lease"), Lessor hereby requests that Lessee provide a Certificate(s) of
Insurance as evidence of both casualty and liability insurance coverage on the
equipment leased to Lessee under the Lease. Such Certificate(s) should name
Leasing Technologies International, Inc., Soundview Plaza, 1266 Main Street,
Stamford, CT 06902 and its assigns as loss payees and additional insureds as
their interests may appear. Please refer to Section 8(a) of the Lease and the
attached Leasing Insurance Requirements for additional instructions.
Lessee, by authorized signature below, acknowledges the obligations under the
Lease to protect the equipment identified therein against all risks of loss, and
hereby confirms that applicable Certificate(s) of Insurance have been requested
from________________________________. (Fill in name of Insurance Agent/Broker).
LESSEE: POWER INTEGRATIONS, INC.
BY: _________________________________
NAME: ______________________________
TITLE:_______________________________
DATE:________________________________
13
<PAGE>
LEASING INSURANCE REQUIREMENTS
------------------------------
LIABILITY INSURANCE:
- -------------------
All liability policies are to meet, at the minimum, the following requirements:
(a) Minimum limits of liability are:
Bodily Injury: $1,000,000 per occurrence
Property Damage: $50,000 per occurrence
(b) All liability insurance policies are to specify Lessor, its assigns, and/or
such other party designated by Lessor as additional insureds, and must be
effective at the time of shipment of the Equipment from the seller.
PROPERTY INSURANCE:
- ------------------
All property insurance policies are to meet, at the minimum, the following
requirements:
(a) All-risk Property insurance coverage in an amount equal to the replacement
cost of the Equipment.
(b) All property insurance policies are to specify Lessor, its assigns, and/or
such other party designated by Lessor as loss payees and must be effective
at the time of shipment of the Equipment from the seller.
GENERAL:
- -------
(1) All insurance policies are to provide that in the event of material
change to the policy (i.e., terms, conditions, limits, broker or
insurer, or cancellation of the policy or any part) either by the
insured or the insurance company, the insurer will provide 10 days'
prior written notice of such material change or cancellation to
Lessor and its specified assigns.
(2) All insurance policies are to provide that violation of terms,
conditions, or warranties of the policy by the insured or others will
not invalidate the insurance insofar as the interest of Lessor and
its specified assigns is concerned.
(3) In order to eliminate multiple certifications, we encourage blanket
liability and All-Risk coverage warranted to remain in force until at
lease 10 days' prior written notice is provided as aforesaid.
14
<PAGE>
LTI
LEASING TECHNOLOGIES INTERNATIONAL, INC.
Date:___________ Return by mail or fax to: Leasing Technologies
International, Inc.,
1266 Main Street, Stamford, CT 06902
Phone: (203) 967-4300 Fax: (203) 323-2394
LEASE APPLICATION
LESSEE
Legal Name________________________________ Trade Name__________________________
Address___________________________ City ________________________ State _____
Zip_______
Phone ____________________ Fax ___________________ Years in Business__________
Description of Business________________________________________________________
Business Type: Corporation ____ Proprietorship ____ Partnership ____
Fed. I. D.# _______________
CEO's Name ________________________ Title ___________________ Phone__________
Address________________________________________________________________________
Contact Officer's Name ______________________ Title__________________________
Address________________________________________________________________________
Auditor & Partner __________________________ Phone#___________________________
Law Firm & Partner___________________________ Phone # ________________________
Duns # ______________________________________
BANK AND CREDIT REFERENCES
Bank Name ______________________________ Address_____________________________
Contact _______________________ Phone # __________________
Checking Acct #_____________
Date Opened ______________________ Loan Acct # ______________Date______________
Lessor Name __________________________________
Address_______________________________
Contact _____________________ Phone # ____________________ Acc't #____________
Other Creditor _________________________Address_______________________________
Contact _____________________ Phone # _________________ Acc't #______________
TRADE SUPPLIER REFERENCES
Trade Name _____________________ Phone # ________________Contact____________
Trade Name _____________________ Phone # ________________Contact____________
Trade Name _____________________ Phone # ________________Contact____________
OTHER INFORMATION TO BE SUPPLIED
1) FINANCIALS: LAST TWO FISCAL AUDITS & YEAR-TO-DATE INTERIM FINANCIALS
2) MOST RECENT BUSINESS PLAN AND/OR OFFERING MEMORANDUM
3) LIST OF ALL COMPANY OFFICERS & DIRECTORS
4) LIST OF MAJOR SHAREHOLDERS WITH PERCENTAGE OWNERSHIP
5) LIST OF EQUIPMENT TO BE LEASED. INCLUDE QTY, DESCRIPTIONS, BRANDS, MODELS,
COST.
I HEREBY AUTHORIZE THE INVESTIGATION AND REVIEW OF ALL THE ABOVE CREDIT
INFORMATION.
BY:__________________________________ TITLE _____________________________
15
<PAGE>
EQUIPMENT SCHEDULE NO.______("EQUIPMENT SCHEDULE")
TO
MASTER LEASE AGREEMENT DATED_______________, 1996 ("LEASE")
BETWEEN LEASING TECHNOLOGIES INTERNATIONAL, INC. ("LESSOR")
AND____________________________("LESSEE")
1. EQUIPMENT:
MODEL/ PURCHASE SERIAL
QTY FEATURE DESCRIPTION MFR PRICE NUMBER
--- ------- ----------- --- ----- ------
2. EQUIPMENT LOCATION:
3. INSTALLATION DATE:______________________. If this space is not completed,
the Installation Date shall be: the date which the Vendor(s) determines to
be the date of installation, which, Lessee agrees, will not occur without
Lessor's prior written consent or the fifth day following delivery of the
Equipment to the location set forth in Section 2, whichever is earlier; or
in the case of Equipment which is the subject of a sale and leaseback
between Lessor and Lessee, the date upon which Lessor obtains title to the
Equipment from Lessee (but not later than the date Lessor pays for the
Equipment).
4. COMMENCEMENT DATE:_____________________. (Subject to the terms and
conditions of Section 3 of the Lease, if all of the Equipment is not
installed on the same date).
5. INITIAL TERM:_________________________months.
6. MONTHLY RENTAL: $___________. The Monthly Rental set forth in this section
is conditional upon Lessor acquiring the Equipment at a purchase price of
$____ and Lessor obtaining financing for such purchase at a 8.25% Prime
Interest Rate. Lessor and Lessee agree that the Monthly Rental shall be
increased by $____ for each one-quarter of one percent (1/4 of 1%) by
which the Prime Interest Rate (as stated by Citibank N.A.) increases prior
to the Commencement Date, or the date Lessor has received sufficient
documentation so as to finance the Lease, whichever is later. Lessee
agrees that it shall confirm the amount of the rental payable hereunder
after adjustment, if any, in such form as Lessor may request.
7. LESSOR'S OBLIGATIONS: Lessor's obligations under this Equipment Schedule
are subject to there being no tax legislation enacted prior to the
Installation Date which would have an adverse effect on the rights or
anticipated benefits to Lessor or any Assignee.
8. SECURITY DEPOSIT: $______________.
Page 1 of 2
16
<PAGE>
EQUIPMENT SCHEDULE NO.______("EQUIPMENT SCHEDULE")
TO
MASTER LEASE AGREEMENT DATED_______________, 1996 ("LEASE")
BETWEEN LEASING TECHNOLOGIES INTERNATIONAL, INC. ("LESSOR")
AND____________________________("LESSEE")
9. END OF LEASE: Provided (i) no Event of Default has occurred and is
continuing and (ii) Lessee has made all payments in accordance with the Lease,
upon written notice furnished by Lessee to Lessor no earlier than one hundred
eighty (180) days and no later than ninety (90) days prior to the expiration of
the Initial Term, Lessee may either:
(a) Extend the Initial Term for not less than all the Equipment for an
additional 12 months at Fair Market Value rental;
(b) Purchase not less than all the Equipment at Fair Market Value for a
purchase price equal to the Fair Market Value thereof as of the end of
the Initial Term, plus any taxes applicable at the time of purchase.
The purchase price shall be paid by Lessee to Lessor at least thirty
(30) days before the expiration of the Initial Term; or
(c) Extend the Initial Term for not less than all the Equipment for an
additional 12 months at a Monthly Rental equal to________% of the
Monthly Rental paid by Lessee during the Initial Term, provided all
payments have been made in accordance with the Lease and there shall be
no default under the Lease by Lessee, title to the Equipment shall pass
to Lessee at the expiration of the 12 month extension and upon payment
of $1.00;
(d) Return not less than all the Equipment, subject to a remarketing charge
equal to_______% of the Purchase Price.
10. LEASE AGREEMENT: All of the terms, covenants and conditions set forth in
the Lease are incorporated herein by reference as if the same had been set forth
herein in full.
LESSOR: LESSEE:
LEASING TECHNOLOGIES INTERNATIONAL,
INC.
BY:____________________________ BY:_________________________
NAME:__________________________ NAME:_______________________
TITLE:_________________________ TITLE:______________________
DATE:__________________________ DATE:_______________________
Page 2 of 2
17
<PAGE>
CERTIFICATE OF ACCEPTANCE
-------------------------
To: Leasing Technologies International, Inc.
Soundview Plaza
1266 Main Street
Stamford, CT 06902
From:_______________________________, Lessee under that certain Master Lease
Agreement ("Lease") dated____________________________,hereby certifies to
Leasing Technologies International, Inc., Lessor under the said Lease, that, to
wit:
1. The Lessee is a corporation in good standing in_____________, the state
of its incorporation.
2. The signatures which appear in said Lease have been duly authorized
by the Lessee and the Lease constitutes a valid and binding
obligation of, and is enforceable by its terms against Lessee.
3. All items of computer equipment ("Equipment") described in Equipment
Schedule No.______to the said Lease, have been delivered to Lessee.
4. The equipment has been received and inspected, and is approved and
accepted by Lessee, effective__________________________________, 1996.
5. As of the date hereof, the Lessee's interest in the Equipment is free
and clear of any liens and encumbrances other than those created by
and in favor of the Lessor.
6. The Lessee hereby represents and warrants that no event of Default or
event which, with the giving of notice or the lapse of time, or both,
would become such an Event of Default has occurred and is continuing
under the Lease.
7. The Lessee hereby represents and warrants that the Lessee has
obtained all insurance policies, with respect to the Equipment, that
may be required under the terms of the Lease and such policies are in
full force and effect.
Lessee is delivering this Certificate to Lessor pursuant to and in connection
with the said Lease.
LESSEE:
BY:________________________________
NAME:______________________________
TITLE:_____________________________
DATE:______________________________
18
<PAGE>
EQUIPMENT SCHEDULE NO.___
TO
MASTER LEASE AGREEMENT DATED____________
EXHIBIT A
---------
STATEMENT OF CASUALTY VALUES
----------------------------
Monthly Stipulated Monthly Stipulated Loss
Pmt. Made Value* Pmts. Made Value
- --------- ------ ---------- -----
1 125.00 19 94.22
2 123.29 20 92.51
3 121.58 21 90.80
4 119.87 22 89.09
5 118.16 23 87.38
6 116.45 24 85.67
7 114.74 25 83.96
8 113.03 26 82.25
9 111.32 27 80.54
10 109.61 28 78.83
11 107.90 29 77.12
12 106.19 30 75.41
13 104.48 31 73.70
14 102.77 32 71.99
15 101.66 33 70.28
16 99.35 34 68.57
17 97.64 35 66.86
18 95.93 36 65.15
* Expressed as a percentage of Lessor's original purchase price for the
equipment.
LESSOR: LESSEE:
LEASING TECHNOLOGIES INTERNATIONAL,
INC.
BY:____________________________ BY:_________________________
NAME:__________________________ NAME:_______________________
TITLE:_________________________ TITLE:______________________
DATE:__________________________ DATE:_______________________
19
<PAGE>
LEASING TECHNOLOGIES INTERNATIONAL, INC.
LEASE ADMINISTRATION DEPARTMENT
GUIDELINES TO A SMOOTH CLOSING
In order to easily and efficiently process your Leaseline takedowns, the
following is a list of information required to prepare the necessary lease
documentation:
WHEN THE EQUIPMENT IS BEING PURCHASED BY LTI FROM THE VENDOR:
Provide detailed equipment description including manufacturer (brand name) and
model number.
. Provide copies of quotes and/or purchase orders.
. Provide contact and phone number of the vendor(s), which are necessary for LTI
to forward Purchase Orders or Assignment of Purchase Orders.
. Indicate any equipment location which may be different from headquarters.
. NOTE: Eliminate any small cost items with extensive lead times.
WHEN THE EQUIPMENT HAS ALREADY BEEN PURCHASED BY THE LESSEE:
. Provide copies of invoices including detailed equipment description support as
above.
. Provide proof of payment (i.e. cancelled checks and/or bills of sale).
. Provide lienholder name and address (if there are any blanket liens against
the company's assets).
. Provide a floppy diskette using Lotus for Windows or Excel containing the
equipment list in the following format: Quantity, Description (detailed vs.
general), Manufacturer, Cost, Serial Numbers and Locations (if Multiple).
. NOTE: Equipment included in a purchase/leaseback will be depreciated from the
date of the original invoice using a 36 month straight line depreciation.
HELPFUL HINTS:
. Additional Charges: i.e. transportation, installation, sales tax, will not be
------------------ ---
included in lease.
. Leaseholds/Fixtures: Will not be included in lease transactions.
--------------------
Administrators: Vicki Hasiotis, Maureen Kramer and Trudy Fox
Supervisor: Robyn Bowers
THANK YOU FOR SELECTING LTI, WE LOOK FORWARD TO WORKING WITH YOU.
20
<PAGE>
EXHIBIT 10.11
MASTER EQUIPMENT LEASE AGREEMENT
Agreement No. 129 Dated: November 17, 1995
LESSOR: LIGHTHOUSE CAPITAL PARTNERS, L.P., a Delaware limited partnership
("Lessor"), 100 Drakes Landing Road, Suite 260, Greenbrae, California
94904
LESSEE: POWER INTEGRATIONS, INC., a California corporation ("Lessee"),
ADDRESS: 477 North Mathilda Avenue, Sunnyvale, California 94086.
IN CONSIDERATION of the mutual covenants contained herein, the parties
agree as follows:
1. LEASE. Lessor leases to Lessee and Lessee leases from Lessor the
personal property described in each Equipment Schedule executed pursuant hereto,
subject to the terms and conditions of this Master Equipment Lease Agreement
("Master Lease") and the applicable Lease Line Schedule (defined below). The
------------
"Equipment" (as defined in the Lease Line Schedule) is being leased for
---------
commercial or business purposes only, and not for personal, home, or family
purposes. The parties agree that each Lease is a "finance lease" under the
Uniform Commercial Code (as in effect in the State of California during the term
of the Lease and referred to hereafter as the "UCC").
---
2. Lease Line Schedule. "Lease Line Schedule" means a Lease Line Schedule
-------------------
in the form of EXHIBIT A, signed by Lessor and Lessee and incorporating by
reference the terms and provisions of this Master Lease.
3. Equipment Schedules. "Equipment Schedule" means an Equipment Schedule
------------------
in the form of EXHIBIT B, signed by Lessor and Lessee and incorporating, by
reference, the terms and provisions of this Master Lease and the applicable
Lease Line Schedule. Each Equipment Schedule shall constitute a separate and
independent lease (a "Lease"); the original of such Lease shall consist of the
signed Equipment Schedule and a copy of the Master Lease and applicable Lease
Line Schedule. Capitalized terms used, but not defined, in this Master Lease
have the meanings given to such terms in the applicable Lease Line Schedule or
Equipment Schedule, as the case may be.
4. TERM AND RENTALS.
(a) Acceptance. The Lease shall commence with respect to
Equipment described on the Equipment Schedule upon the Acceptance Date. The
"Acceptance Date" shall be the date upon which Lessee executes a Delivery and
---------------
Acceptance Certificate in the form of EXHIBIT C.
(b) Term and Payment of Rent. The lease term for the Equipment
shall be the "Lease Term" set forth in the Equipment Schedule which shall
----------
commence on the "Commencement Date" (as defined in the Lease Line Schedule).
-----------------
Lessee agrees to pay to Lessor the "Rental Payments" for the Lease Term, in the
---------------
amounts and at the times set forth in the Equipment Schedule.
(c) Interim Period. If the Acceptance Date does not fall on the
Commencement Date, then Lessee agrees to pay to Lessor "Interim Rent" for the
------------
period commencing on the later of (i) the Acceptance Date or (ii) the
disbursement of funds by Lessor through and including the day preceding the
Commencement Date (the "Interim Period"). The Interim Rent payment for the
--------------
Interim Period shall accrue at the "Interim Rate" (as defined in the Lease Line
Schedule) and shall be due and payable in full on the Commencement Date.
(d) Lease Termination. Lessee may terminate the Lease at the
expiration of the Lease Term or any renewal term (the "Lease Termination") by
-----------------
submitting to Lessor a Notice of Election in the form of EXHIBIT D. If a Notice
of Election is not submitted by Lessee to Lessor during the "Advance Notice
Period" (as defined in the Lease Line Schedule), then the Lease Term or any
renewal Term will be automatically extended for an additional period equal to
the "Automatic Extension Period" (as defined in the Lease Line Schedule). The
--------------------------
Lease will continue to automatically extend until Lessee submits to Lessor a
Notice of Election. The Lease may only be
1
<PAGE>
terminated as expressly provided in this Section, in the applicable Lease Line
Schedule or in the applicable Equipment Schedule. Lessee agrees to continue
paying rent for the Equipment in the amount of the Rental Payment set forth in
the Equipment Schedule until the later of (i) the expiration of the Lease Term,
any renewal term and any Automatic Extension Period and (ii) either (A) the
purchase option price is paid pursuant to SECTION 6(A), or (B) a mutually agreed
renewal of the Lease takes effect pursuant to SECTION 6(B), or (C) the Equipment
is returned in the manner and condition prescribed in SECTION 6(C), in each case
after delivery of a Notice of Election.
(e) Net Lease. Each Equipment Schedule shall be a net lease,
and Lessee's obligation to pay all rent and other sums thereunder shall be
absolute and unconditional, and shall not be subject to any abatement,
reduction, set-off, defense, counterclaims, interruption, deferment or
recoupment, for any reason whatsoever.
5. LATE FEE. Lessee shall pay a late charge on any rent payments or other
sums due hereunder which are past due, in the amount specified in the Lease Line
Schedule, payable on demand. In addition, interest shall accrue daily at the
"Default Rate" (as defined in the Lease Line Schedule), or if such rate exceeds
------------
the maximum rate allowed by law, then at such maximum rate, and shall be payable
on demand.
6. LEASE TERMINATION OPTIONS. Upon Lease Termination, Lessee will have the
option to purchase the Equipment, renew the term of the Lease, or return the
Equipment to Lessor, as set forth below. Lessee shall specify its election of a
Lease Termination Option in the Notice of Election.
(a) Purchase Option. If Lessee exercises the option to
purchase, then, provided no Event of Default has occurred and is then
continuing, Lessee shall at the expiration of the Lease Term, renewal term or
extension, as the case may be, purchase the Equipment. The purchase price shall
be the Equipment's then fair market value ("FMV"). FMV, as applied to a purchase
---
option, shall be determined by Lessor based on the price a willing buyer would
pay and a willing seller would accept (neither buyer nor seller being under
compulsion to act) for the Equipment as installed and in use, giving due
consideration to its condition, utility, revenue-producing capability, and
replacement costs. If Lessee fails to agree with Lessor's good faith
determination of the FMV, Lessee shall nevertheless pay Lessor's invoice and
provide Lessor with a written request for a determination of the FMV with or
prior to such payment. Within ten (10) days after such request Lessor and Lessee
shall agree on an appraiser to determine the FMV or, lacking such agreement,
shall each tender the name of an appraiser. The appraiser(s) shall, within
thirty (30) days, either agree on the FMV or select a third appraiser, to form a
committee to determine the FMV. Determination by the appraiser(s) shall be final
and binding on both parties. Within fifteen (15) days after such determination,
Lessor shall refund any excess received over the FMV, and/or Lessee shall pay
any additional amount of the FMV above the amount previously paid. Each party
shall bear the fees and expenses of any appraiser which it names and share
equally the fees and expenses of any appraiser(s) jointly selected. If the
appraised FMV is within 5% of the amount invoiced by Lessor, then Lessee shall
pay all appraiser fees and expenses. The purchase option price shall be paid not
later than the last day of the Lease Term.
(b) Renewal. If Lessee exercises the option to renew this
Lease, such renewal shall be upon the terms and conditions of this Master Lease
and the applicable Lease Line Schedule, for a rental period and rental amount to
be agreed upon by Lessee and Lessor.
(c) Return. If the Notice of Election specifies return of the
Equipment, Lessee at its own risk and expense (i) will immediately return the
Equipment to Lessor in the same condition as when delivered, ordinary wear and
tear excepted, at such location as Lessor shall designate; and (ii) in the case
of Equipment with respect to which a maintenance service contract is required
under the Lease Line Schedule will, on request from Lessor, obtain from the
Equipment supplier (or other maintenance service supplier approved by Lessor) a
certificate stating that the Equipment qualifies for continued maintenance
service at the standard rates and terms then in effect.
7. USE; MAINTENANCE.
(a) Lessee, at its expense, shall make all necessary site
preparations and cause the Equipment to be operated in accordance with any
applicable operating manuals and manufacturer's instructions. Notwithstanding
any transfer or assignment by Lessor and provided Lessee is not in default
hereunder, Lessee shall
2
<PAGE>
have the right to quietly possess and use the Equipment as provided herein
without interference by Lessor, its assigns or any other third party claiming
through or under Lessor.
(b) Lessee shall effect and bear the expense of all necessary
repair, maintenance, operation and replacements required to be made to maintain
the Equipment in good condition, reasonable wear and tear excepted, and to
comply with all domestic and international laws to which the use and operation
of the Equipment may be or become subject. All replacement Equipment and parts
furnished in connection with such maintenance or repair shall immediately become
the property of Lessor and part of the Equipment for all purposes hereof. All
such maintenance, repair and replacement services shall be immediately paid for
and discharged by Lessee with the result that no lien under any applicable laws
will attach to the Equipment as a result of the performance of such services or
the provision of any such material.
8. INSURANCE. Lessee shall obtain and maintain for the Lease Term (and
any renewal term or extension), at its own expense, (a) "all risk" insurance
against loss or damage to the Equipment, (b) commercial general liability
insurance (including contractual liability, products liability and completed
operations coverage) reasonably satisfactory to Lessor, and (c) such other
insurance against such other risks of loss and with such terms, as shall in each
case be reasonably satisfactory to or reasonably required by Lessor (as to
carriers, amounts and otherwise). The amount of the "all risk" insurance shall
be the lesser of (i) the Lessor's Cost or (ii) the Stipulated Loss Value (as
defined in SECTION 9 below) of all Equipment outstanding under the Lease Line
Schedule, and must otherwise be reasonably satisfactory to Lessor as of each
anniversary date of this Lease. Any increase in the amount of such insurance
coverage, other than "all risk", reasonably requested by Lessor shall be put
into effect on the next succeeding renewal date of such insurance.
Each "all risk" policy shall: (i) name Lessor as sole loss payee with
respect to the Equipment, (ii) provide for each insurer's waiver of its right of
subrogation against Lessor and Lessee, and (iii) provide that such insurance
shall not be invalidated by any action of, or breach of warranty by, Lessee of a
provision of any of its insurance policies, and shall waive set-off,
counterclaim or offset against Lessor.
Each liability policy shall name Lessor as an additional insured and
provide that such insurance shall have cross-liability and severability of
interest endorsements (which shall not increase the aggregate policy limits of
Lessee's insurance).
All insurance policies shall provide that Lessee's insurance shall be
primary without a right of contribution of Lessor's insurance, if any, or any
obligation on the part of Lessor to pay premiums of Lessee, and shall contain a
clause requiring the insurer to give Lessor at least 30 days' prior written
notice of its cancellation (other than cancellation for non-payment for which 10
days' notice shall be sufficient). Lessee shall on or prior to the date of
Equipment Schedule No. 1 and prior to each policy renewal, furnish to Lessor
certificates of insurance or other evidence satisfactory to Lessor that such
insurance coverage is in effect. Lessee further agrees to give Lessor prompt
notice of any damage to, or loss of, the Equipment, or any part thereof.
9. LOSS OR DAMAGE. If any items of Equipment shall become lost, stolen,
destroyed, or damaged beyond repair for any reason, or in the event of
condemnation, confiscation, seizure or requisition of title to or use of such
items (collectively, an "Event of Loss"), Lessee shall promptly pay to Lessor
-------------
the applicable Stipulated Loss Value of the Equipment subject to the Event of
Loss. Upon payment by Lessee of the Stipulated Loss Value, Lessor will transfer
to Lessee, "AS IS, WHERE IS, WITHOUT RECOURSE, REPRESENTATION OR WARRANTY," all
of Lessor's right, title and interest, if any, in such items of Equipment. The
"Stipulated Loss Value" payable by Lessee under this Lease shall be an amount
---------------------
equal to the product of (a) Lessor's Cost of the affected Equipment and (b) the
percentage set forth in the table attached to the applicable Lease Line Schedule
as ANNEX A opposite the Rental Payment number next following the Event of Loss.
Stipulated Loss Values and Rental Payments shall not be prorated.
10. TITLE, INSPECTION AND LOCATION.
(a) Title. Lessor and Lessee confirm their intent that title
to the Equipment shall remain in Lessor (or its successors and assigns)
exclusively. If requested by Lessor, Lessee will affix plates or markings on
3
<PAGE>
the Equipment and on any operating manuals and manufacturer's instructions
indicating the interests of Lessor and its assigns therein, and Lessee will not
allow any other indicia of ownership or other interest in the Equipment to be
placed on the Equipment. Lessee shall not sell, assign, grant a security
interest in, sublet, pledge, hypothecate or otherwise encumber or suffer a lien
upon or against this Lease or the Equipment.
(b) Inspection. Lessor (through any of its officers, employees
or agents) shall have the right to inspect the Equipment during regular business
hours, with reasonable notice, and in compliance with Lessee's reasonable
security procedures; provided, that such inspections will be conducted no more
--------
often then once every six (6) months unless an Event of Default, or event which,
with notice or lapse of time or both, would become an Event of Default, has
occurred and is continuing.
(c) Location. In the case of Equipment other than mobile
Equipment, Lessee may move such Equipment from the installation address shown on
the Equipment Schedule (or any other location for which Lessee has complied with
this provision) only if (i) the new location is within the continental United
----
States or Malaysia, and (ii) Lessee gives at least 30 days' prior written notice
of the relocation and provides UCC-1 financing statements, landlord waivers or
such other documentation as Lessor reasonably requests to protect its interest
in the Equipment. In the case of mobile equipment (including, without
limitation, lap-top computers), Lessee agrees to obtain from the person using
such mobile Equipment and deliver to Lessor, an Acknowledgment in the form of
EXHIBIT F. [SEE ADDED SENTENCE REGARDING NOTICE AND UCC]
(d) Lessee shall keep copies of all operating manuals and
manufacturer's instructions with respect to the Equipment in good condition at
the locations specified in SECTION 10(C).
11. LESSEE'S REPRESENTATIONS, WARRANTIES AND WAIVERS. Upon execution of
the Master Lease and each Equipment Schedule, Lessee warrants and represents the
following:
(a) Lessee is a corporation duly organized, validly existing
and in good standing under the laws of its state of incorporation. Lessee has
full power and authority and all necessary licenses and permits to carry on its
business as presently conducted, to own or hold under lease its properties and
to enter into this Master Lease, the Lease Line Schedule and each Equipment
Schedule and to perform its obligations thereunder; and Lessee is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction in which the character of its properties or the nature of its
business or the performance of its obligations under this Master Lease, the
Lease Line Schedule and any Equipment Schedule requires such qualification,
except for such jurisdictions in which failure to qualify would not have a
material adverse effect on Lessee.
(b) The execution and delivery by Lessee of this Master Lease,
the Lease Line Schedule and each Equipment Schedule and the performance by
Lessee of its obligations thereunder have been duly authorized by all necessary
corporate action on the part of Lessee; and do not and will not contravene the
provisions of, or constitute a default (either with or without notice or lapse
of time, or both) under, or result in the creation of any lien upon, the
Equipment or any property of Lessee under any indenture, mortgage, contract or
other instrument to which Lessee is a party or by which Lessee or its properties
is bound.
(c) No consent or approval of, giving of notice to,
registration with, or taking of any other action by, any state, federal, foreign
or other governmental commission, agency or regulatory authority or any other
person or entity is required for the consummation or performance by Lessee of
the transactions contemplated under this Master Lease, the Lease Line Schedule
and each Equipment Schedule.
(d) This Master Lease, the Lease Line Schedule and each
Equipment Schedule, when executed by Lessee, constitute legal, valid and binding
agreements of Lessee enforceable against Lessee in accordance with their terms,
except as limited by any bankruptcy, insolvency, reorganization, or other
similar laws of general application affecting the enforcement of creditor or
Lessor rights.
(e) There are no actions, suits or proceedings pending or
threatened against or affecting Lessee or any property of Lessee in any court,
before any arbitrator of any kind or before or by any federal state, municipal
or other government department, commission, board, bureau, agency or
instrumentality (collectively
4
<PAGE>
"Governmental Body"), which, if adversely determined, would materially adversely
-----------------
affect the business, financial condition, assets, or operations of Lessee, or
adversely affect the ability of Lessee to perform its obligations under this
Master Lease, the Lease Line Schedule and each Equipment Schedule; and Lessee is
not in default with respect to any order of any court, arbitrator or
Governmental Body or with respect to any material loan agreement, debt
instrument or contract with a supplier or customer of Lessee, except as
disclosed in writing to Lessor.
(f) To the extent permitted by applicable law, Lessee waives
any and all rights and remedies to: (i) cancel this Lease; (ii) repudiate this
Lease; (iii) reject the Equipment; (iv) revoke acceptance of the Equipment; (v)
recover damages from Lessor for any breaches of warranty or for any other
reason; (vi) claim a security interest in the Equipment in Lessee's possession
or control for any reason; (vii) deduct from Rental Payments all or any part of
any claimed damages resulting from Lessor's default, if any, under this Lease;
(viii) accept partial delivery of the Equipment; (ix) "cover" by making any
purchase or lease of or contract to purchase or lease equipment in substitution
for Equipment designated in the Lease; (x) recover any direct, general, special,
incidental, indirect, exemplary or consequential damages, for any reason
whatsoever; and (xi) obtain specific performance, replevin, detinue,
sequestration, claim and delivery or the like for any Equipment identified to
this Lease. To the extent permitted by applicable law, Lessee also waives any
rights now or hereafter conferred by statute or otherwise which may require
Lessor to sell, lease or otherwise use any Equipment in mitigation of Lessor's
damages or which may otherwise limit or modify any of Lessor's rights or
remedies.
12. ASSIGNMENT BY LESSOR. LESSEE ACKNOWLEDGES THAT LESSOR MAY SELL,
ASSIGN, GRANT A SECURITY INTEREST IN, OR OTHERWISE TRANSFER ALL OR ANY PART OF
ITS RIGHTS, TITLE AND INTEREST IN THIS LEASE AND THE EQUIPMENT WITHOUT NOTICE TO
OR CONSENT OF LESSEE. Upon Lessor's written notice to Lessee that this Lease,
or the right to the Rental Payments hereunder, have been assigned, Lessee shall,
if requested, pay directly to Lessor's assignee without abatement, deduction or
set-off all amounts which become due hereunder. Lessee waives and agrees it
will not assert against Lessor's assignee any counterclaim or set-off in any
action for rent under the Lease. Upon the assignment of this Lease, Lessor's
assignee shall have and be entitled to exercise any and all rights and remedies
(but none of the obligations) of lessor hereunder, and all references herein to
Lessor shall include Lessor's assignee. Lessee acknowledges that any assignment
or transfer by Lessor does not materially change Lessee's duties or obligations
under this Lease nor materially increase the burdens or risks imposed on Lessee.
13. ASSIGNMENT BY LESSEE. LESSEE MAY NOT, WITHOUT LESSOR'S PRIOR WRITTEN
CONSENT, (I) ASSIGN THIS LEASE, WHETHER BY OPERATION OF LAW OR OTHERWISE, OR
SUBLEASE THE EQUIPMENT OR ANY PART THEREOF OR (II) ASSIGN, GRANT A SECURITY
INTEREST IN, OR OTHERWISE TRANSFER ALL OR ANY PART OF ITS RIGHTS, TITLE AND
INTEREST IN AND TO THIS LEASE OR THE EQUIPMENT. Notwithstanding the foregoing,
in the event of a reincorporation merger Lessor shall not withhold its consent
to the assignment of this Lease to the successor entity if each of the following
conditions precedent is satisfied:
(i) Lessee gives Lessor at least thirty (30) days prior written notice of
such reincorporation;
(ii) such merger, sale of assets or other reorganization does not
adversely affect the rights of lessor;
(iii) the corporation that results from such merger or other reorganization
or which purchases the assets in the case of a sale of assets (the "Surviving
---------
Corporation") shall have executed and delivered to Lessor an agreement in form
- -----------
and substance reasonably satisfactory to Lessor, containing an assumption by
Surviving Corporation of the due and punctual performance and observance of each
covenant and condition of Lessee in the Master lease, Lease Line Schedule and
Equipment Schedules (the "Lease Documents") and making representations and
---------------
warranties with respect to the Surviving Corporation similar in scope and
substance to the representations and warranties made by Lessee in the Lease
Documents;
(iv) the Surviving Corporation executes any precautionary financing
statements or amendments thereto reasonably requested by Lessor; and
5
<PAGE>
(v) immediately after giving effect of such merger, sale of assets or
other reorganization, no Event of Default or, event which with the lapse of time
or giving of notice or both, would result in an Event of Default shall have
occurred and be continuing.
In the event Lessee makes an assignment, sublease or other transfer (to
which Lessor has consented), Lessee shall not thereby be relieved of its duties
and obligations hereunder, for which it shall remain fully responsible and
liable (independent of its assignee).
14. TAXES.
(a) Lessee shall comply with all applicable federal, state,
local, foreign and international laws, regulations and orders relating to this
Lease. Lessee assumes liability for, and shall pay when due, and on a net after-
tax basis shall indemnify and defend Lessor against, all federal, state, local,
foreign and international fees, taxes and government charges (including, without
limitation, interest and penalties) of any nature imposed upon or in any way
relating to Lessor, Lessee, any item of Equipment or this Lease, except federal,
state and local taxes on or measured by Lessor's net income (other than any such
tax which is in substitution for or relieves Lessee from the payment of taxes it
would otherwise be obligated to pay to or reimburse Lessor for as herein
provided). Lessee shall at its expense file when due with the appropriate
authorities any and all tax and similar returns and reports required to be filed
with respect thereto or, if requested by Lessor, notify Lessor of all such
requirements and furnish Lessor with all information required for Lessor to
effect such filings, which filings shall also be at Lessee's expense. Any fees,
taxes or other charges paid by Lessor upon failure of Lessee to make such
payments shall at Lessor's option become immediately due from Lessee to Lessor.
(b) This Lease has been entered into on the assumption that
Lessor shall be entitled to all deductions, credits, and other tax benefits as
are provided in the Internal Revenue Code of 1986, including amendments as may
occur (the "Code"), to an owner of property including, without limitation,
depreciation deductions and interest deductions with respect to any debts
incurred to finance the purchase of the Equipment. If, as a result of any acts,
omissions or misrepresentations by Lessee, Lessor's projected after-tax economic
return resulting from ownership and lease of the Equipment is reduced, then
Lessee's Rental Payments shall be increased in an amount (based on Lessor's
reasonable calculations) sufficient to provide the same net after-tax economic
return as if such acts or omissions or changes had not occurred. Appropriate
increases shall also be made in the applicable Stipulated Loss Values for this
Lease. In the event the Equipment is sold by Lessor to another party, the net
after-tax economic returns considered shall be those of such other party.
15. EQUIPMENT WARRANTIES. Lessee acknowledges that (i) Lessee has
selected the supplier of the Equipment, (ii) Lessor acquired the goods or the
right to possession and use of the goods in connection with the Lease, and (iii)
Lessee received a copy of the contract by which Lessor acquired the Equipment or
the right to possession and use of the Equipment before signing the Lease.
LESSOR MAKES NO EXPRESS OR IMPLIED WARRANTIES INCLUDING THOSE OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR USE WITH RESPECT TO THE EQUIPMENT AND DISCLAIMS THE
SAME. Lessor shall have no liability for any damages, whether direct, indirect,
general, special, incidental, exemplary or consequential, incurred by Lessee as
a result of any defect or malfunction of the Equipment. Lessee shall look
solely to the Equipment supplier for any and all claims related to the
Equipment. Lessor assigns to Lessee, for and during the Lease Term, any
warranty on the Equipment provided by the supplier. Lessor and Lessee agree
that all limitations on remedies and liability contained in this Lease represent
a reasonable allocation of risks that is part of the fundamental bargain between
the parties.
16. EVENTS OF DEFAULT. An Event of Default shall occur if Lessee (i)
fails to pay any Rental Payment or other payment required under the Lease when
due and such failure continues for a period of five (5) days after written
notice from Lessor; or (ii) fails to perform or observe any other covenant,
condition or agreement to be performed or observed by it or breaches any
provision contained in the Lease or in any other document furnished to Lessor in
connection herewith, and such failure or breach continues for a period of thirty
(30) days after written notice from Lessor; or (iii) without Lessor's consent,
attempts to assign this Lease or sell, transfer, encumber, part with possession,
or sublet any item of Equipment; or (iv) makes any representation or warranty
herein or in any document furnished by Lessee in connection herewith, which
shall have been materially false or inaccurate when made or at the time to which
such representation or warranty relates; or (v) shall commit an act of
bankruptcy or
6
<PAGE>
become insolvent or bankrupt or make an assignment for the benefit of creditors
or consent to the appointment of a Trustee or Receiver or either shall be
appointed for Lessee or for a substantial part of its property without its
consent, or bankruptcy reorganization, or insolvency proceedings shall be
instituted by or against Lessee, and, if instituted against Lessee, shall not be
vacated or dismissed within sixty (60) days. Any Event of Default shall be
deemed material and a substantial impairment of Lessor's interests for the
purposes of this Lease, the UCC, and any other applicable law.
17. REMEDIES. Upon the occurrences of any Events of Default and at any
time thereafter, provided such Event of Default is then continuing, Lessor may,
in its discretion, do any one or more of the following:
(a) cancel any or all Leases which reference this Master Lease
or the Lease Line Schedule, upon notice to Lessee;
(b) recover any accrued and unpaid Rental Payments and other
amounts which are due and owing under the Leases so canceled on the Rental
Payment Date immediately preceding the date on which Lessor obtains possession
of the Equipment (or such earlier date as judgment is entered in favor of
Lessor) (the "Determination Date"), plus interest at the Default Rate;
(c) with or without canceling this Lease, recover such
Stipulated Loss Value as of the Rental Payment Date immediately preceding the
Determination Date;
(d) recover any amounts due under any indemnity then
determinable, plus interest at the Default Rate;
(e) require that Lessee provide the return and certification of
the Equipment in accordance with SECTION 6(C) hereof;
(f) enter the premises where such Equipment is located and take
immediate possession of and remove the same, all without liability to Lessor or
its agents for such entry;
(g) sell any or all of the Equipment at public or private sale,
with or without notice to Lessee or advertisement, or otherwise dispose of,
hold, use, operate, lease to others or keep idle such Equipment, all free and
clear of any rights of Lessee and without any duty to account to Lessee for such
action or inaction or for any proceeds with respect thereto; and
(h) exercise any other right or remedy which may be available
to it under the UCC or other applicable law including the right to recover
damages for the breach hereof.
In addition, Lessee shall be liable for, and reimburse Lessor for, all
reasonable legal fees and all commercially reasonable costs and expenses
incurred by Lessor as a result of the foregoing defaults or the exercise of
Lessor's remedies, including without limitation recovering possession of the
Equipment, selling or leasing the Equipment (including broker's and sales
representative's fees and commissions), and placing any Equipment in the
condition and obtaining the certificate required by SECTION 6(C) hereof. No
remedy referred to in this Section is intended to be exclusive, but each shall
be cumulative and in addition to any other remedy referred to above or otherwise
available to Lessor at law or in equity. No express or implied waiver by Lessor
of any default shall constitute a waiver of any other default by Lessor, or a
waiver of any of Lessor's rights.
18. INDEMNIFICATION. Lessee assumes liability for, and shall pay when
due, and shall indemnify, reimburse and hold each Indemnified Person (defined
below) harmless from and against all Claims (defined below), directly or
indirectly relating to or arising out of the acquisition, use, manufacture,
purchase, shipment, transportation, delivery, installation, lease or sublease,
ownership, operation, possession, control, storage, return or condition of any
item of Equipment (regardless of whether such item of Equipment is at the time
in the possession of Lessee), the falsity of any non-tax representation or
warranty of Lessee or Lessee's failure to comply with the terms of the Lease
during the Lease Term. The foregoing indemnity shall cover, without limitation,
(i) any Claim in connection with a design or other defect (latent or patent) in
any item of Equipment, (ii) any Claim for
7
<PAGE>
infringement of any patent, copyright, trademark or other intellectual property
right, or (iii) any Claim for negligence or strict or absolute liability in
tort; provided, however, that Lessee shall not indemnify Lessor for any
-------- -------
liability incurred by Lessor as a direct and sole result of Lessor's gross
negligence or willful misconduct.
"Claim" means all liabilities, losses, damages, actions, suits, demands,
-----
claims of any kind and nature (including, without limitation, claims relating to
environmental discharge, cleanup or compliance), and all costs and expenses
whatsoever to the extent they may be incurred or suffered by an Indemnified
Person in connection therewith (including, without limitation, reasonable
attorneys' fees and expenses), fines, penalties (and other charges of applicable
governmental authorities), licensing fees relating to any item of Equipment,
damage to or loss of use of property (including, without limitation,
consequential or special damages to third parties or damages to Lessee's
property), or bodily injury to or death of any person (including, without
limitation, any agent or employee of Lessee).
"Indemnified Person" means Lessor (including without limitation, each of
------------------
its partners) and each of their respective successors, assigns, agents,
officers, directors, shareholders, partners, servants, agents and employees.
Such indemnities shall continue in full force and effect, notwithstanding
the expiration or termination of this Lease. Upon Lessor's written demand,
Lessee shall assume and diligently conduct, at its sole cost and expense, the
entire defense of any Indemnified Person against any indemnified Claim described
in this SECTION 18. Lessee shall not settle or compromise any Claim against or
involving Lessor without first obtaining Lessor's written consent thereto, which
consent shall not be unreasonably withheld. Lessee shall give Lessor prompt
notice of any occurrence, event or condition in connection with which Lessor may
be entitled to indemnification hereunder. The provisions of this SECTION 18 are
in addition to, and not in limitation of, the provisions of SECTION 14(B).
19. NOTICES. Any notices or demands required or permitted hereunder shall
be given to the parties in writing and by personal delivery, regular or
certified mail, facsimile or telegram at the address set forth in the Lease Line
Schedule or to such other address as the parties may hereafter substitute by
written notice given in the manner prescribed in this Section. Such notices or
demands shall be deemed given upon receipt in the case of personal delivery and
upon mailing or transmission in the case of mail, facsimile or telegram. Lessee
agrees to provide Lessor with thirty (30) days' prior written notice of (a) any
merger or consolidation with or into any other business organization, (b) any
sale, lease or other disposition of assets not in the ordinary course of
business, and (c) any other material change in Lessee's financial structure or
ownership.
20. FURTHER ASSURANCES. Lessee will promptly execute and deliver to
Lessor such further reasonable documents and take such further reasonable action
as Lessor may request in order to more effectively carry out the intent and
purpose of this Lease or an assignment of Lessor's interest herein.
21. MISCELLANEOUS. This Lease shall be binding upon and inure to the
benefit of the parties hereto, their permitted successors and assigns. Any
provision of the Lease which is unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof; and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction; provided,
however, that to the extent that the provisions of any such applicable law can
be waived, they are waived by Lessee. Time is of the essence with respect to
the Lease. The captions set forth herein are for convenience only and shall not
define or limit any of the terms hereof. THIS LEASE SHALL IN ALL RESPECTS BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CALIFORNIA, WITHOUT REFERENCE TO CONFLICT OF LAWS PRINCIPLES. LESSOR AND LESSEE
WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING FROM THIS LEASE.
THIS LEASE SHALL BECOME EFFECTIVE AND BINDING ON THE PARTIES, THEIR RESPECTIVE
SUCCESSORS AND PERMITTED ASSIGNS, AND SHALL BE DEEMED EXECUTED AND PERFORMED IN
THE STATE OF CALIFORNIA, WHEN THE RELATED EQUIPMENT SCHEDULE IS ACCEPTED BY
LESSOR. LESSEE CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE COURTS
OF CALIFORNIA FOR THE RESOLUTION OF ANY DISPUTES HEREUNDER.
8
<PAGE>
22. AMENDMENTS, MODIFICATIONS, WAIVERS. NONE OF THE PROVISIONS OF THIS
LEASE MAY BE AMENDED, MODIFIED OR WAIVED EXCEPT IN A WRITING SIGNED BY LESSOR
AND LESSEE.
INITIALS _______________ (LESSEE) INITIALS _______________(LESSOR)
LESSEE: LESSOR:
POWER INTEGRATIONS, INC. LIGHTHOUSE CAPITAL PARTNERS, L.P.
BY: BY: LIGHTHOUSE MANAGEMENT
----------------------------------- PARTNERS, L.P.,
NAME: Robert G. Staples its general partner
---------------------------------
BY: LIGHTHOUSE CAPITAL
TITLE: Vice President of Finance PARTNERS, INC.,
& Administration its general partner
-------------------------------
BY:
NAME: Richard D. Stubblefield
-----------------------
TITLE: Managing Director
-----------------
9
<PAGE>
EXHIBIT 10.12
MASTER EQUIPMENT LEASE AGREEMENT
Agreement No. 3247 Dated as of ____________________
between
MMC/GATX PARTNERSHIP NO. I,
Four Embarcadero Center,
San Francisco, CA 94111
as Lessor
and
POWER INTEGRATIONS, INC.
a California corporation
411 Clyde Avenue
Mountain View, California 94043
as Lessee
LESSOR'S COMMITMENT: $1,000,000
Initial Rent Factor: 2.8342% Initial Lease Term: 42 months
------- --------
Treasury Base Rate: 4.78 % Treasury Note Maturity: 42 months
------- --------
Initial Implicit Rate: 10.58 % Minimum Implicit Rate: 9.0 %
------- ------
Minimum Funding Amount $ 75,000 Maximum No. of Fundings 4
-------- ------
Minimum Renewal Percentage 1.3 %
-------
Commitment Termination Date: August 31, 1994
Eligible Equipment: Semiconductor production and test equipment, computers and
software.
The terms and information set forth on this cover page are a part of the
MASTER EQUIPMENT LEASE AGREEMENT, dated as of the date first written above (this
"Lease"), entered into by and between MMC/GATX PARTNERSHIP NO. I ("Lessor") and
the Lessee set forth above, the terms and conditions of which are as follows:
<PAGE>
LESSOR'S OBLIGATIONS UNDER THIS LEASE AND EACH SCHEDULE ARE SUBJECT TO THE
PRIOR SATISFACTION OF THE CONDITIONS SET FORTH ON RIDER I HERETO.
1. DEFINITIONS: Unless otherwise defined in this Lease (which term shall
include the cover page, any Rider, any Exhibit or any Schedule hereto),
capitalized terms shall have the following meanings:
"Commitment Termination Date" means the date set forth opposite such term
---------------------------
on the cover page of this Lease or such earlier date on which Lessor terminates
its commitment to fund Schedules pursuant to the terms of this Lease.
"Delivery Date" means, with respect to any Schedule, the date first set
-------------
forth on such Schedule.
"Eligible Equipment" means Equipment of the types listed following such
------------------
term on the cover page of this Lease to the extent acceptable to Lessor.
"Environmental Law" means the Resource Conservation and Recovery Act of
-----------------
1987, the Comprehensive Environmental Response, Compensation and Liability Act,
and any other Federal, state or local statute, law, ordinance, code, rule,
regulation, order or decree (in each case having the force of law) regulating or
imposing liability or standards of conduct concerning any Hazardous Materials or
other hazardous, toxic or dangerous waste, constituent, or other substance,
whether solid, liquid or gas, as now or at any time hereafter in effect.
"Equipment" means all Units listed in any Schedule together with all
---------
replacement parts, additions, accessions and accessories to such Units.
"Event of Default" shall have the meaning set forth in Section 12 hereof.
----------------
"Hazardous Material" means any hazardous or toxic substance, material,
------------------
pollutant or waste which is regulated by any Federal, state or local
governmental authority.
"Implicit Rate" means, with respect to a Schedule, an implicit interest
-------------
rate used in calculating the Rent Factor applicable to such Schedule, calculated
as set forth in Section 3(b) of this Lease.
"Initial Implicit Rate" means the implicit interest rate set forth
---------------------
following such term on the cover page of this Lease.
"Initial Lease Term" means the period of months set forth following such
------------------
term on the cover page of this Lease.
"Initial Rent Factor" means the Rent Factor set forth following such term
-------------------
on the cover page of this Lease calculated using the Initial Implicit Rate.
"Interim Rental Payment" shall have the meaning set forth in Section 3(a)
----------------------
of this Lease.
"Lessor's Commitment" means the maximum amount that Lessor may be obligated
-------------------
to fund under the Lease, which amount is set forth opposite such term on the
cover page of this Lease.
"Lessor's Cost" means, with respect to a Unit of Equipment, the total cost
-------------
to Lessor of purchasing such Unit, as indicated on the applicable Schedule.
"Maximum Number of Fundings" means the number of fundings under this Lease
--------------------------
specified opposite such term on the cover page hereof.
"Minimum Funding Amount" means the amount set forth opposite such term on
----------------------
the cover page of this Lease.
"Minimum Implicit Rate" means the interest rate set forth opposite such
---------------------
term on the cover page to this Lease.
"Minimum Purchase Option Percentage" means the percentage of Lessor's Cost
----------------------------------
set forth opposite such term on the cover page of this Lease.
"Minimum Renewal Percentage" means the percentage set forth opposite such
--------------------------
term on the cover page of this Lease.
"Rent Commencement Date" shall have the meaning, with respect to any
----------------------
Schedule, set forth in Section 3(a) of such Schedule.
"Rent Factor" means, with respect to a Schedule, the rent factor calculated
-----------
using the Implicit Rate applicable on the Delivery Date of such Schedule.
"Rental Payment" means, for any Schedule, the monthly rent payment for the
--------------
Units identified in such Schedule.
"Schedule" or "Schedule No. " means a schedule in the form of Exhibit E
-------- ---------------
to this Lease identifying this Lease and incorporating this Lease by reference,
which is executed by both parties hereto.
"Stipulated Loss Value" shall have the meaning set forth in Section 11(e).
---------------------
"Term" means the Initial Lease Term, together with any renewal or extension
----
thereof.
"Treasury Base Rate" means the interest rate set forth following such term
------------------
on the cover page of this Lease.
"Treasury Note Maturity" means the period of months set forth following
----------------------
such term on the cover page of this Lease.
"Unit" means an item of Equipment.
----
2. LEASE: Lessor agrees to lease to Lessee and Lessee agrees to lease
from Lessor the Equipment described in each Schedule on the terms and subject to
the conditions specified herein and therein. Lessor's obligation to fund
Schedules under this Lease shall terminate on the Commitment Termination Date.
Lessor may, in its sole discretion, terminate its commitment herein to fund the
Lessor's Commitment or any unfunded portion thereof at any time if: (a) there is
any material adverse change to the general affairs, management, results of
operations, condition (financial or otherwise) or prospects of Lessee, whether
or not arising from transactions in the ordinary course of business, (b) there
is any material adverse deviation by Lessee from the business plan of Lessee
presented to and not disapproved by Lessor, since the date first written on the
cover page of this Lease, (c) any Event of Default exists, or (d) if any term or
condition in any Schedule is not satisfied by the Delivery Date of such
Schedule. This Lease, and Lessee's obligation to pay all rent and other sums
hereunder, shall constitute a "finance lease" under the California Uniform
Commercial Code ("UCC") and shall be absolute and unconditional, and shall not
be subject to, and Lessee hereby waives any right of or to, abatement,
reduction, set-off, defense or counterclaim. Lessee waives any and all rights
and remedies conferred upon Lessee by UCC Sections 10508 through 10522,
including (without limitation) Lessee's rights to (i) cancel or repudiate this
Lease, (ii) reject or revoke acceptance of the leased property, (iii) recover
damages from Lessor for breach of warranty or for any other reason, (iv) claim a
security interest in any rejected property in Lessee's possession or control,
(v) deduct from Rental Payments all or any part of any claimed damages resulting
from Lessor's default under this Lease, (vi) accept partial delivery of the
Equipment, (vii) "cover" by making any purchase or lease of other property in
substitution for property due from Lessor, (viii) recover from the Lessor any
general, special, incidental or consequential damages, for any reason
whatsoever, and (ix) seek specific performance, replevin or the like for any of
the Equipment. Lessee acknowledges that it has received and approved the terms
of the agreements with the vendors under which Lessor will, subject to the
terms and conditions of this Lease, purchase the Units. The Units shall be
leased for commercial purposes only, and not for consumer, personal, home or
family purposes.
<PAGE>
This Lease describes the terms of, and is intended by the parties hereto to
be, a true lease; provided, however, that the parties acknowledge that the
terms and conditions of the Lease may, alternatively, create a secured
financing or lease for security. If this Lease as supplemented by any Schedule
constitutes a security agreement or lease for security, the Lessee hereby
grants a security interest to Lessor in all of Lessee's right, title and
interest in the Units described in Annex A to such Schedule and the proceeds
thereof, to secure all of Lessee's obligations under this Lease and such
Schedule.
3. TERM AND RENTALS: THIS LEASE SHALL BE EFFECTIVE UPON EXECUTION AND
DELIVERY HEREOF by Lessee and Lessor. (a) The Initial Lease Term for each
Schedule shall commence upon the Rent Commencement Date set forth in such
Schedule. For the Initial Lease Term of such Schedule, Lessee agrees to pay
Lessor aggregate rentals equal to the number of months in the Initial Lease Term
of such Schedule multiplied by the amount of the Rental Payment specified in
such Schedule. In addition, for the period from the Delivery Date of each
Schedule until such Schedule's Rent Commencement Date, Lessee shall pay an
interim rental ("Interim Rental Payment") equal to the product of (i) the total
annual rental for the first year of the Initial Lease Term of such Schedule
divided by 360 and (ii) the actual number of days between the Delivery Date and
the Rent Commencement Date, including the Delivery Date but excluding the Rent
Commencement Date. The Interim Rental Payment shall be payable as set forth in
each Schedule to this Lease. Lessor will make reasonable efforts to send Lessee
invoices for Rental Payments, but the failure to do so or the incorrectness of
any invoice will not relieve Lessee of its obligation to pay all amounts,
including Rental Payments, due under this Lease. The Interim Rental Payment for
each Schedule is due on the Delivery Date for such Schedule and the remaining
Rental Payments are due commencing on the Rent Commencement Date and thereafter
on the same date of each succeeding month of the Term, or as specified in the
applicable Schedule. If any payment is not received within ten (10) days of the
dated on which it is due, a late charge on such overdue payment shall accrue
from the due date at the rate of 1.5% per month on the overdue amount, or the
highest lawful rate, whichever is less. (b) The Rent Factor will be calculated
for each Schedule based on a basis point for basis point adjustment (if any) to
the Initial Implicit Rate equal to the change from the Treasury Base Rate in the
U.S. Treasury note rate for notes of a term equal to the Treasury Note Maturity
as quoted in The Wall Street Journal on the date on which the Schedule is
-----------------------
prepared. The Implicit Rate used for calculating the Rent Factor for any
Schedule shall not be less than the Minimum Implicit Rate. (c) It is not the
intent of the parties to create rent or other payment obligations of Lessee
which will be considered usurious under applicable law. However, if any such
payment shall be found to be usurious by a court of competent jurisdiction, then
Rental Payments or such other amounts shall automatically be reduced to the
highest rate or amounts permitted by applicable law and the usurious portion of
the Rental Payments or such other amounts shall be applied to the Lessee's
remaining obligations under the Lease in a manner reasonably determined by
Lessor. If Lessee retains possession of any Unit after the expiration or
termination of this Lease, Rental Payments shall continue to be paid with
respect to such Unit at the rate set forth in Section 3(a) of the Schedule
relating to such Unit until all obligations of Lessee under this Lease relating
to such Unit, including, without limitation, Rental Payments and payments due
under Section 4 of this Lease, have been satisfied. This Lease may only be
terminated as expressly provided herein.
4. OPTIONS AT END OF INITIAL LEASE TERM:
(a) Provided that the Lease has not been terminated and that no Event of
Default or event which, with notice or lapse of time or both, would become an
Event of Default shall have occurred and be continuing, Lessee shall elect one
of the following options in clauses (i) or (ii) below:
(i) Lessee's Option to Renew: At the expiration of the Initial Lease
------------------------
Term of Schedule No. 1, Lessee may elect to renew the Lease with respect to
all, but not less than all, of the Units under all Schedules to the Lease at
their respective expiration dates for not less than twelve (12) months nor
more than thirty-six (36) months for a rent equal to the "Fair Rental Value"
(as defined in Section 4(b) below) of such Units for such additional period,
but in no event less than the Minimum Renewal Percentage of Lessor's Cost of
such Units per month, which rent shall be paid monthly in advance. At the
end of the renewal term, Lessee must purchase all of the Units for a purchase
price equal to the Fair Market Value (as defined in Section 4(b) below) plus
any applicable sales or other transfer tax.
(ii) Lessee's Option to Purchase: At the expiration of the Initial
---------------------------
Lease Term of Schedule No. 1, Lessee may elect to purchase all, but not less
than all, of the Units under all Schedules to the Lease at their respective
expiration dates for a purchase price equal to the "Fair Market Value" (as
defined in Section 4(b) below) thereof as of the end of the Initial Lease
Term of Schedule No. 1 but in no event less than the 10% nor greater than 20%
of Lessor's Cost of all Units plus any applicable sales or other transfer
tax.
(iii) If neither of the foregoing options in clauses (i) or (ii) of
this Section 4(a) is duly exercised by Lessee, this Lease shall be renewed at
the rental in effect immediately prior to the renewal with respect to all
Units covered by the applicable Schedule from the expiration date of the
Initial Lease Term of such Schedule on a month-to-month basis. Lessee may
terminate any such extended term on 90 days' notice to Lessor and shall along
with such notice elect one of the options in clauses (i) or (ii) above.
Either of the foregoing options in clauses (i) or (ii) shall be exercised by
written notice delivered to Lessor not more than 180 days and not less than 120
days prior to the expiration of the Initial Lease Term of the Units which are
subject to Schedule No. 1.
(b) Fair Market Value or Fair Rental Value, as the case may be, shall be
determined on the basis of and shall be equal in amount to the value which would
obtain in an arm's-length transaction between an informed and willing buyer-user
or lessee-user (other than a used equipment dealer) and an informed and willing
seller or lessor under no compulsion to sell or lease, on the assumptions that:
such Units (i) are being sold "in place and in use"; (ii) are free and clear of
all liens and encumbrances; and (iii) are in the condition required upon the
return of the Units under Section 9 of this Lease. In such determination, costs
of removal from the location of current use shall not be a deduction from such
value(s).
(c) If the Lessor and Lessee have not agreed upon a determination of the
Fair Market Value or Fair Rental Value of any Unit within 30 days after one of
the parties has requested such determination, that determination shall be made
by a certified independent
<PAGE>
appraiser approved by both Lessor and Lessee, such approvals not to be
unreasonably withheld. The appraiser shall be furnished with a letter of
instruction concerning the preparation of the appraisal, together with a copy
of the Lease and Schedule and, to the extent available, related purchase
orders and/or invoices. The appraiser shall be instructed to make such
determination within 30 days following appointment. The determination made by
the appraiser shall be final and binding on both Lessor and Lessee. The fees
and expenses of any appraisal shall be paid by the Lessee, if such appraisal
is needed for the Lessor's exercise of its remedies under Sections 12 and 13
hereof, and equally by the Lessor and Lessee otherwise.
(d) The purchase of the Units by Lessee pursuant to its option herein
shall be "AS IS, WHERE IS", without recourse to or any warranty by Lessor, other
than a warranty that the Units are free and clear of liens and encumbrances
resulting from acts of Lessor.
5. WARRANTIES; INDEMNITY:
(a) Lessee acknowledges that it has made the selection of each Unit based
upon its own judgment. LESSOR MAKES NO EXPRESS OR IMPLIED WARRANTIES INCLUDING,
WITHOUT LIMITATION, THOSE OF DESCRIPTION, INFRINGEMENT, MERCHANTABILITY OR
FITNESS FOR A PARTICULAR USE OR PURPOSE WITH RESPECT TO THE EQUIPMENT AND
HEREBY DISCLAIMS THE SAME. Lessor shall have no liability for any damages,
whether direct or consequential, incurred by Lessee as a result of any defect or
malfunction of a Unit. Lessee agrees to look solely to the manufacturer or
vendor of any defective or malfunctioning Unit for the repair or replacement of
such Unit and to continue to make all Rental Payments with respect to such Unit
in spite of such defect or malfunction. Lessor hereby assigns to Lessee, for
and during the Term, any warranty of the manufacturer or vendor issued to Lessor
with respect to any Unit.
(b) Lessee shall indemnify, reimburse and hold Lessor (including without
limitation, each of its partners) and each of their respective successors,
assigns, agents, officers, directors, shareholders, servants, agents and
employees harmless from and against all liabilities, losses, damages, actions,
suits, demands, claims of any kind and nature (including, without limitation,
claims relating to environmental discharge, cleanup or compliance), and all
costs and expenses whatsoever to the extent they may be incurred or suffered by
such indemnified party in connection therewith (including, without limitation,
reasonable attorneys' fees and expenses), fines, penalties (and other charges of
applicable governmental authorities), licensing fees relating to any Unit,
damage to or loss of use of property (including, without limitation,
consequential or special damages to third parties or damages to Lessee's
property), or bodily injury to or death of any person (including, without
limitation, any agent or employee of Lessee) (each a "Claim"), directly or
indirectly relating to or arising out of the acquisition, use, lease or
sublease, ownership, operation, possession, control, storage, return or
condition of any Unit (so long as, at the time of the occurrence of any such
event or the existence of any such condition, any such Unit was in the
possession of Lessee, its agents or designees), the falsity of any non-tax
representation or warranty of Lessee or Lessee's failure to comply with the
terms of the Lease during the Term. The foregoing indemnity shall cover,
without limitation, (i) any Claim in connection with a design or other defect
(latent or patent) in any Unit, (ii) any Claim for infringement of any patent,
copyright, trademark or other intellectual property right, (iii) any Claim
resulting from the presence on or under or the escape, seepage, leakage,
spillage, discharge, emission or release from any Unit of any Hazardous
Materials, including, without limitation, any Claims asserted or arising under
any Environmental Law, or (iv) any Claim for negligence or strict or absolute
liability in tort; provided, however, that Lessee shall not indemnify Lessor for
-----------------
any liability incurred by Lessor as a result of Lessor's gross negligence or
willful misconduct. Such indemnities shall continue in full force and effect,
for four years following the expiration or termination of this Lease. Upon
Lessor's written demand, Lessee shall assume and diligently conduct, at its sole
cost and expense, the entire defense of Lessor and its agents, employees,
successors and assigns against any indemnified Claim described in this Section
5. Lessee shall not settle or compromise any Claim against or involving Lessor
without first obtaining Lessor's written consent thereto, which consent shall
not be unreasonably withheld.
6. TITLE, LOCATION AND RETURN: Lessor and Lessee hereby confirm their
intent that the Equipment remain and be deemed personal property and that title
thereto shall remain in Lessor. If requested at any time by Lessor, Lessee will
place in a conspicuous location on each item of Equipment a notice (to be
supplied by Lessor) which reads: "MMC/GATX Partnership No. I - Owner/Lessor".
Such notice shall not be removed (or if damaged such notice shall be replaced)
until the Equipment is returned to Lessor or purchased by Lessee. Lessee may
not remove the Equipment from its place of installation without Lessor's prior
written consent, which consent shall not be unreasonably withheld. Lessor shall
have the right to inspect the Equipment during regular business hours, with
reasonable notice, and in compliance with Lessee's reasonable security
procedures. If for any reason the Equipment is to be returned to Lessor on
Lessor's demand hereunder, Lessee at its own risk and expense, will cause the
Equipment to be delivered promptly to Lessor free of all Hazardous Materials and
in the same condition as when delivered hereunder, ordinary wear and tear
excepted, to such point in the United States as Lessor may designate and in such
a manner as is consistent with the manufacturer's recommendations, if any, for
transportation and packaging of such Equipment. All charges to cover Equipment
transportation, deinstallation, storage until returned, packing, and handling
and all other costs associated with a return of the Equipment to the location
designated by Lessor shall be paid by Lessee.
7. SUBLEASE, ASSIGNMENT: Lessee acknowledges and agrees that Lessor may,
subject to the terms of this Lease, sell, assign, grant a security interest in,
or otherwise transfer all or any part of its rights, title and interest in this
Lease and the Equipment. Upon Lessor's written notice, Lessee shall, if
requested, pay directly to such assignee without abatement, deduction or set-off
all amounts which become due hereunder. Lessee waives and agrees it will not
assert against such assignee any counterclaim or set-off in any action for rent
under the Lease. Such assignee shall have and be entitled to exercise any and
all rights and remedies of Lessor hereunder, and all references herein to Lessor
shall include Lessor's assignee. Lessee acknowledges that such a sale,
assignment, grant or transfer would neither materially change the Lessee's
duties nor materially increase the burdens or risks imposed on the Lessee under
this Lease. LESSEE MAY NOT, WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, (I)
SUBLEASE, TRANSFER, DISPOSE OF OR ASSIGN ITS RIGHTS IN RESPECT OF ANY UNIT OR
ITS OBLIGATIONS UNDER THIS LEASE (except to a successor in interest to all or
substantially all of the business of Lessee to which the Equipment relates,
provided, that such successor has a net worth and financial condition greater
- --------
than or equal to that of Lessee at the time of execution of this Lease as
determined in good faith by Lessor prior to such transfer), OR (ii) ASSIGN,
GRANT A SECURITY INTEREST IN, OR OTHERWISE TRANSFER ALL OR
<PAGE>
ANY PART OF ITS RIGHTS, TITLE AND INTEREST IN AND TO THIS LEASE OR THE
EQUIPMENT.
8. TAXES: Lessee agrees to pay if and when due, in addition to other
amounts due hereunder and under each Schedule, all fees and assessments, and all
sales, use, property, excise and other taxes and charges (including all interest
and penalties) (collectively "Taxes"), now or hereafter imposed by any
governmental body or agency upon any of the Equipment or upon the purchase,
ownership, possession, leasing, operation, use, rentals or other payments, or
disposition hereunder whether payable by Lessor or Lessee (exclusive of (i)
taxes on or measured by Lessor's net income, (ii) taxes imposed in connection
with Lessor's transfer of any interest in this Lease, and (iii) taxes imposed in
connection with any transfer of the Equipment, except for a transfer of the
Equipment to Lessee by Lessor upon any exercise of the purchase option set forth
herein or to Lessor by Lessee in connection with a sale-leaseback). Lessee
agrees to prepare and file promptly with the appropriate offices any and all tax
and similar returns required to be filed with respect thereto, or, if requested
by Lessor, to notify Lessor of such requirements and furnish Lessor with all
information required by Lessor so that it may effect such filing, at Lessee's
expense. Any Taxes paid by or imposed on, Lessor on behalf of Lessee shall
become immediately due and payable on Lessor's demand. Lessor, as owner, shall
be entitled to any and all depreciation and modified cost recovery deductions
provided under the Internal Revenue Code of 1986, as amended from time to time
and any other such tax benefits which may now or hereafter be available to an
owner of such Equipment (collectively, "Tax Benefits"). If as a result of (i)
the inaccuracy or breach of any of Lessee's representations, warranties and
covenants herein or in any Schedule, or (ii) the acts or failure to act of
Lessee or any person claiming an interest in the Equipment through the Lessee
(other than a casualty or other event described in Section 11 with respect to
which Stipulated Loss Value shall have been paid by Lessee), Lessor or any of
its assigns shall lose, or shall not, in its reasonable opinion, have the right
to claim, or there shall be disallowed, deferred or recaptured, any portion of
the Tax Benefits with respect to a Unit (a "Loss of Tax Benefits") or there
shall be included in Lessor's gross income any amounts other than Rental
Payments in respect of the purchase price of any Unit (an "Inclusion"), then, on
and after the next succeeding Rent Payment date after written notice to Lessee
by Lessor, Lessee agrees as follows: The rent for the Equipment shall, on the
Rent Payment date next succeeding Lessor's written notice to Lessee of Lessor's
payment of any tax payment attributable to such Inclusion or of a Loss of Tax
Benefits, be increased to such amount or amounts as shall, by the end of the
original term of the last Schedule to this Lease, in the reasonable opinion of
Lessor, after deduction of all fees, taxes, or other charges required to be paid
by Lessor in respect of the receipt of all amounts payable by Lessee to Lessor
under this Section 8 under the laws of any federal, state, or local government
or taxing authority in the United States, cause Lessor's after-tax yield and
cash flow in respect of the Equipment to equal those which would have been
realized by Lessor if Lessor had not incurred such a Loss of Tax Benefits or
had such an Inclusion. If any claim or contest regarding any tax indemnity
covered by this Section 8 shall arise, such claim or contest shall be addressed
or conducted, at Lessee's expense, in the manner reasonably specified by Lessor.
9. USE; MAINTENANCE: (a) Lessee, at its expense, shall make all
necessary site preparations and cause the Equipment to be operated in accordance
with any applicable manufacturer's manuals or instructions. So long as no Event
of Default has occurred and is continuing, Lessee shall have the right to
quietly possess and use the Equipment as provided herein without interference by
Lessor. (b) Lessee, at its expense, shall maintain the Equipment in good
condition, reasonable wear and tear excepted, and will comply with all laws,
ordinances and regulations to which the use and operation of the Equipment may
be or become subject, violation of which could have a material adverse effect on
the condition of Lessee. Such obligation shall extend to repair and replacement
of any partial loss or damage to the Equipment, regardless of the cause. If
maintenance is mandated by the manufacturer, Lessee shall obtain and keep in
effect at all times during the Term maintenance service contracts with suppliers
approved by Lessor, such approval not to be unreasonably withheld. All parts
furnished in connection with such maintenance or repair shall immediately become
part of the Equipment. All such maintenance, repair and replacement services
shall be immediately paid for and discharged by Lessee with the result that no
lien will attach to the Equipment. Only qualified personnel of Lessee shall
operate the Equipment. The Equipment shall be used only for the purposes for
which it was designed.
10. INSURANCE: (a) Lessee shall obtain and maintain for the Term, at its
own expense, (i) "all risk" insurance against loss or damage to the Equipment,
(ii) commercial general liability insurance (including contractual liability,
products liability and completed operations coverages) reasonably satisfactory
to Lessor, and (iii) such other insurance against such other risks of loss and
with such terms, as shall in each case be reasonably satisfactory to or
reasonably required by Lessor (as to carriers, amounts and otherwise). (b) The
amount of the "all risk" insurance shall be the greater of the replacement value
of the Equipment (as new) or the "Stipulated Loss Value" specified in the
applicable Schedules, which amount shall be determined to Lessor's reasonable
satisfaction as of each anniversary date of this Lease with the amount so
determined being put into effect on the next succeeding renewal or inception
date of such insurance. (c) The deductible with respect to "all-risk" insurance
required by clause (b) above and product liability insurance required by clause
(a) above shall not exceed $25,000; otherwise there shall be no deductible with
respect to any insurance required to be maintained hereunder. (d) The amount of
commercial general liability insurance (other than products liability coverage
and completed operations insurance) required by clause (a) above shall be at
least $2,000,000 per occurrence. The amount of the products liability and
completed operations insurance required by clause (a) above shall be at least
$2,000,000 per occurrence. (e) Each "all risk" policy shall: (i) name Lessor
as sole loss payee with respect to the Equipment, (ii) provide for each
insurer's waiver of its right of subrogation against Lessor and Lessee, and
(iii) provide that such insurance (A) shall not be invalidated by any action of,
or breach of warranty by, Lessee of a provision of any of its insurance
policies, and (B) shall waive set-off, counterclaim or offset against Lessor.
Each liability policy shall (w) name Lessor as an additional insured and (x)
provide that such insurance shall have cross-liability and severability of
interest endorsements (which shall not increase the aggregate policy limits of
Lessee's insurance). All insurance policies shall (y) provide that Lessee's
insurance shall be primary without a right of contribution of Lessor's
insurance, if any, or any obligation on the part of Lessor to pay premiums of
Lessee, and (z) shall contain a clause requiring the insurer to give Lessor at
least 30 days' prior written notice of its cancellation (other than cancellation
for non-payment for which 10 days' notice shall be sufficient. Lessee shall on
or prior to the Delivery Date of Schedule No. 1 and prior to each policy
renewal, furnish to Lessor certificates of insurance or other evidence
satisfactory to Lessor that such insurance coverage is in effect. Lessee
further agrees to give Lessor prompt notice of any damage to, or loss of, the
Equipment, or any part thereof.
11. LOSS; DAMAGE; DESTRUCTION AND SEIZURE: (a) Lessee shall bear the
risk of the Units being lost, stolen, destroyed, damaged or seized by
governmental authority for any reason whatsoever at any time until the latest to
occur of (i) the expiration
<PAGE>
or termination of the Term or (ii) any storage period thereafter prior to the
return of the Unit to Lessor or Lessor's designee or (iii) the return of the
subject Unit to Lessor or Lessor's designee (if authorized hereunder), and
shall proceed diligently and cooperate fully to recover any and all damages,
insurance proceeds or condemnation awards. (b) Except as described in Section
11(c) hereof, if during the Term or the storage period thereafter, any Unit
shall be lost, stolen, destroyed, irreparably damaged or seized by a
governmental authority for a period equal to at least the remainder of the
Term, Lessor shall receive from the proceeds of insurance obtained pursuant to
Section 10 hereof, from any award paid by the seizing governmental authority
and, to the extent not received from the proceeds of such insurance or award
or both, from Lessee, on or before the Rental Payment date next succeeding
such loss, theft, destruction, damage or governmental seizure: (i) all accrued
and unpaid rent in respect of such Unit including rent due on the rental
payment date next succeeding the date of such loss or seizure if the rent is
in arrears; (ii) the Stipulated Loss Value of such Unit, determined as of such
Rental Payment date; (iii) all other sums, if any, that shall have become due
and payable hereunder; and (iv) interest on the foregoing at the lower of the
rate equal to 1.5% per month or the highest rate then permitted by applicable
law from the due dates(s) of such payment(s) to the date of payment. On
receipt by Lessor of the amount specified hereinabove with respect to each
such Unit so lost, stolen, destroyed, damaged or seized, (i) this Lease shall
be deemed terminated as to such Unit and rent in respect of such Unit shall be
deemed abated, as of the Rental Payment date next succeeding such loss, theft,
damage, destruction or seizure; and (ii) so long as no default or Event of
Default has occurred and is continuing hereunder, Lessor shall on demand,
transfer title to such Unit, "AS IS, WHERE IS, WITHOUT RECOURSE,
REPRESENTATION OR WARRANTY," to Lessee, or, if appropriate in Lessor's sole
judgment, which judgment shall be exercised in a reasonable manner, and on
prior notice to Lessee, to Lessee's insurance carrier. Any proceeds of
insurance payable to Lessor pursuant to this Section 11 and Section 10 hereof
received by Lessee shall be paid to Lessor promptly upon their receipt by
Lessee. If any proceeds of insurance or awards received from governmental
authorities are in excess of the amount owed under this Section 11(b), Lessor
shall promptly remit to Lessee the amount in excess of the amount owed to
Lessor. (c) So long as no Event of Default shall have occurred and be
continuing, any proceeds of insurance obtained pursuant to Section 10 hereof
received with respect to any Unit the repair of which is practical shall, at
the election of Lessee, be applied either to the repair of such Unit or, upon
Lessor's receipt of evidence of the repair of the Unit reasonably satisfactory
to Lessor, to the reimbursement of Lessee for the cost of such repair. (d)
Lessee shall promptly, but in any event within 30 days thereafter, notify
Lessor in writing in reasonable detail of any loss, theft, destruction or
seizure described in this Section 11. (e) The Stipulated Loss Value payable by
Lessee under this Lease shall be that percentage of Lessor's Cost of the
affected Unit(s) set forth in the table attached to the applicable Schedule as
Annex B opposite the Rental Payment date next following the event giving rise
to Lessee's obligation to pay Stipulated Loss Value. Stipulated Loss Values
and Rental Payments shall not be prorated.
12. EVENTS OF DEFAULT: An "Event of Default" shall occur if Lessee: (a)
fails to pay/make any Rental Payment or other payment required hereunder when
due and such failure continues for a period of 10 days; or (b) fails to perform
or observe any other material covenant, condition or agreement hereunder or
breaches any provision contained herein or in any other document furnished
Lessor in connection herewith, and such failure or breach continues for a period
of 30 days after written notice by Lessor; or (c) makes any representation or
warranty herein or in any document furnished in connection herewith, which shall
have been materially false or inaccurate when made; or (d) fails to maintain
insurance under this Lease or otherwise required by the Lessor hereunder; or (e)
shall admit in writing that it is unable to pay its debts as they become due,
become insolvent or bankrupt or make an assignment for the benefit of its
creditors or consents to the appointment of a trustee or receiver or insolvency
proceedings shall be instituted by or against Lessee.
13. REMEDIES: Upon the occurrence of any Event of Default and at any
time thereafter, provided such Event of Default is then continuing (which
occurrence, for purposes of clause (a)(ii)(B) below is the day Lessee shall be
deemed to tender possession of the Equipment to Lessor), (a) Lessor may, in its
discretion, do any one or more of the following, all of which Lessor and Lessee
expressly agree are commercially reasonable under the UCC and any other
applicable law: (i) terminate this Lease; (ii) declare to be immediately due
and payable: (A) all unpaid rent and sums then due and payable under this Lease
(other than amounts payable under clause (B) hereof, if any,) plus (B) an amount
equal to the greater of the then applicable Stipulated Loss Value (which value
Lessee acknowledges has a reasonable discount rate implicit therein) or the then
applicable fair market value of the Equipment as determined by Lessor (but in no
event less than an amount equal to the Minimum Purchase Option Percentage of
Lessor's Cost); (iii) require that Lessee return all Equipment to Lessor in
accordance with Section 6 hereof; (iv) enter upon the premises where such
Equipment is located and take immediate possession of and remove the same, all
without liability to Lessor or its agents for such entry; (v) sell any or all of
the Equipment at public or private sale, with or without notice to Lessee or
advertisement, or otherwise dispose of, hold, use, operate, lease to others or
keep idle such Equipment, all free and clear of any rights of Lessee and without
any duty to account to Lessee for such action or inaction or for any proceeds
with respect thereto subject to applicable law; (vi) exercise any other right or
remedy which may be available under the UCC or other applicable law including
the right to recover damages for the breach hereof. (b) In addition, Lessee
shall be liable for, and reimburse Lessor for, all reasonable and necessary
attorneys' fees and other expenses incurred by Lessor as a result of the
foregoing defaults, or the exercise of Lessor's remedies, including without
limitation placing any Equipment in the condition required by Section 9 hereof.
No remedy referred to in this Section 13 is intended to be exclusive, but each
shall be cumulative and in addition to any other remedy referred to above or
otherwise available to Lessor at law or in equity. (c) There shall be no waiver
by Lessor of any default unless in writing and such waiver shall not constitute
a waiver of any other default by Lessee, or a waiver of any of Lessor's other
rights. Lessee waives any rights now or hereafter conferred by statute or
otherwise that may require Lessor to sell, re-lease or otherwise use or dispose
any Unit in mitigation of the Lessor's damages or that might otherwise limit or
modify any of Lessor's rights or remedies under this Lease; provided, however,
that the foregoing waiver of the duty of Lessor to mitigate its damages shall
not be effective as to damages applicable to any Units which come into
Lessor's or Lessor's designee's possession in the condition required under
Section 6 of this Lease.
14. LESSEE'S REPRESENTATIONS, WARRANTIES AND COVENANTS: (a) Lessee
warrants and represents the following as of the date hereof: (i) Lessee is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation and is duly qualified and authorized to do
business in the state where the Equipment will be located; (ii) Lessee has the
full corporate power, authority and legal right and has obtained all approvals
and consents and has given all notices necessary to execute and deliver this
Lease and perform the terms hereof and of each Schedule; (iii) there is no
action, proceeding or patent claim pending or, insofar as Lessee knows,
threatened against Lessee or any of its subsidiaries before any court or
administrative agency which might have a materially adverse effect on the
business, condition or operations of Lessee or such subsidiary; and (iv) this
Lease
<PAGE>
has been and each Schedule will be duly executed and delivered by Lessee and
constitute or will constitute the valid, binding and enforceable obligations
of Lessee. (b) Lessee agrees that by its signature on each Schedule it shall
be deemed to have warranted and represented the following as of the Delivery
Date of such Schedule: (i) all of the Units being delivered on the Delivery
Date of such Schedule are accurately described in Annex A attached to such
Schedule, have been fully assembled and conform to all applicable performance
criteria; (ii) the requirements of this Lease and of Lessor with respect to
the identification of the Units have been met; and (iii) except as set forth
in Annex C to the applicable Schedule, each of the representations and
warranties set forth in clause (a) of this Section 14 remains true and
correct. (c) Lessee covenants and agrees that it shall not, without Lessor's
prior written consent, attempt, cause or permit another to sell, transfer,
encumber, part with possession, or sublet, voluntarily or involuntarily, any
Unit.
15. NOTICES. All notices (and financial information required to be
delivered to Lessor under Section 16(c) of this Lease) shall be addressed as
follows:
If to Lessor:
MMC/GATX PARTNERSHIP NO. I
c/o GATX CAPITAL CORPORATION, Agent
Four Embarcadero Center, Suite 2200
San Francisco, CA 94111
Attn: Contract Administration
With a copy of required financial information to:
MEIER MITCHELL & COMPANY
4 Orinda Way, Suite 200-B
Orinda, California 94563
Attn: Contract Administration
If to Lessee, at the address set forth on the cover page of this Lease.
16. MISCELLANEOUS: (a) Any notices hereunder shall be in writing and
shall be deemed given when delivered personally, by private courier, by
facsimile transmission or sent by certified mail, postage prepaid, addressed to
the other party at its address set forth herein or to such other address as
either party may designate in writing. Such notices or demands shall be deemed
given upon receipt in the case of personal delivery, mailing or facsimile
transmission. (b) Lessee will promptly execute and deliver to Lessor such
further reasonable documents (including, but not limited to, financing
statements) and take such further reasonable action (such as obtaining landlord
or mortgagee's waivers), as Lessor may request in order to more effectively
carry out the intent and purpose of this Lease or an assignment of Lessor's
interest herein. (c) Lessee shall promptly as they become available furnish to
Lessor monthly and audited annual financial statements and such other financial
information as Lessor may reasonably request from time to time. (d) This Lease
constitutes the entire agreement on the subject matter hereof between the
parties hereto (other than any document executed in connection herewith),
supersedes the provisions of any "term sheet" executed by the parties hereto and
shall be binding upon and inure to the benefit of the parties hereto, their
permitted successors and assigns. (e) Any provision of the Lease which is
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof; and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. (f) Time is of the
essence with respect to the Lease. (g) The captions set forth herein are for
convenience only and shall not define or limit any of the terms hereof. (h) The
language in this Lease and the related documents is to be construed as to its
fair meaning and not strictly for or against any party. (i) All payments shall
be paid to the address designated by Lessor in the applicable Schedule or
otherwise in a writing signed by Lessor. (j) Lessee's and Lessor's obligations
hereunder shall survive the expiration and termination of the Term to the extent
required for full performance and satisfaction thereof. (k) ALL MATTERS
INVOLVING THE CONSTRUCTION, VALIDITY, PERFORMANCE AND ENFORCEMENT OF THIS LEASE
WILL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAW OR CHOICE OF LAW. This Lease is being executed
in the State of California and is to be performed in such State. (l) This Lease
may be executed by the parties hereto in separate counterparts, each of which
when so executed and delivered shall be an original, but all such counterparts
shall together constitute one and the same instrument; provided, however, that
-------- -------
to the extent, if any, that this Lease constitutes chattel paper (as such term
is defined in the Uniform Commercial Code as in effect in any applicable
jurisdiction), no security interest in this Lease may be created through the
transfer or possession of any counterpart of this Lease or any Schedule other
than the original counterparts marked "Lessor's Original Counterpart". (m) If
Lessee has paid a commitment fee to Lessor, any portion of the commitment fee
not used to pay Lessor's expenses will be applied on a pro rata basis to the
first Rental Payment on each Schedule. If Lessee does not utilize all or a
portion of Lessor's Commitment hereunder, the commitment fee shall be retained
by Lessor.
<PAGE>
17. AMENDMENTS, MODIFICATIONS, WAIVERS: NONE OF THE PROVISIONS OF THIS
LEASE MAY BE AMENDED, MODIFIED OR WAIVED EXCEPT IN A WRITING SIGNED BY LESSOR
AND LESSEE.
INITIALS _______________ (LESSEE) INITIALS_______________ (LESSOR)
This Lease is hereby duly executed by the parties hereto as set forth
below.
LESSEE: POWER INTEGRATIONS, INC. LESSOR: MMC/GATX PARTNERSHIP
NO. I
By GATX CAPITAL
CORPORATION, as Agent
BY: ______________________________ BY:__________________________________
NAME (PRINT): ____________________ NAME (PRINT):________________________
TITLE: ___________________________ TITLE: ______________________________
DATE: ____________________________ DATE: ______________________________
This Lease incorporates the following Riders as if set forth herein:
Rider I; Rider II and Rider III
INITIALS _______________ (LESSEE) INITIALS _______________ (LESSOR)
<PAGE>
RIDER I
TO MASTER EQUIPMENT
LEASE AGREEMENT NO.3247
DATED _____________
Conditions to Lessor's Obligations
----------------------------------
By their initials below and on the signature page of the Master Equipment
Lease Agreement referenced in the upper right corner of this page, Lessor and
Lessee agree that the Lease incorporates the following terms:
1. On or prior to the date of execution of the Lease by Lessor, Lessor
shall have received in form and substance satisfactory to Lessor:
(a) A Warrant substantially in the form of Exhibit A hereto.
(b) A legal opinion of Lessee's legal counsel in form and substance
reasonably satisfactory to Lessor.
(c) Copies, certified by the Secretary or Assistant Secretary or Chief
Financial Officer of Lessee, of: (A) the Articles of Incorporation
and By-Laws of Lessee (as amended to the date of the Lease) and
(B) the resolutions adopted by Lessee's board of directors
authorizing the execution and delivery of this Lease, the
Schedules, the Warrant and the other documents referred to herein
and the performance by Lessee of its obligations hereunder and
thereunder;
(d) Unless the opinion of Lessor's legal counsel contains language to
the same effect, a Good Standing Certificate (including franchise
tax status) with respect to Lessee from Lessee's state of
incorporation, dated a date reasonably close to the date of
acceptance of the Lease by Lessor.
(e) Evidence of the insurance coverage required by Section 10 of the
Lease.
(f) All necessary consents of shareholders and other third parties
with respect to the subject matter of the Lease, the Schedules and
the Warrant.
(g) All other documents as Lessor shall have reasonably requested.
2. Prior to any funding on a Delivery Date, Lessee shall have satisfied
all of the conditions set forth in the applicable Schedule.
(Lessor) Initials ___________
RIDER I
(Lessee) Initial ___________
<PAGE>
RIDER II
TO MASTER EQUIPMENT
LEASE AGREEMENT NO.3247
DATED ____________
Negative Pledge on Intellectual Property
----------------------------------------
By their initials below and on the signature page of the Master Equipment
Lease Agreement referenced in the upper right hand corner of this page, Lessor
and Lessee agree that such Lease shall include the following provision:
Prior to the occurrence of the Equity Sale (as defined in Rider III to the
Lease), Lessee shall not grant, create, incur, assume or suffer to exist any
security interest or other lien of any kind upon the Intellectual Property (as
defined below). In order to effect the negative pledge described in this Rider
II, Lessee also contingently pledges to and grants to Lessor a lien on and
security interest in the Intellectual Property. Such lien and security interest
are subject to the condition subsequent that Lessee shall have granted or
suffered to exist a security interest or other lien in the Intellectual Property
in contravention of the provisions of this Rider II. If Lessee does not grant
or suffer to exist a security interest or other lien in the Intellectual
Property in contravention of the provisions of this Rider II, then this Rider II
shall not constitute a pledge of or a grant of a security interest in the
Intellectual Property. However, if Lessee does grant or suffer to exist a
security interest or other lien in the Intellectual Property in contravention of
the provisions of this Rider II, then Lessee shall be deemed to have granted a
lien on and security interest in the Intellectual Property to Lessor as of the
date of this Lease to secure Lessee's obligations hereunder. Lessee shall
execute such financing statements, assignments and other instruments as may be
requested by Lessor to reflect the assignment, pledge and security interest
(whether contingent or absolute) granted pursuant to this Rider II.
For purposes of this Rider II, the term "Intellectual Property" means all
of Lessee's technology, trade secrets, patents, trademarks, copyrights, mask
works and other intellectual property rights, in the United States and in
foreign countries, and applications for patents, trademarks, copyrights, mask
works and other intellectual property rights, in the United States and in
foreign countries, together with all related books and records, general
intangibles, proceeds, products, additions, accessions and substitutions of and
to such intellectual property rights.
(Lessor) Initials ___________
RIDER II
(Lessee) Initial ___________
<PAGE>
RIDER III
TO MASTER EQUIPMENT
LEASE AGREEMENT NO.3247
DATED ____________
CONDITION TO LESSOR'S OBLIGATION TO FUND IN EXCESS OF $500,000
--------------------------------------------------------------
By their initials below and on the signature page of the Master Equipment
Lease Agreement referenced in the upper right hand corner of this page, Lessor
and Lessee agree that such Lease shall include the following provision:
Lessor's obligation to fund Lessor's Commitment in an amount in excess of
$500,000 shall be subject to the prior receipt by Lessee of the proceeds of its
next offering of its equity securities in an aggregate amount not less than
$5,000,000 (the "Equity Sale").
(Lessor) Initials ___________
RIDER III
(Lessee) Initial ___________
<PAGE>
Exhibit A - Warrant
Exhibit B - Landlord Waiver
Exhibit C - Purchase Order and Invoice Assignment
Exhibit D - Bill of Sale
Exhibit E - Form of Schedule
<PAGE>
EXHIBIT A
WARRANT
<PAGE>
EXHIBIT B
LANDLORD WAIVER
<PAGE>
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
MMC/GATX PARTNERSHIP NO. I
c/o GATX CAPITAL CORPORATION, Agent
Four Embarcadero Center, Suite 2200
San Francisco, CA 94111
Attn: Contract Administration
LANDLORD'S WAIVER AND CONSENT
THIS LANDLORD'S WAIVER AND CONSENT (this "Waiver"), dated as of
_________________________________________, 199____________, is executed by and
between ___________________________________________________________,
_____________________________________________________________________
("Landlord") and MMC/GATX PARTNERSHIP NO. I, a California general partnership
("Lessor").
RECITALS
--------
A. Landlord and Power Integrations, Inc. ("Tenant") are parties to a
________________________________________________________________________________
___ [Lease Agreement], dated as of ______________________________, 19_________
(together with any other agreement between Landlord and Tenant relating to the
Premises, as defined below, all as amended from time to time, to be referred to
herein collectively as the "Lease"), pursuant to which Landlord has leased to
Tenant that certain real property commonly known as 411 Clyde Avenue, and more
particularly described in Attachment 1 hereto (the "Premises").
------------
B. Tenant and Lessor intend to or have entered into a Master Equipment
Lease Agreement dated as of ____________________ (the "Credit Agreement")
pursuant to which Lessor has agreed or will agree to lease to Tenant from time
to time certain equipment (the "Equipment") which will be located on the
Premises.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the above recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Landlord and Lessor hereby agree as follows:
1. Waiver and Consent. Landlord hereby consents to the location of the
------------------
Equipment on the Premises and does irrevocably waive, disclaim and relinquish
and assign to Lessor any and all rights to impose, receive, assert or enforce
any lien, encumbrance, charge, security interest, ownership interest, claim or
demand of any kind against or involving the Equipment, whether arising by common
law, statute or consensually (under the Lease or otherwise) and whether now in
existence or hereafter created, including, but not limited to, those for rent or
other right of payment. This waiver, disclaimer, relinquishment and assignment
shall survive the termination of the Lease. Landlord further agrees that (a)
neither the Equipment nor any item thereof shall become part of, or otherwise be
or become a fixture attached to, the Premises, notwithstanding the manner of the
Equipment's annexation, the Equipment's adaptability to the uses and purposes
for which the Premises are used, and the intentions of the party making the
annexation; (b) the Equipment (or any item thereof) may be repossessed by
Lessor; (c) in connection with such repossession or otherwise, Lessor, and any
of its agents and employees, may enter upon the Premises for the purposes of (i)
guarding and maintaining the Equipment (or any item thereof), (ii) showing the
Equipment (or any item thereof) to prospective lenders, buyers, lessees and
sublessees, as applicable, and any of their respective agents and employees,
(iii) preparing, disassembling, dismantling, loading and/or removing the
Equipment (or any item thereof), and (iv) general inspections of the Equipment
pursuant to the Credit Agreement; and (d) the right of Lessor to enter the
Premises and the other rights granted to Lessor in this Waiver shall not
terminate until thirty (30) days after Lessor receives written notice from
Landlord of the termination of the Lease. If Lessor should exercise its rights
hereunder (and the failure to exercise such rights shall not be construed as a
waiver thereof), Landlord agrees upon receiving prior written notice, to provide
ingress and egress to effect such exercise as well as provide reasonably
adequate space contiguous to the location of the Equipment to permit the
exercise of such rights. Landlord further agrees that Lessor has no obligation
to exercise any right granted to Lessor in this Waiver and that Lessor may elect
to remove only a portion or none of the Equipment from the Premises.
2. Costs. Lessor agrees to indemnify and hold the Landlord harmless from
-----
any out-of-pocket costs incurred by Landlord for any physical damage to the
Premises caused by Lessor solely from the exercise of its rights under clause
(b) or (c) of Paragraph 1 above.
3. Lease Defaults. Landlord further agrees to provide Lessor written
--------------
notice of any default or event of default under the Lease (each a "Default
Notice") simultaneously with the giving of notice of the same to Tenant or, if
no such notice is required under the Lease, at least thirty (30) days prior to
the date Landlord would be entitled to terminate the Lease. Each such notice
shall be sent to the address of Lessor set forth below the signature of Lessor
on the last page hereof or such other address as Lessor may from time to time
provide to Landlord, and shall be deemed delivered (i) in the case of notice by
letter, five (5) business days after deposited in the United States mail
registered and return receipt requested, (ii) in the case of notice by overnight
courier, two (2) business days after delivery to such courier and (iii) in the
case of notice given by telex or telecommunication, when given or sent with
electronic confirmation of receipt. During any time period when Tenant is in
default under the Lease, Lessor shall have the option, but not the obligation,
to cure any such default. Landlord shall accept such cure if it occurs within
thirty (30) days after Lessor has received the relevant Default Notice as fully
as if Tenant had fully performed its obligation under the Lease. Upon curing
any such default, Lessor shall be subrogated to the rights of Landlord against
Tenant and, as between Landlord and Tenant, such cured defaults shall no longer
exist.
4. Landlord's Representations and Warranties. Landlord hereby warrants
------------------------------------------
and represents to Lessor that (a) Landlord is
<PAGE>
the lessor under the Lease; (b) there are no other agreements between the
parties affecting or relating to the Premises; (c) Landlord has all requisite
power and authority to execute and deliver this Waiver and no consents from
any third party are required to do so; (d) Landlord is the sole owner of the
landlord's interest under the Lease and has not conveyed, transferred or
assigned any part of that interest to any other person or entity; (e) no event
of default (nor any event which with the passage of time would constitute an
event of default) has occurred under the Lease; (f) there exists no litigation
affecting title to the Premises or any adverse claim with respect to the
Premises of which Landlord has received notice; (g) there is no condemnation
proceeding pending with respect to any part of the Premises, nor any threat
thereof, of which the Landlord has received notice; (h) the Lease is in full
force and effect; and (i) the Premises are not subject to any mortgage or
other security interest in favor of any person which has not executed an
attornment agreement acceptable to Lessor with respect to this Waiver.
5. Miscellaneous. This Waiver and all rights hereby granted to Lessor
-------------
hereunder shall remain in effect so long as there are any obligations owing by
Tenant under the Credit Agreement or any present or future agreement between
Tenant and Lessor which involves the Equipment. All the terms and provisions of
this Waiver shall be binding on and inure to the benefit of the respective
successors and assigns of Landlord and Lessor, and Landlord covenants and agrees
that any assignment, mortgage or other transfer of all or any part of its
interest as the owner and/or landlord of the Premises shall provide and shall be
subject and subordinate to all the terms and provisions hereof. Landlord shall
provide each of Tenant and Lessor a duly executed copy of the agreement
evidencing such subordination. Such agreement shall be in form and substance
reasonably satisfactory to Lessor. The rights and benefits of this Waiver may
be assigned or transferred by Lessor or to third parties who may become the
lessor, directly or indirectly, to Tenant. Lessor shall provide subsequent
written notice to Landlord and Tenant of the assignment or transfer. Headings
in this Waiver are for convenience of reference only and are not part of the
substance hereof. This Waiver shall be governed by and construed in accordance
with the laws of the State of California.
IN WITNESS WHEREOF, Landlord and Lessor have executed this Waiver as of the
date and year first written above.
______________________________________________
By:
___________________________________________
Name:
______________________________________
Title:
_____________________________________
Address:
______________________________________________
______________________________________________
______________________________________________
Attention:
____________________________________
MMC/GATX PARTNERSHIP NO. I
By: GATX Capital Corporation, Agent
By:
___________________________________________
Name:
______________________________________
Title:
_____________________________________
Address:
MMC/GATX PARTNERSHIP NO. I
c/o GATX Capital Corporation
Four Embarcadero Center
Suite 2200
San Francisco, CA 94111
Attention: Contract Administrator
2
<PAGE>
ATTACHMENT 1
------------
LEGAL DESCRIPTION OF PREMISES
-----------------------------
[To Be Provided By Tenant]
<PAGE>
State of ______________________________ )
County of _____________________________ )
On _________________________________________________________,
19____________ before me, the undersigned, personally appeared
________________________________________________________________________________
______________________________________________________________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.
WITNESS my hand and official seal.
Signature _____________________________ (Seal)
State of _____________________________ )
County of _____________________________ )
On _________________________________________________________,
19____________ before me, the undersigned, personally appeared
________________________________________________________________________________
______________________________________________________________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.
WITNESS my hand and official seal.
Signature ______________________________ (Seal)
<PAGE>
EXHIBIT C
PURCHASE ORDER AND INVOICE ASSIGNMENT
<PAGE>
PURCHASE ORDER AND INVOICE ASSIGNMENT
THIS PURCHASE ORDER ASSIGNMENT, dated as of ______________________,
199____________ (this "Assignment"), between Power Integrations, Inc.
("Assignor") and MMC/GATX Partnership No. I ("Assignee");
W I T N E S E T H :
- - - - - - - - -
WHEREAS, Assignor has submitted its Purchase Orders and Invoices listed in
Schedule 1 hereto (collectively, the "Purchase Orders"), to
________________________________________________________________________________
___________________________________________________________ (the "Vendor")
concerning certain Units of equipment (the "Units") listed in Schedule 1 hereto
to be subject to a Master Equipment Lease Agreement, dated as of
____________________ (the "Lease"), between Assignor and Assignee (all terms
used but not otherwise defined herein shall have the meaning given to them in
the Lease):
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
1. Assignor does hereby sell, assign, transfer and set over unto
Assignee, all of the Assignor's rights to and interests in the Purchase Orders
as and to the extent that the same relates to the Units. The assignment herein
shall include, without limitation, the right of Assignee to purchase the Units
pursuant to the Purchase Orders and to take title to the Units, all claims for
damages in respect of the Units arising as a result of any default by Vendor
under the Purchase Orders, together with any and all rights of Assignor to
compel performance of the terms of the Purchase Orders in respect of the Units.
2. The exercise by Assignee of any of the rights assigned hereunder shall
not release Assignor from any of its duties or obligations to Vendor under the
Purchase Orders except to the extent that such exercise by Assignee shall
constitute performance of such duties and obligations.
3. Upon satisfaction of the conditions set forth in the applicable
Schedule to the Lease with respect to the Units, Assignee shall purchase such
Unit by paying or causing to be paid, by check mailed or delivered to Vendor, on
such date or thereafter as permitted by Vendor, an amount equal to the purchase
price of the Unit, as such amount may be adjusted in accordance with the terms
of the Purchase Orders and reflected on invoices prepared by Vendor to Assignee
on or before the date of delivery and acceptance of the Unit.
4. Assignor agrees that it will, at any time and from time to time, upon
the written request of Assignee, promptly and duly execute and deliver any and
all such further instruments and documents and take such further action as
Assignee may reasonably request in order that Assignee may obtain the full
benefits of this Agreement and of the rights and powers herein granted.
5. Assignor does hereby represent and warrant that the Purchase Orders
are in full force and effect and that Assignor is not in default under any of
them. Assignor does hereby further represent and warrant that Assignor has not
assigned or pledged, and so long as this Assignment shall remain in effect, will
not assign or pledge, the whole or any part of the rights hereby assigned or any
of its rights with respect to the Units under the Purchase Orders to anyone
other than Assignee.
IN WITNESS WHEREOF, the parties hereto have caused this Purchase Order
Assignment to be duly executed as of the day and year first above written.
POWER INTEGRATIONS, INC. (Assignor) MMC/GATX PARTNERSHIP NO. I (Assignee)
By GATX Capital Corporation, Agent
By _________________________________ By ___________________________________
Title ______________________________ Title ________________________________
Acknowledged and Consented to this
________day of_______________, 199_____.
__________________________________________________ (Vendor)
By:___________________________________ Title: ____________________________
<PAGE>
SCHEDULE I
TO
PURCHASE ORDER AND INVOICE ASSIGNMENT
-------------------------------------
<PAGE>
EXHIBIT D
BILL OF SALE
<PAGE>
BILL OF SALE
For and in consideration of the sum of One Dollar ($1.00) and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
POWER INTEGRATIONS, INC. (herein "Seller"), does hereby sell, grant, transfer
and deliver all right, title and interest in and to the equipment further
described on Annex A hereto (herein the "Equipment"), together with all
warranties, guarantees or other similar rights with respect to the Equipment
("Equipment Warranties") unto MMC/GATX PARTNERSHIP NO. I (herein "Purchaser")
and to its successors and assigns to have and to hold said Equipment and the
Equipment Warranties forever. Except for the Equipment Warranties, the
Equipment is sold "as is" and "where is" and the description of the Equipment is
for the sole purpose of identifying it and is not part of the basis of the
bargain.
Seller hereby represents and warrants that it holds all right, title and
interest in and to the Equipment being transferred hereby free and clear of all
liens and encumbrances of any kind and Seller does for itself, its successors
and assigns covenant and agree with Purchaser, its successors and assigns, to
warrant and defend the sale of the Equipment and the transfer of the Equipment
Warranties unto Purchaser, its successors and assigns against all and every
person and persons whomsoever claiming or laying claim to the same, except for
any defects in title or liens or encumbrances in or to the Equipment arising
solely by reason of Purchaser's own acts.
THE WARRANTY SET FORTH IN THE FOREGOING PARAGRAPH AND THE EQUIPMENT WARRANTIES
ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES OF SELLER, WHETHER WRITTEN,
ORAL OR IMPLIED, AND SELLER SHALL NOT, BY VIRTUE OF HAVING SOLD THE EQUIPMENT
HEREWITH, BE DEEMED TO HAVE MADE ANY REPRESENTATION OF WARRANTY AS TO THE
MERCHANTABILITY, FITNESS, DESIGN OR CONDITION OF, OR AS TO THE QUALITY OF THE
MATERIAL OR WORKMANSHIP IN, THE EQUIPMENT.
IN WITNESS WHEREOF, we have set our hand and seal this ______________________
day of __________________________________________, 19____________________.
Power Integrations, Inc.
By:
____________________________________
Name:
___________________________________
Title:
_________________________________
<PAGE>
ANNEX A
TO
BILL OF SALE
------------
<PAGE>
EXHIBIT E
FORM OF SCHEDULE
<PAGE>
EXHIBIT 10.13
SUBLEASE
--------
by and between
INTERMEDICS, INC.,
a Delaware corporation
("Sublessor")
and
POWER INTEGRATIONS, INC.,
a California corporation
("Sublessee")
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Parties............................................... 1
2. Subordination; Default; Provisions Constituting
Sublease.............................................. 1
2.1 Subordination.................................... 1
2.2 Default under Lease.............................. 1
2.3 Provisions Constituting Sublease................. 2
2.4 Status of Lease.................................. 2
3. Premises.............................................. 3
3.1 Premises......................................... 3
3.2 condition of the Premises........................ 3
3.3 Parking.......................................... 4
3.4 Signage.......................................... 4
4. Term.................................................. 4
5. Rent.................................................. 5
5.1 Base Rent........................................ 5
5.2 Late Charge...................................... 5
5.3 Additional Rent.................................. 6
5.4 Rents............................................ 7
6. Security Deposit...................................... 7
7. Hazardous Materials................................... 8
7.1 Hazardous Materials Defined...................... 8
7.2 Permitted Materials.............................. 8
7.3 Sublessor's Inspection Rights.................... 8
7.4 Investigation and Remediation.................... 9
7.5 Sublessee's Indemnity............................ 10
7.6 Sublessor's Indemnity............................ 10
7.7 Sublessor's Representation....................... 11
7.8 survival......................................... 11
8. Performance Under Lease and Sublease.................. 11
8.1 Repair of the Premises........................... 11
8.2 Lessor's Default................................. 11
8.3 Sublessor's Default.............................. 12
9. Taxes................................................. 13
10. Damage or Destruction................................. 13
10.1 Uninsured Casualty............................... 13
10.2 Insured Casualty................................. 14
10.3 Termination Rights............................... 14
10.4 No Repair By Sublessor........................... 16
10.5 Rent Abatement................................... 16
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
11. Property Insurance.................................... 16
12. Indemnification and Liability Insurance............... 17
12.1 Waiver of claims; Indemnity...................... 17
12.2 Liability Insurance.............................. 18
13. Eminent Domain........................................ 18
13.1 Total Taking..................................... 18
13.2 partial Taking................................... 19
13.3 Sublessor's Termination Rights................... 19
14. Lessor's Consent; Lease Limitations................... 19
14.1 Lessor's Consent................................. 19
14.2 Lease Limitations................................ 20
15. Notices............................................... 20
15.1 General.......................................... 20
15.2 Notices from Lessor.............................. 21
16. Interest.............................................. 21
17. Rent Abatement........................................ 21
18. Entry By Sublessor.................................... 22
19. Assignment and Subletting............................. 22
20. Alterations and Additions............................. 23
21. Abandonment........................................... 23
22. Subordination......................................... 23
23. Offset Statement...................................... 24
24. General............................................... 24
24.1 Counterparts..................................... 24
24.2 Construction of Sublease Provisions.............. 24
24.3 Entire Agreement................................. 24
24.4 Exhibits......................................... 25
24.5 Attorneys' Fees.................................. 25
25. Conditions Precedent to Sublease...................... 25
</TABLE>
ii
<PAGE>
SUBLEASE
--------
1. Parties. This Sublease ("Sublease") is entered into as of the 15th day of
-------
June, 1995 (the "Effective Date"), by and between INTERMEDICS, INC., a Delaware
corporation ("Sublessor") and POWER INTEGRATIONS, INC., a California corporation
("Sublessee"), as a Sublease under that certain Second Lease dated October 28,
1982 ("Lease") by and between MATHILDA DEVELOPMENT, a California limited
partnership, as lessor ("Lessor"), and Sublessor, as lessee. A copy of the Lease
is attached hereto as Exhibit A and made a part hereof.
---------
2. Subordination: Default: Provisions Constituting Sublease.
--------------------------------------------------------
2.1 Subordination. This Sublease is Subject and Subordinate to all of the
-------------
terms and conditions of the Lease, and to the matters to which the Lease is
Subject and Subordinate in accordance with its terms.
2.2 Default under Lease. Subject to the terms and conditions hereof,
-------------------
Sublessee covenants and agrees to refrain from doing or causing to be done, or
permitting any act to be done by Sublessee's employees, agents, contractors, and
invitees, which would constitute a default under the Lease or would cause the
Lease or the rights of Sublessor as lessee under the Lease to be terminated or
surrendered, or which would make Sublessor liable for any damages, claims or
penalty under the Lease. Sublessee agrees that Sublessor shall have no liability
to Sublessee as a consequence of Lessor's failure or delay in performing its
obligations under the Lease, unless such failure or delay is a result of a
"Sublessor's Lease Default". For purposes of this Sublease, the term
"Sublessor's Lease Default" shall mean a default by Sublessor under the Lease
which default is not due to a default by Sublessee hereunder with respect to the
same obligation. Sublessee's obligations hereunder (including without limitation
the obligation of Sublessee to pay Rents defined in Paragraph 5.4 below) shall
not be impaired nor shall the performance thereof be excused because of any
failure or delay on Lessor's part in performing its obligations under the Lease
unless (i) such failure or delay results from Sublessor's being in default under
the Lease and Sublessor's default thereunder is not due to a default of
Sublessee hereunder, or (ii) such failure or delay results from Sublessor's
negligence or willful misconduct. Under no circumstances shall Sublessee have
the right to require performance by Sublessor of Lessor's obligations. In the
event of the termination of Sublessor's interest as lessee under the Lease for
any reason (other than a Sublessor's Lease Default), then this Sublease shall
terminate concurrently therewith without any liability of Sublessor to
Sublessee. Notwithstanding the foregoing or any provision herein to the
contrary, Sublessor (i) at its sole cost shall perform all its obligations and
comply with all conditions and terms of the Lease to the extent such obligations
are not assumed by Sublessee under this. Sublease, and (ii) shall, pursuant to
Paragraph 8 hereof, at
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<PAGE>
Sublessee 5 request use diligent efforts to enforce a against Lessor all
provisions benefiting Sublessee set forth in the Lease.
2.3 Provisions Constituting Sublease. All of the terms and conditions
--------------------------------
contained in the Lease are incorporated herein, except for the recitals,
----------
Paragraphs 1, 2, 3 (except for the last paragraph of Paragraph 3(b) dealing with
late charges, which Subject to Paragraph 5.2 hereof is incorporated herein), 4
and 6, the first paragraph of Paragraph 9, Paragraph 12(a), Paragraph 18(c),
Paragraphs 25, 28, 38, 39, 41(e) (other than the first sentence thereof, which
is incorporated herein), 42, and 44, and the First Amendment to Second Lease,
- --
the Second Amendment to Second Lease, and the Third Amendment to Second Lease,
copies of which are attached hereto as part of Exhibit A. For purposes of this
---------
Sublease, with respect to those paragraphs incorporated from the Lease, all
references to "Lessor" and "Lessee" shall be deemed to be references to
"Sublessor" and "Sublessee," respectively; all references to the "Lease" shall
be deemed to be references to this "Sublease;" all references to the "Premises,"
the "premises," "said premises," and "leased premises" shall be deemed to be
references to the "Premises" as defined in this Sublease; all references to the
"property," "real property," and "Property" herein or in the Lease shall be
deemed to be references to the Second Property, as defined herein; and all
references herein and in the Lease to the "building" shall be references to the
building in which the Premises are located. In addition, Paragraphs 11, 13, 17,
22, 24, 26, 32, 33, 35, and 36 of the Lease are not incorporated herein and have
been replaced and superseded by, respectively, Paragraphs 20, 21, 18, 13, 22,
23, 10, 12, 11, and 12 hereof.
Those provisions incorporated into this Sublease from the Lease, together
with the provisions set forth in this Sublease, shall be the complete terms and
conditions of the Sublease. Unless otherwise defined herein, capitalized terms
used in this Sublease shall have the meanings ascribed to them in the Lease. In
the event of any inconsistency between the terms and conditions of the Lease and
the terms and conditions of this Sublease, the terms and conditions of this
Sublease shall prevail.
2.4 Status of Lease. Sublessor hereby represents and warrants to Sublessee
---------------
that to the best of Sublessor's knowledge (i) the Lease attached hereto as
Exhibit A has been executed and delivered by Lessor and Sublessor and
- ---------
constitutes the entire agreement of the parties thereto relating to the lease of
the Premises, (ii) no default or breach by Sublessor or, to the best of
Sublessor's knowledge, by Lessor exists under the Lease, (iii) no event has
occurred that, with the passage of time, the giving of notice, or both,
otherwise would constitute a default or breach by Sublessor or, to the best of
Sublessor's knowledge, by Lessor under the Lease, (iv) the term of the Lease
expires concurrently with or Subsequent to the term of this Sublease; and (v)
Subject to receipt of Lessor's written consent hereto, Sublessor has the right
and power to execute
-2-
<PAGE>
and deliver this Sublease and to perform its obligations hereunder. Sublessor
shall not rescind, amend or otherwise enter into any agreement modifying or
affecting the Lease (including, without limitation, any agreement Subordinating
its rights under the Lease to the rights of any other party which agreement does
not comply with the terms of Paragraph 24 of the Lease) without the prior
written consent of Sublessee. So long as no default by Sublessee has occurred
and remains uncured hereunder, Sublessee shall be entitled to peaceful and quiet
possession of the Premises and the Second Property, Subject to the terms and
conditions of this Sublease and the Lease.
3. Premises.
---------
3.1 Premises. Sublessor leases to Sublessee and Sublessee leases from
--------
Sublessor the entire building located at 477 North Mathilda Avenue, Sunnyvale,
California, consisting of approximately Thirty Thousand (30,000) square feet,
and all improvements now contained therein or a part thereof (the "Premises").
Sublessee also shall have the right and license to use the real property
(including parking areas and landscaped areas) surrounding the Premises shown on
the site plan attached hereto as Exhibit B, and Sublessor confirms that such
---------
real property shown in Exhibit B is the "Second Property" referred to in the
---------
Lease.
3.2 Condition of the Premises.
--------------------------
(a) Sublessor shall deliver the Premises to Sublessee in good working
order and repair. Except as expressly provided in this Paragraph 3.2(a) and
Paragraph 3.2(b), Sublessee agrees to accept the Premises broom clean, in its
"As Is" condition on the Commencement Date (defined in Paragraph 4 below).
Sublessee shall have a period of sixty (60) days from the Commencement Date
within which to notify Sublessor in writing of any item of disrepair. Sublessor
shall repair such item as soon as practicable, but in any event within thirty
(30) days after receipt of such notice.
(b) On or before the Commencement Date, Sublessor at its sole cost
shall perform the following work with respect to the
Premises:
(i) repair the existing damage to the stucco at the front of
the Premises;
(ii) power-wash the front of the Premises; and
(iii) clean the parking area.
(c) Sublessee may contract for the painting of the building,
including the roof screen, upper one-foot band, roll-up and man-doors, risers,
hydrants, ballards, blue roof system, the red curbs, parking lot restriping (in
compliance with all applicable code requirements as to number and type of
spaces), and the fifteen (15) foot light poles. Upon receipt of notice that such
work has been
-3-
<PAGE>
completed, Sublessor shall pay to Sublessee the sum of Four Thousand Dollars
($4,000) toward the cost thereof. Sublessee shall be responsible for the payment
of all costs therefor in excess of said amount.
(d) notwithstanding anything in this Sublease or in Paragraph 9 or
elsewhere in the Lease to the contrary requiring Sublessee to surrender the
Premises in good condition and repair, Sublessee's obligation to surrender the
Premises in good condition and repair shall be Subject to normal wear and tear
and (i) damage to or destruction of the Premises arising from a casualty, (ii)
any partial or complete condemnation or taking of the Premises, (iii) damage
resulting from the negligence, willful misconduct, or breach of the Lease or
this Sublease by Sublessor or its agents, contractors, employees, or invitees
(collectively, "Sublessor's Agents"), (iv) damage resulting from the negligence,
willful misconduct, or breach of the Lease by Lessor or its agents, (v) latent
defects and conditions existing on the Premises or Second Property prior to the
Commencement Date, and (vi) all alterations and improvements made to the
Premises or the Second Property by Sublessee which Lessor specifically agrees
will not be required to be removed upon expiration of the term of the Lease.
3.3 Parking. Sublessee and Sublessee's employees and invitees shall have
-------
the right to park in the areas designated for parking on the site plan attached
hereto as Exhibit B.
---------
3.4 Signage. It is Sublessor's understanding that the existing monument
-------
sign at the Premises complies with local governmental regulations. Sublessee
shall have the right to utilize any existing signage rights (and to modify the
existing monument sign to place Sublessee's name thereon so long as such
modifications comply with local governmental regulations), at the cost and
expense of Sublessee.
4. Term. The term of this Sublease shall commence on the date which is the
----
later of (i) the Effective Date, or (ii) the date on which Sublessee notifies
Sublessor in writing that the conditions identified in clauses (a) and (b) of
the second paragraph of Paragraph 25 below have been satisfied or waived
("Commencement Date"), but not later than the date which is (30) days following
the Effective Date, and shall end on October 31, 1998 (such period herein
referred to as the "term").
The first sentence of Paragraph 5 of the Lease is hereby amended by
deleting that portion of the sentence that begins with the words "but in that
event" and replacing it with the following:
"but in that event, the Commencement Date shall be revised to conform to
the date of Sublessor's delivery of possession. The termination date of the
Sublease shall be unaffected."
-4-
<PAGE>
5. Rent.
-----
5.1 Base Rent. Commencing on September 1, 1995, Sublessee shall pay to
---------
Sublessor as basic rental for the Premises ("Base Rent") the sum of Eighteen
Thousand Six Hundred Dollars ($18,600) per month. Sublessee shall be entitled to
immediate possession of the Premises upon the Commencement Date, but no Base
Rent shall be due or payable by Sublessee prior to September 1, 1995. Sublessee
shall pay Sublessor on execution hereof the Base Rent for the month of September
1, 1995. Base Rent shall be prorated, based on thirty (30) days per month, for
any partial month during the Sublease term. Except as otherwise provided herein,
Base Rent shall be payable without deduction, offset, prior notice or demand in
lawful money of the United states at the address set forth in Paragraph 15.1, or
at such other place or places as Sublessor may from time to time direct.
5.2 Late Charge. Sublessee hereby acknowledges that late payment by
-----------
Sublessee to Sublessor of Base Rent will cause Sublessor to incur costs not
contemplated by this Sublease, the exact amount of which will be extremely
difficult to ascertain. such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Sublessor by
the terms of the Lease. Accordingly, Sublessee shall pay to Sublessor, as
Additional Rent (defined in Paragraph 5.3 below), without the necessity of prior
notice or demand (except as expressly provided below in this Paragraph 5.2), a
late charge equal to ten percent (10%) of any installment of Base Rent which is
not received by Sublessor within five (5) days after the due date for such
installment. The parties hereby agree that such late charge represents a fair
and reasonable estimate of the costs Sublessor will incur by reason of late
payment by Sublessee. In no event shall this provision for a late charge be
deemed to grant to Sublessee a grace period or extension of time within which to
pay any installment of Base Rent or prevent Sublessor from exercising any right
or remedy available to Sublessor upon Sublessee's failure to pay such
installment of Base Rent when due, including without limitation the right to
terminate the Sublease, which remedies may be pursued by Sublessor after
expiration of the time period set forth in, and in accordance with, Paragraph
30(a) of the Lease. Subject to the notice provision set forth below in this
Paragraph 5.2, in the event any installment of Base Rent is not received by
Sublessor by the thirtieth (30th) day after the due date for such installment,
such installment shall bear interest at an annual rate set forth in Paragraph 16
below, commencing on the thirty-first (31st) day after the due date for such
installment and continuing until such installment is paid in full. In addition,
Sublessee shall pay all costs and attorneys' fees incurred by Sublessor in the
collection of such amounts.
In addition, Sublessee hereby acknowledges that late payment by Sublessee
to Sublessor of Base Rent may cause Sublessor to incur the late payment charge
set forth in the second paragraph of Paragraph 3(b) of the Lease. Subject to the
notice provision set forth below in
-5-
<PAGE>
this Paragraph 5.2, in the event Sublessee fails to pay Base Rent to
Sublessor within ten (10) days of the due date thereof and Sublessor is assessed
a late charge by Lessor pursuant to said paragraph, Sublessee shall immediately
upon demand by Sublessor pay to Sublessor the full amount of the late charge
assessed by Lessor. Said charge shall be payable by Sublessee in addition to,
and not in lieu of, the late charge specified in the immediately preceding
paragraph. Notwithstanding the foregoing, Sublessee shall not be responsible for
any late charge or fee arising from a Sublessor's Lease Default.
The foregoing notwithstanding, before Sublessee is assessed a late charge
hereunder or interest accrues on delinquent installments of Base Rent as
provided above, (i) Sublessee shall have failed to pay an installment of Base
Rent on or prior to the date such installment was due, and (ii) Sublessor shall
have given Sublessee one (1) written notice during the immediately preceding
twelve (12) month period that Sublessee has failed to pay an installment of Base
Rent on or prior to the date such installment was due. No late charge shall be
assessed nor shall interest accrue if the delinquent installment is paid by
Sublessee within five (5) days after Sublessee's receipt of such written notice
If in the twelve (12) month period following Sublessor's delivery of such
written notice, (i) an installment of Base Rent is not paid within five (5) days
after the due date for such installment or (ii) any installment of Base Rent is
not received by Sublessor by the thirtieth (30th) day after the due date for
such installment, then a late charge shall be payable and/or interest shall
accrue with respect to such delinquent installment, as provided above. In
addition, in the event such written notice given by Sublessor to Sublessee
pursuant to this Paragraph 5.2 satisfies the requirements of California Code of
Civil Procedure Sections 1161 and 1161.1 (or any successor or replacement
statute), Sublessor shall not be required to give any additional notice in order
to be entitled to commence an unlawful detainer proceeding after expiration of
the ten (10) day period set forth in Paragraph 30(a) of the Lease.
5.3 Additional Rent. In addition to the Base Rent due pursuant to
---------------
Paragraph 5.1 of this Sublease, but otherwise Subject to the terms hereof,
Sublessee shall pay to Sublessor the additional rent (excluding the difference
between basic monthly rent payable under the Lease and Base Rent payable
hereunder) required to be paid by Sublessor to Lessor pursuant to Paragraphs 31
and 35 of the Lease (as modified by Paragraphs 9 and 11 hereof), and, following
Sublessor's receipt of written notice from Sublessee, Sublessor shall pay such
additional amounts required to be paid under any other provision of this
Sublease, for the period commencing on the Commencement Date and continuing
through the expiration of the Sublease term ("Additional Rent"). Additional Rent
shall include all utilities and services described in Paragraph 37 of the Lease,
which shall be paid by Sublessee directly to the providers of such services.
Additional Rent shall also include all charges, costs and expenses and other
sums
-6-
<PAGE>
which Sublessee is required to pay hereunder (together with all interest and
charges that may accrue thereon in the event of Sublessee's failure to pay the
same to the extent payable hereunder), and all damages, costs and expenses which
Sublessor may incur by reason of any default by Sublessee shall be deemed to be
Additional Rent hereunder. Additional Rent shall accrue commencing on the
commencement Date. In the event of nonpayment by Sublessee of any Additional
Rent, Sublessor shall have all rights and remedies with respect thereto as
Sublessor has for the nonpayment of Base Rent, Subject to the ten (10) day
notice period provided in Paragraph 30(a) of the Lease. Notwithstanding the
foregoing, Sublessee shall not be required to pay Additional Rent to the extent
such amounts become due by reason of a Sublessor's Lease Default, if such
default is not cured within such ten (10) day period.
5.4 Rents. The term "Rents" or "rent" as used in this Sublease shall mean
-----
Base Rent and Additional Rent.
6. Security Deposit. Concurrently with Sublessee's execution of the Sublease,
----------------
Sublessee shall deposit with Sublessor a security deposit ("Security Deposit")
in the amount of Eighteen Thousand Six Hundred Dollars ($18,600). The Security
Deposit shall be held (and/or applied or returned) by Sublessor as security for
Sublessee's faithful performance of Sublessee's obligations hereunder, and not
as prepayment of rent. If Sublessee shall at any time fail to keep or perform
any term, covenant or condition of this Sublease, including, without limitation,
the payment of Rents or those provisions requiring Sublessee to repair damage to
the Premises caused by Sublessee or to surrender the Premises in the condition
required pursuant to the Sublease, upon expiration of such time period as is
provided hereunder for Sublessee to cure such failure, Sublessor may, but shall
not be obligated to and without waiving or releasing Sublessee from any
obligation under the Sublease, use, apply or retain the whole or any part of the
Security Deposit reasonably necessary for the payment of any amount which
Sublessor may spend by reason of Sublessee's default or as necessary to
compensate Sublessor for any loss or damage which Sublessor may suffer by reason
of Sublessee's default. In the event Sublessor uses or applies any portion of
the Security Deposit, Sublessee shall, within fifteen (15) days after written
demand by Sublessor specifying the amount and the reasons for application of all
or a portion of the Security Deposit, remit to Sublessor sufficient funds to
restore the Security Deposit to its original sum. Failure by Sublessee to so
remit funds shall be a default by Sublessee under this Sublease. The Security
Deposit, or so much thereof as is left after Sublessor cures any then
outstanding defaults, shall be returned to Sublessee (or, at Sublessee's option,
to the last assignee, if any, of Sublessee's interest hereunder) within fourteen
(14) days after termination of the Sublease and surrender of the Premises by
Sublessee; provided, however, if any portion of the Security Deposit is to be
applied to repair damages to the Premises caused by Sublessee, to clean the
Premises or to remove alterations and restore the Premises pursuant to the terms
of this
-7-
<PAGE>
Sublease, then the balance of the Security Deposit shall be returned to
Sublessee no later than thirty (30) days from the date Sublessor receives
possession of the Premises.
In the event Sublessee receives from Lessor all or any portion of the
security deposit paid by Sublessor to Lessor under the Lease pursuant to the
last sentence of Paragraph 4 of the Lease, Sublessee shall immediately deliver
the same to Sublessor, except to the extent that Sublessor has failed to return
the Security Deposit (or such portion thereof not previously applied by
Sublessor to cure outstanding defaults of Sublessee) as and when required
hereunder.
7. Hazardous Materials.
-------------------
7.1 Hazardous Materials Defined. As used in this Sublease, the term
---------------------------
"Hazardous Materials" means any material, waste, chemical or byproduct that is
or hereafter is defined or designated under Environmental Laws (as defined
below) as a pollutant or as a contaminant, a hazardous or toxic Substance, waste
or material, or any other unwholesome, hazardous, toxic, or radioactive
Substance, waste, material, chemical or byproduct, or which is listed, regulated
or restricted by any Environmental Law (including without limitation, petroleum
hydrocarbons and any distillates or fractions thereof, polychlorinated biphenyls
and asbestos). As used herein, the term "Environmental Laws" means any
applicable federal, state, local or foreign law, statute, regulation, rule,
ordinance, permit, license, order, requirement, agreement or approval, or any
determination, judgment, directive or order of any executive or judicial
authority at any federal, state or local level (whether now existing or
Subsequently adopted or promulgated) relating to pollution or the protection of
the environment natural resources or public health and safety.
7.2 Permitted Materials. Except as expressly provided herein, neither
-------------------
Sublessee nor Sublessee's agents shall cause or knowingly and willfully permit
the introduction, placement, use, storage, manufacture, transportation, release
or disposition (collectively, "Handling") of any Hazardous Material(s) on or
about any portion of the Premises or the Second Property. Sublessee may use,
keep and store in the Premises (i) Hazardous Materials of such types and volumes
that individually or collectively would not require Sublessee to obtain a
Hazardous Materials Storage Permit as defined in and pursuant to ordinances of
the City of Sunnyvale, and/or (ii) such other Hazardous Materials which may be
approved by Sublessor from time to time in Sublessor's reasonable discretion, in
such quantities and volumes as are necessary to conduct Sublessee's business in
the Premises (collectively, "Permitted Materials")
Permitted Materials shall be used, kept, stored, disposed of, removed and
transported in strict compliance with all Environmental Laws. Upon Sublessor's
written request, but no more frequently than once every six (6) months,
Sublessee shall provide Sublessor with a
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<PAGE>
list that reasonably identifies all Hazardous Materials used, kept or stored by
Sublessee in the Premises as to which Sublessee is required to obtain a
Hazardous Materials Storage Permit. Sublessee shall promptly comply with any
Environmental Law requiring modifications to the Premises that are intended to
protect the Premises and the environment against the release of Hazardous
Materials used, kept, stored, disposed of or transported by Sublessee. Sublessee
shall obtain all necessary permits required to maintain the Permitted Materials
and shall furnish Sublessor with copies of such permits or any plans, reports or
other material required to be filed with any governmental authority relating to
Sublessee's use of the Permitted Materials.
Upon the expiration or sooner termination of this Sublease, Sublessee shall
remove from the Premises and the Second Property, at its sole cost and expense,
any and all Hazardous Materials then stored or kept on or about the Premises or
Second Property by Sublessee.
7.3 Sublessor's Inspection Rights. Sublessor shall have the right, upon
-----------------------------
reasonable advance written notice to Sublessee, to inspect, investigate, sample
and/or monitor (collectively, an "Inspection") the Premises and the Second
Property, including any soil, water, groundwater or other sampling, to the
extent reasonably necessary to determine whether Sublessee is complying with the
terms of this Sublease with respect to Hazardous Materials. In the event any
invasive physical work is to be performed as part of an Inspection, Sublessor
shall provide Sublessee with written notice reasonably in advance of such work
which describes in reasonable detail the work to be performed, the locations in
the Premises or on the Second Property of such work, and the protocols to be
employed. In connection with an Inspection, Sublessee shall provide Sublessor
with reasonable access to all portions of the Premises; provided, however, that
Sublessor (i) shall avoid any unreasonable interference with the operation of
Sublessee's business on the Premises, and (ii) shall comply with all reasonable
safety and business security restrictions of Sublessee that are communicated in
advance to Sublessor. Sublessee shall have the right, but not the obligation, to
accompany Sublessor during an Inspection. When conducting an Inspection,
Sublessor shall comply with all applicable Environmental Laws and other
applicable laws, ordinances, rules and regulations. Sublessor shall promptly
provide Sublessee with a copy of any written report and/or data prepared
respecting an Inspection. All costs incurred by Sublessor pursuant to this
Subparagraph shall be the responsibility of Sublessor, unless an Inspection
discloses the presence of Hazardous Materials and it is shown that Sublessee is
in violation of the covenants contained in this Paragraph 7, in which event such
costs shall be reimbursed by Sublessee to Sublessor as Additional Rent within
ten (10) days after Sublessor's demand for payment.
7.4 Investigation and Remediation. Sublessee shall immediately or as soon
-----------------------------
thereafter as is practicable notify Sublessor
-9-
<PAGE>
of (i) Sublessee's receipt of any written notice of an inquiry, investigation or
enforcement proceeding against Sublessee, the Premises or the Second Property
concerning Hazardous Materials, or (ii) a test or investigation (other than
Sublessee's routine auditing or inspections) initiated by Sublessee respecting
the Premises or second Property concerning Hazardous Materials. Sublessee shall,
within five (5) days after receipt by Sublessee, Submit to Sublessor copies of
all inquiries, test and investigation results, and enforcement proceedings
described above and copies of all reports and responses thereto prepared by or
on behalf of Sublessee.
If Sublessee or Sublessee's agents cause or knowingly and willfully permit
a release of Hazardous Materials at the Premises or Second Property, Sublessee
shall perform such investigations, undertake such monitoring of site conditions,
and perform such clean-up, containment, restoration, removal and other remedial
work (collectively, "Remedial Work") as is required under, and in compliance
with, all Environmental Laws. All costs and expenses of such Remedial Work shall
be paid by Sublessee, including without limitation, the charges of contractors
and consulting engineers.
7.5 Sublessee's Indemnity. Sublessee shall indemnify, defend and hold
---------------------
Sublessor and Sublessor's employees and agents harmless from and against any and
all damages, claims, losses, governmental and quasi-governmental directives,
orders, judgments, liabilities, penalties, fines, costs and expenses (including
without limitation reasonable attorneys' fees and expenses) (collectively,
"Environmental Claims") arising in connection with any Hazardous Materials
Handled in, on, or under the Premises or the Second Property by Sublessee or
Sublessee 5 agents.
The foregoing indemnity shall not apply to, and Sublessee shall not be
responsible to Sublessor for, the presence of Hazardous Materials on, under, or
about the Premises or the Second Property to the extent caused by any third
parties or by Sublessor or Sublessor's employees, agents, contractors or
invitees.
7.6 Sublessor's Indemnity. Sublessor shall indemnify, defend and hold
---------------------
Sublessee and Sublessee's employees and agents harmless from and against any and
all Environmental Claims arising in connection with (i) any Hazardous Materials
Handled by Sublessor or any assignee or Sublessee of Sublessor in, on, or under
the Premises or the Second Property during the term of the Lease prior to the
Commencement Date, (ii) any closure requirements imposed in connection with any
Hazardous Materials Handled in, on, or under the Premises or the Second Property
by Sublessor or any assignee or Sublessee of Sublessor prior to the Commencement
Date, and (iii) any inspection, investigation, sampling and/or monitoring
performed by Sublessor pursuant to this Paragraph 7.
The foregoing indemnity shall not apply to, and Sublessor shall not be
responsible to Sublessee for: (i) the presence of Hazardous Materials on, under,
or about the Premises or the Second Property,
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<PAGE>
except to the extent the source of same is Handling of Hazardous Materials in,
on, or under the Premises or the Second Property (A) during the term of the
Lease prior to the Commencement Date, or (B) by Sublessor's agents or
contractors in connection with Sublessor's Inspections on or after the
Commencement Date; (ii) the presence of Hazardous Materials on, under, or about
the Premises or the Second Property caused by Sublessee or Sublessee's
employees, agents, contractors or invitees, or (iii) the presence of Hazardous
Materials in the Premises, or in the interior improvements in the Premises,
originally installed or constructed by Lessor.
7.7 Sublessor's Representation. To the actual knowledge of Sublessor,
--------------------------
there has been no Handling of Hazardous Materials in, on, or under the Premises
or the Second Property in violation of Environmental laws during the term of the
Least prior to the date of execution of this Sublease by Sublessor. For purposes
of the phrase "to the actual knowledge of Sublessor", "Sublessor" shall mean
T.C. Selman, Group Vice President of Facilities and Human Resources.
7.8 Survival. The provisions of this Paragraph 7 shall survive any
--------
termination of the Sublease.
8. Performance Under Lease and Sublease.
-------------------------------------
8.1 Repair of the Premises. Sublessor shall not be responsible to
----------------------
Sublessee for furnishing any repairs to the Premises which are the obligation of
Lessor under the Lease (if any), it being understood that such obligations are
solely those of Lessor pursuant to Paragraph 12(b) of the Lease. Unless such
failure is caused by a Sublessor's Lease Default, the failure of Lessor to
fulfill its obligations under the Lease or the exercise by Lessor of any rights
specified in the Lease shall not (i) entitle Sublessee to any allowance,
reduction or adjustment of Rents, (ii) make Sublessor liable to Sublessee, (iii)
excuse or impair the obligation of Sublessee to perform or observe any of the
terms or conditions of this Sublease, or (iv) entitle Sublessee to any claim of
constructive eviction against Sublessor.
8.2 Lessor's Default. If Lessor shall be in material default under the
----------------
Lease in any of its obligations to Sublessor with respect to the Premises,
Sublessee shall be entitled to participate with Sublessor in the enforcement of
Sublessor's rights against Lessor in accordance with the terms of this Paragraph
8.2. Promptly following receipt by Sublessor from Sublessee of written notice
specifying the nature of Lessor's material default under the Lease and the basis
for the claim or claims against Lessor (the "Lease Default Notice"), Sublessor
shall use diligent efforts to require Lessor to comply with the terms and
conditions of the Lease (including, without limitation, making written demand
for performance by Lessor), provided that except as otherwise provided herein,
Sublessor shall have no obligation to commence any action or proceeding against
Lessor. Any steps, actions, or proceedings so instituted by Sublessor shall be
at
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<PAGE>
the expense of Sublessee, and any recovery or relief obtained shall be for the
sole benefit of Sublessee (unless Sublessor has elected, as provided below, to
cure the default by Lessor, in which event Sublessor shall be reimbursed from
such recovery for all costs of such cure). Promptly following Sublessor's
receipt of the Lease Default Notice, Sublessor may elect to (i) take action for
the enforcement of Sublessor's rights against Lessor with respect to such
default as provided herein, or (ii) cure any such default to the extent
permitted pursuant to the provisions of the Lease. If sublessor does not elect
to do either of the foregoing, Sublessee shall have the right to take
enforcement action against Lessor in its own name and, for that purpose and only
to such extent, all of the rights of Sublessor to enforce the obligations of
Lessor under the Lease are hereby conferred upon and are assigned to Sublessee,
and Sublessee hereby is subrogated to such rights (including the benefit of any
recovery or relief); provided, however, if the foregoing assignment and
subrogation is ineffective under applicable law, Sublessor shall, upon written
demand from Sublessee, take such steps (including, if so specified by Sublessee,
commencing litigation or seeking other relief from Lessor) in its own name to
enforce the Lease at the expense of Sublessee. Notwithstanding the provisions of
the immediately preceding sentence, in no event shall Sublessee be entitled to
take such action in its own name if (i) such action would constitute a default
under the Lease or (ii) there is a good faith disagreement between Sublessor and
Sublessee as to whether or not Lessor has so defaulted. Should Sublessee take
action against Lessor in its own name, or, if the foregoing assignment and
Subrogation is ineffective under applicable law, should Sublessee require that
Sublessor take action against Lessor in Sublessor's name, then Sublessee shall
indemnify and hold Sublessor harmless from and against all loss, cost,
liability, claims, damages and expenses (including without limitation reasonable
attorneys' fees), penalties and fines incurred in connection with or arising
from the taking of any such action by Sublessee, except to the extent caused by
a Sublessor's Lease Default or by Sublessor's default under this Sublease or
Sublessor's negligence or willful misconduct.
8.3 Sublessor's Default. If Sublessor commits a material breach of any
-------------------
provision of the Sublease or the Lease ("Sublessor's default"), Sublessee shall
give Sublessor written notice specifying in what manner Sublessor allegedly has
defaulted. If Sublessor's default is not cured by Sublessor within the period of
time specifically provided for elsewhere in the Sublease or the Lease, or, if no
such cure period is provided, within thirty (30) days after the delivery of such
notice (except that if Sublessor's default cannot be cured within the thirty
(30) day period and Sublessor proceeds diligently thereafter to effect such
cure), Sublessee, upon delivery of written notice to Sublessor, may cure
Sublessor's default and Sublessor within twenty (20) days thereafter shall
reimburse Sublessee for all costs and expenses (including reasonable attorneys'
fees and court costs) reasonably incurred by Sublessee therefor, provided that
if Sublessor fails to reimburse Sublessee within such
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<PAGE>
twenty (20) day period, Sublessee may offset the amounts owing by Sublessor
against the next installment or installments of Rents due hereunder.
Notwithstanding the foregoing, if Sublessor's default materially and adversely
affects Sublessee's rights to use and occupy the Premises under this Sublease,
and if under the circumstances such default cannot be cured within a reasonable
time or at a reasonable cost by either Sublessee or Sublessor, then Sublessee
may terminate this Sublease upon thirty (30) days prior written notice to
Sublessor.
9. Taxes. Sublessor shall deliver to Sublessee copies of all notices of property
-----
tax payments and tax bills received from Lessor pursuant to Paragraph 31 of the
Lease promptly upon receipt thereof by Sublessor. Sublessor represents and
Sublessee acknowledges that the tax bill received by Sublessor pursuant to
Paragraph 31 of the Lease includes the Premises and the Second Property and real
property and building adjacent to the Premises. In order to permit Sublessor to
remit tax payments timely to Lessor, Sublessee shall pay to Sublessor an amount
equal to fifty percent (50%) of the total amount of such taxes not later than
ten (10) days prior to the date such shall be due and payable. The foregoing
notwithstanding, Sublessee shall not be required to make such payments to
Sublessor on less than ten (10) days written notice. Sublessor shall remit such
payments to Lessor in accordance with Paragraph 31 of the Lease.
10. Damage or Destruction.
----------------------
10.1 Uninsured Casualty. If ten percent (l0%) or less of the Premises and
------------------
the building of which the same are a part is damaged by an uninsured peril,
Sublessor shall cause Lessor to promptly and diligently proceed to repair and
restore the same to Substantially the same condition as existed prior to such
damage of destruction as required under the Lease; provided, however, that
should the damage be caused by the act, negligence, fault or omission of any
duty with respect to the same by Sublessee, or its agents, servants, employees
or invitees, Sublessee and not Lessor shall be so obligated to repair and
restore.
Sublessee acknowledges that under the Lease if the Premises are damaged by
an uninsured peril rendering more than ten percent (10%) of the Premises
unusable for the conduct of the business of Sublessor (as "Lessee" under the
Lease), Lessor upon written notice given to Sublessor (as "Lessee" under the
Lease) within thirty (30) days after the occurrence of such damage may elect to
terminate the Lease; provided, however, that Sublessor may, within thirty (30)
days after receipt of Lessor's notice of termination, elect to make any required
repairs and/or restoration, in which event the Lease will remain in full force
and effect as provided therein. Sublessor hereby grants Sublessee the right to
elect to make the repairs (at Sublessee's sole cost) if the circumstances
referred to in the preceding sentence occur, in which event, and provided
Sublessee timely notifies Sublessor, Sublessor shall give notice of such
election to Lessor
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<PAGE>
before expiration of the thirty (30) day period referred to in the preceding
sentence. If Sublessee elects to complete such repairs at its own expense in
accordance with the foregoing, Sublessee shall indemnify, defend, protect and
hold harmless Sublessor from all claims, losses, liabilities, expenses and costs
(including reasonable attorneys' fees), but excluding the amount by which base
rental payable under the Lease exceeds the Base Rent payable under the Sublease,
incurred by Sublessor in connection with Sublessee's election. During any such
repairs or restoration, Rents and all other amounts to be paid by Sublessee on
account of the Premises shall abate in proportion to the area of the Premises
rendered not reasonably suitable for the conduct of Sublessee's business.
10.2 Insured Casualty. It the Premises are damaged or destroyed by fire or
----------------
other insured peril, and Lessor does not timely proceed with the repairs or
restoration, Sublessee may request that Sublessor use diligent efforts to cause
Lessor to perform pursuant to the Lease as provided in Paragraph 8.2 above.
Sublessee acknowledges that Lessor shall not be obligated to repair and restore
the Premises until either the insurer acknowledges that the loss is covered by
insurance and sufficient proceeds of such insurance are made available to Lessor
to pay the costs (including a reasonable allowance for contractor's profit and
overhead not to exceed ten percent (10%) of the repairs and/or restoration), or
Sublessee agrees to pay such costs to Lessor, in which case Sublessee shall
indemnify, defend, protect and hold harmless Sublessor from all claims, losses,
liabilities, expenses and costs (including reasonable attorneys' fees), but
excluding the amount by which base rental payable under the Lease exceeds the
Base Rent payable under the Sublease, incurred by Sublessor in connection with
Sublessee's agreement to pay such costs to Lessor. If the existing laws do not
permit the restoration, either Sublessor or Sublessee can terminate this
Sublease immediately by giving notice to the other party.
10.3 Termination Rights.
------------------
(a) If the cost of restoration of damage to the Premises caused by a
casualty exceeds the amount of proceeds received from the insurance required
under Paragraph 11 of this Sublease (which insurance is maintained by Lessor),
and if Sublessee has not agreed to pay the excess cost of repairs and/or
restoration to Lessor, Lessor can elect to terminate the Lease as provided in
Paragraph 32(b) thereof by giving notice to Sublessor within fifteen (15) days
after determining that the restoration cost will exceed the insurance proceeds,
in which case this Sublease also shall terminate automatically. Sublessor and
Sublessee acknowledge that, under Paragraph 32(b) of the Lease, in the case of
destruction to the Premises, if Lessor elects to terminate the Lease, Sublessor,
within thirty (30) days after receiving Lessor's notice to terminate, can agree
to pay to Lessor the difference between the amount of insurance proceeds and the
cost of restoration in which case Lessor is required to restore the Premises.
Sublessor agrees to give Sublessee prompt
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<PAGE>
written notice following its receipt of Lessor's election to terminate the
Lease, and Sublessee shall have the right to elect to pay to Lessor the
difference between the amount of insurance proceeds and the cost of restoration,
as provided in the preceding sentence, provided that notice of such election is
delivered to Sublessor not less than three (3) business days prior to the
expiration of said thirty (30) day period. If Sublessee makes such election
timely, Sublessor shall give prompt written notice to Lessor of such election
within the thirty (30) day period referred to in this paragraph. If Sublessee
elects to complete such repairs at its own expense in accordance with the
foregoing, Sublessee shall indemnify, defend, protect and hold harmless
Sublessor from all claims, losses, liabilities, expenses and costs (including
reasonable attorneys' fees), but excluding the amount by which base rental
payable under the Lease exceeds the Base Rent payable under the Sublease,
incurred by Sublessor in connection with Sublessee's election. Sublessor shall
have no obligation to assure that Lessor properly applies any sums so
contributed by Sublessee
If Lessor elects to terminate the Lease and Sublessee does not elect to
contribute toward the cost of restoration as provided herein, this Sublease
shall terminate and all of the proceeds of the insurance shall be paid to
Lessor; provided, however, that in the event such proceeds shall include any
amounts paid for damage to or destruction of property belonging to Sublessee,
Sublessee may request that Sublessor use diligent efforts to cause Lessor to pay
over such amounts to Sublessee pursuant to Paragraph 8.2. If the Premises are
destroyed or Substantially damaged within one year of the end of this Sublease
term, Lessor, Sublessor, or Sublessee each shall have the option to cancel the
Sublease, and all insurance proceeds on the real property shall be paid to
Lessor. In the event Sublessee shall have paid all or a portion of the costs of
any repairs or restorations for which Lessor Subsequently receives insurance
proceeds, then to the extent that such insurance proceeds and Sublessee's
payments exceed Lessor 5 cost of repair and/or restoration, Sublessee may
request that Sublessor use diligent efforts to cause Lessor to reimburse
Sublessee to the extent of Sublessee's payments pursuant to Paragraph 8.2.
(b) In the event of a material casualty affecting the Premises or the
Property, Sublessee shall have the right to obtain and Submit to Sublessor
within thirty (30) days after the date of the casualty a written estimate (the
"Contractor's Estimate"), prepared by a licensed contractor, stating the
estimated time necessary to repair the damage to the Premises. Sublessee shall
have the right to terminate this Sublease by giving written notice of
termination to Sublessor within ninety (90) days after the date of the casualty
if (i) the damage and the expected repair work materially interfere with the
conduct of Sublessee's normal business, and (ii) either of the following
---
conditions are satisfied: (A) the repair work would take (based on the
Contractor's Estimate) more than ninety (90) days to complete, or (B) Lessor is
--
not required to or otherwise refuses to
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<PAGE>
complete the repair of such damage. If the Premises (including reasonable means
of access thereto) are not restored so that Sublessee can conduct its business
from the Premises without unreasonable interference arising from the damage and
repair work within a period which is thirty (30) days longer than the period
stated in the Contractor's Estimate, Sublessee, within ninety (90) days after
the expiration of such thirty (30) day period, may terminate this Sublease by
delivering written notice to Sublessor of such termination. Any termination of
the Sublease pursuant to this Paragraph 10.3(b) shall be effective as of the
date Sublessee surrenders possession of the Premises to Sublessor. During the
period from the event of damage to the date of such surrender, Rents and all
other amounts to be paid by Sublessee on account of the Premises shall abate in
proportion to the area of the Premises rendered not reasonably suitable for the
conduct of Sublessee's business.
10.4 No Repair By Sublessor. Sublessor shall have no obligation to
----------------------
rebuild, restore or repair the Premises in the event of any damage or
destruction thereto, Sublessee acknowledging that such obligation is Lessor's
pursuant to Paragraph 32 of the Lease ("Paragraph 32"). If Lessor elects to
terminate the Lease pursuant to Paragraph 32, this Sublease shall terminate
concurrently therewith without any liability of Sublessor to Sublessee.
Notwithstanding any provision of Paragraph 32 to the contrary, Sublessor shall
have no right to terminate the Lease or this Sublease under Paragraph 32 or this
Paragraph 10 except to the extent Sublessee first elects to exercise the right
to terminate the Sublease pursuant to Paragraph 10 of this Sublease.
10.5 Rent Abatement. From the date of the casualty until the repairs are
--------------
completed, Rents under the Sublease shall be abated in proportion to the extent
to which the usable area of the Premises has been diminished as a result of the
casualty and the repair work. In addition, if the damage or destruction affects
any portion of the parking area or access roads needed for Sublessee's use and
occupancy of the Premises, Rents shall be abated to the extent that such damage
or destruction has a Substantial and material adverse effect on Sublessee's
ability to conduct its business from the Premises.
11. Property Insurance. Sublessor represents to Sublessee, and Sublessee
------------------
acknowledges, that Lessor maintains the insurance required to be carried under
Paragraph 35 of the Lease, and that Sublessor reimburses Lessor for the cost of
such coverage upon invoice to Sublessor by Lessor. Sublessor further represents
to Sublessee and Sublessee acknowledges that the insurance coverage maintained
by Lessor, and therefore the insurance premium invoice received by Sublessor
includes the Premises and the Second Property and real property and building
adjacent to the Premises. Sublessee shall pay to Sublessor an amount equal to
fifty percent (50%) of the total amount of such insurance premium invoice within
ten (10) days after receipt by Sublessee of Sublessor's invoice or billing
therefor.
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<PAGE>
Sublessor shall remit such payments to Lessor in a timely manner.
Sublessor shall forward copies of all insurance amendments, notices and
correspondence relating to the same concerning the Premises within fifteen (15)
days after receipt by Sublessor.
12. Indemnification and Liability Insurance.
----------------------------------------
12.1 Waiver of Claims: Indemnity.
----------------------------
(a) Sublessee, as a material part of the consideration to be rendered
to Sublessor, waives all claims against Lessor and Sublessor for damages to
goods, wares and merchandise, and all other personal property in, upon or about
the Premises and for injuries to persons in or about the premises, from any
cause arising at any time except to the extent such injuries or damages are
caused by the negligence or willful misconduct of the Sublessor or Lessor, or
their respective agents, servants, employees, invitees, or contractors, and
Sublessee will hold Lessor and Sublessor exempt and harmless from any damage or
injury to any person or to the goods. Wares and merchandise and all other
personal property of any person, arising out of and in connection with the use
or occupancy of the Premises by Sublessee, or from the failure of Sublessee to
keep the Premises in good condition and repair except to the extent any such
injuries or damages are caused by the negligence or willful misconduct of
Sublessor or Lessor, or their respective agents, servants, employees, invitees,
or contractors.
Sublessor and Lessor shall not be liable to Sublessee for any injury or
damage that may result to any person or property by or from any cause whatsoever
except to the extent that the injuries or damages are caused by the negligence
or misconduct of Sublessor or Lessor, or their respective agents, servants,
employees, invitees, or contractors. The foregoing exculpation of Lessor and
Sublessor expressly extends to injury or damage caused by water or vapor leakage
of any character from the roof, walls, pipes or any other part of the Property,
or caused by gas, oil, electricity, or any other cause in or about the Premises
or the building. Sublessee agrees to hold Sublessor and Lessor harmless for and
to defend Sublessor and Lessor against, any and all claims or liability for any
death of or injury to any person or damage to any property whatsoever, occurring
in, on or about the area or facilities of the building (including without
limiting the generality of the foregoing, elevators, stairways, passageways,
hallways, or parking areas) excepting only to the extent that such death, injury
or damage shall be caused by the negligence or misconduct of the Sublessor or
Lessor or of their respective agents, employees or contractors.
(b) Sublessor and Sublessee (and, upon execution of the consent
attached hereto, Lessor) each hereby waive their respective claims against each
other and against Lessor and their respective
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<PAGE>
rights of Subrogation for the benefit of the others, to the extent that any loss
or damage (i) is insured against under insurance policies actually carried by
the parties, and (ii) would have been insured under any insurance policy that is
required to be carried by Lessor, Sublessor, or Sublessee, under this Sublease
or the Lease, irrespective of whether such policy actually is in force at the
time such loss occurs. Sublessor and Sublessee hereby agree that the waiver of
claims and Subrogation rights set forth herein and in Paragraph 34 of the Lease
shall be deemed an agreement by and among Lessor, Sublessor, Sublessee.
12.2 Liability Insurance.
--------------------
(a) Sublessee shall secure and keep in force a public liability
insurance and property damage policy covering the premises and the Second
Property, insuring the Sublessee and naming Sublessor and Lessor (and Lessor's
mortgage lender, if required) as additional insured(s) with regard to
Sublessee's use or occupancy of the Premises. A copy of the policy shall be
delivered to Sublessor and Lessor and the minimum limits of coverage thereto
shall be not less than $3,000,000.00 per occurrence for personal injury and for
damage to property.
(b) All policies required to be maintained by Sublessee pursuant to
the terms of this Sublease shall be issued by companies of recognized financial
standing authorized to do insurance business in California. Sublessee shall pay
all the premiums and costs therefor and shall deliver to Sublessor and Lessor
annually copies of or certificates of the insurer that said policies are in
effect. should Sublessee fail to effect, maintain or renew any insurance
provided for in this Sublease, or to pay any cost of premium therefor, or to
deliver to Sublessor or Lessor any of such policies or certificates, then in any
of said events, Sublessor, at its option, but without obligation to do so, may,
upon five (5) days written notice to Sublessee of its intention so to do,
procure such insurance and any sums expended by it to procure any such insurance
shall be Additional Rent hereunder and shall be repaid by Sublessee within five
(5) days following the date on which written notice of such expenditure shall be
given by Sublessor to Sublessee. Sublessee shall obtain a written undertaking
from each insurer that cancellation or reduction in coverage of said policy(ies)
cannot be had without notification to Sublessor and Lessor and any loss payee at
least thirty (30) days prior thereto.
13. Eminent Domain.
---------------
13.1 Total Taking. If the whole of the Premises shall be taken or
------------
condemned by any competent authority for any public or quasi-public use or
purpose, then the term of this Sublease shall automatically end upon the date
when the possession so taken shall be required for such use or purpose, and
current rent and taxes shall be apportioned as of the date of such termination.
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13.2 Partial Taking. If only part of the Premises shall be so taken and a
--------------
part thereof remains which is reasonably susceptible for occupation by Sublessee
hereunder for the purposes for which Sublessee has entered into this Sublease,
this Sublease shall, as to the part so taken, terminate as of the date when the
possession so taken shall be required, and the rent and all other sums payable
by Sublessee on account of the Premises hereunder, shall be adjusted as provided
below. If, after the taking of a portion of the Premises, there does not remain
a portion reasonably susceptible for Sublessee's occupation hereunder, this
Sublease shall thereupon automatically terminate in the manner is if the whole
Premises had been taken. Whether all or part of the Premises be taken, all
compensation awarded upon such taking with respect to the real property and
improvements shall go to Lessor, and Sublessee shall have no claim thereto, nor
shall Sublessee have claim against Lessor for any loss, damage, or for any other
reason alleged to result therefrom, provided, however, that Sublessee shall in
no event be precluded hereby from perfecting its own claim against the authority
or taker for damages for the taking of its leasehold interest, personal
property; fixtures; or expenses incurred in, or as a result of, any eminent
domain action. In the event of a partial termination of this Sublease under this
Paragraph 13 or under Paragraph 22 of the Lease, Rents shall be reduced, based
on the ratio that the number of square feet of the Premises so taken bears to
the total square feet comprising the Premises. In the event any taking of the
Premises under power of eminent domain results in Substantial and material
interference with Sublessee's ability to conduct its business from the Premises,
Sublessee shall have the right to terminate this Sublease by delivering written
notice thereof to Sublessor.
13.3 Sublessor's Termination Rights. Sublessor shall not be entitled to
------------------------------
terminate this Sublease as the result of any taking of the Premises, except to
the extent that Lessor terminates the Lease pursuant to Paragraph 22 thereof, in
which event the Lease and this Sublease shall terminate concurrently therewith
without any liability of Sublessor to Sublessee arising from such termination.
14. Lessor's Consent: Lease Limitations.
-----------------------------------
14.1 Lessor's Consent. Sublessee acknowledges that as to certain matters
----------------
set forth in this Sublease, Sublessor has rights of approval or disapproval. In
addition, Sublessee acknowledges that as to certain matters set forth in the
Lease, Lessor has rights of approval or disapproval. If any matter requiring
Sublessor's approval but not Lessor's approval is Submitted to Sublessor by
Sublessee for Sublessor's approval, Sublessor shall not unreasonably withhold,
delay or condition its approval and shall respond to Sublessee in a timely
manner, not to exceed ten (10) business days after Sublessor's receipt of
written request for such approval. If any matter requires Lessor's approval
under the Lease (irrespective of whether such matter also requires Sublessor's
consent under this Sublease), Sublessor shall Submit the same to Lessor for
approval within ten
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<PAGE>
(10) business days after Sublessor's receipt of written request from Sublessee,
and Sublessor shall use reasonably diligent efforts to obtain Lessor's approval
of such matter. If Lessor approves such matter, Sublessor also shall. be deemed
to have consented thereto. If Lessor disapproves any such matter, Sublessor
shall have no liability to Sublessee by reason of such refusal.
14.2 Lease Limitations Except as otherwise provided herein, this Sublease
-----------------
is not intended to provide Sublessee with any rights or remedies in addition to
those set forth in the Lease.
15. Notices.
-------
15.1 General. Notices given under this Sublease (including notices given
-------
under Paragraph 30(a) at the Lease as incorporated herein) shall be given
strictly in accordance with the provisions hereof in order to ensure that the
recipient receives actual notice thereof or that the recipient knowingly and
voluntarily refuses delivery thereof. Any notice required or desired to be given
under this Sublease shall be in writing and all notices shall be given by
personal delivery or by reputable overnight courier for delivery to the
recipient on business days, during normal business hours, at the addresses set
forth below.
To Sublessor: Intermedics, Inc.
c/o SULZERMEDICA USA, INC.
4000 Technology Drive
Angleton, TX 77515
Attention: T.C. Selman
To Sublessee: Power Integrations, Inc.
411 Clyde Avenue
Mountain View, CA 94043
Attn: President and Chief Financial Officer
Notwithstanding the foregoing, from and after the commencement of occupancy
of the Premises by Sublessee, Sublessee's address for purposes of this paragraph
shall be deemed to be the address of the Premises. Either party may change its
address for purposes of notice by giving notice of such change of address to the
other party in accordance with the provisions of this paragraph. Any notice
given pursuant to this paragraph shall be deemed served or delivered upon actual
receipt or upon refusal of such service or delivery, provided that delivery or
service shall be effective only if the recipients specified above (or a
responsible agent thereof acting on their behalf) acknowledge receipt thereof in
writing. If service or delivery of any notice is refused, then the party
attempting to make service or delivery promptly shall send to the intended
recipient a follow-up notice by registered or certified U.S. mail, postage
prepaid with return receipt requested, at the address of the recipient specified
above, specifying that the receiving party has refused delivery of the original
notice. If the follow-up notice referred to in the preceding sentence is sent
within one (1) business
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day after the party sending the notice receives notice from the courier that the
recipient has refused delivery, then the intended recipient shall be deemed to
have received the original notice as of the date service thereof was refused,
irrespective of when, if ever, the recipient actually receives the follow-up
notice. However, if the follow-up notice is not sent within one (1) business day
after the party sending the original notice receives notice from the courier
that the recipient has refused delivery of the original notice, then the
intended recipient shall be deemed to have received the original notice as of
the date the follow-up notice is actually sent.
15.2 Notices from Lessor. Sublessee and Sublessor shall each send to the
-------------------
other a copy of all notices and other communications received from Lessor within
forty-eight (48) hours of receipt. All such notices shall be delivered in
accordance with Paragraph 15.1 hereof.
16. Interest. Subject to the notice provisions contained in Paragraph 5.2, any
--------
payment due from Sublessee, except for Base Rent received by Sublessor within
thirty (30) days after the same is due, shall bear interest from the date due
until paid, or with respect to Base Rent from the thirty-first (31st) day after
the due date until paid, at an annual rate equal to the greater of: ten percent
(10%); or five percent (5%) plus the rate established by the Federal Reserve
Bank of San Francisco, as of the twenty-fifth (25th) day of the month
immediately proceeding the due date, on advances to member banks under Sections
13 and 13(a) of the Federal Reserve Act, as now in effect or hereafter from time
to time amended, not to exceed the maximum rate allowable by law. In Addition,
Sublessee shall pay all costs and attorneys' fees incurred by Sublessor in the
collection of such amounts.
17. Rent Abatement. Notwithstanding anything in the Lease or this Sublease to
--------------
the contrary, and in addition to any rent abatement to which Sublessee otherwise
is entitled, in the event that Sublessee is prevented from using the Premises or
any material portion thereof, for five (5) consecutive days or ten (10) days in
any twelve (12) month period (the "Eligibility Period") as a result of the
presence of Hazardous Materials in, on or around the Premises or the Second
Property which (i) are not Hazardous Materials Handled in, on, or under the
Premises or the Second Property by Sublessee or Sublessee's agents and (ii) in
the determination of the governmental agency having jurisdiction over such
Hazardous Materials poses a health risk to occupants of the Premises, then Rents
shall be abated after expiration of the Eligibility Period for such time that
Sublessee continues to be so prevented from using the Premises or such portion
thereof, in the proportion that the rentable area of the portion of the Premises
that Sublessee is prevented from using bears to the total rentable area of the
Premises. However, in the event that Sublessee is so prevented from so
conducting its business in any material portion of the Premises for a period in
excess of the Eligibility Period, and the remaining portion of the Premises is
not sufficient to allow
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Sublessee to conduct its business therein, then for such time after expiration
of the Eligibility Period during which Sublessee is so prevented from conducting
its business therein, Rents for the entire Premises shall be abated; provided,
however, if Sublessee reoccupies and conducts its business from any portion of
the Premises during such period, the Rents allocable to such reoccupied portion,
based on the proportion that the rentable area of such reoccupied portion of the
Premises bears to the total rentable area of the Premises, shall be payable by
Sublessee from the date such business operations commence.
18. Entry By Sublessor. Upon prior written notice, Sublessee shall permit
------------------
Sublessor and Lessor and their respective agents to enter into and upon the
Premises, at such times as Sublessor or Lessor, as the case may be, and
Sublessee mutually agree, for the purpose of inspecting the same or for the
purpose of maintaining the building in which the Premises are situated, or for
the purpose of making repairs, alterations or additions to any other portion of
said building, including the erection and maintenance of such scaffolding,
canopies, fences and props as may be required without any rebate of rent and
(except as otherwise provided herein) without any liability to Sublessee for any
loss of occupation or quiet enjoyment of the Premises thereby occasioned,
provided, that Sublessor and Lessor shall act so as to avoid any unnecessary
interference with Sublessee's business operations. Sublessee shall permit Lessor
and its agents, at any time within ninety (90) days prior to the expiration of
this Sublease, to place upon the Premises any usual or ordinary "For Sale" or
"For Rent" signs and exhibit the Premises to prospective tenants at reasonable
hours. Sublessee shall not unreasonably refuse to agree to permit Sublessor or
Lessor or their respective agents to enter the Premises for the purposes stated
herein.
Notwithstanding the foregoing, Sublessor may enter the Premises only during
reasonable times after giving written notice to Sublessee not less than twenty-
four (24) hours before such proposed entry, provided that Lessor or Sublessor
may enter the Premises immediately and without prior notice if reasonably
required in the case of an emergency. At all times during any entry by
Sublessor, Sublessee shall have the right to require that an employee of
Sublessee accompany Sublessor, and Sublessor shall comply in all respects with
Sublessee's customary security precautions. If Sublessor exercises its right of
entry upon the Premises, Sublessor shall use its best efforts to minimize the
disruption of Sublessee's business. If Sublessor's conduct during any entry
Substantially interferes with the conduct of Sublessee's business, Sublessee
shall be entitled to an abatement of rent for the period of time equal to the
duration of the disruption.
19. Assignment and Subletting. Notwithstanding any provision of the Lease or
-------------------------
this Sublease to the contrary, Sublessee may assign this Sublease at any time,
or Sublease all or part of the Premises, without receipt of Sublessor's consent,
to any entity which acquires all or part of Sublessee, or which is acquired in
whole or in part by
-22-
<PAGE>
Sublessee, or which is controlled directly or indirectly by Sublessee, or which
is under common control with Sublessee, or which entity controls, directly or
indirectly, Sublessee ("Affiliate"), or which owns or is owned by the Affiliate,
so long as such transaction was not entered into as a Subterfuge to avoid the
obligations and restrictions of this Sublease.
20. Alterations and Additions. Excepting only non-structural alterations not
-------------------------
exceeding Ten Thousand Dollars ($10,000.00) in cost for any item of work,
Sublessee shall not make, or suffer to be made, any alteration or addition to
the Premises, or any part thereof, without the written consent of Sublessor
first had and obtained by Sublessee, which consent shall not be unreasonably
withheld. Any addition or alteration to the Premises, except movable furniture
and trade fixtures, shall become, at the option of Lessor, a part of the realty
and belong to Lessor. Alterations and additions which are not to be deemed as
trade fixtures shall include heating, lighting, electrical systems, air
conditioning, partitioning (except as stated below), carpeting, or any other
installation which has become an integral part of the Premises. Notwithstanding
the above, Sublessor agrees that additions and alterations installed by
Sublessee which do not become an integral part of the Premises, such as, but not
limited to, portable metal partitioning shall be considered movable furniture or
trade fixtures and shall remain the property of the Sublessee. Sublessee agrees
not to proceed to make such alterations or additions, after having obtained
consent from Sublessor to do so, until two days from the receipt of such
consent, in order that Sublessor may post appropriate notices to avoid liability
to contractors or material suppliers for payment of Sublessee's improvements.
Sublessee will at all times permit such notices to be posted and to remain
posted until the completion of the work.
21. Abandonment. Sublessee shall not abandon the Premises at any time during
-----------
the term; and if Sublessee shall abandon or surrender the Premises, or be
dispossessed by process of law, any personal property belonging to Sublessee and
left on the Premises shall be deemed to be abandoned, at the option of the
Sublessor, except such property as may be mortgaged to Sublessor.
Notwithstanding the foregoing, Sublessee may vacate the Premises so long as
Sublessee continues to pay the Rents required to be paid hereunder.
22. Subordination. At Lessor's option, this Sublease shall be Subordinated to
-------------
any mortgage or deed of trust which is now or shall hereafter be placed upon the
Premises, and Sublessee agrees to execute and deliver any instrument, releases
or other documents, without cost to it, which may be deemed necessary to further
effect the Subordination of this Sublease to any such mortgage or deed of trust;
provided that the mortgagee or beneficiary under such deed of trust, prior to
the commencement of the lease term or at the time such Subordination is
requested, shall deliver to Sublessee a written undertaking on its behalf and on
behalf of its successors and assigns to permit Sublessee to occupy the Premises
under the terms of this
-23-
<PAGE>
Sublease so long as Sublessee is not in default if there shall be a foreclosure
or sale under such mortgage a deed of trust, or conveyance in lieu of
foreclosure or similar transfer, which undertaking shall be binding upon any
Subsequent assignee or transferee of such parties. Failure of Sublessee to
execute any such instruments, releases or documents shall constitute a default
hereunder.
23. Offset Statement. Sublessee shall, at any time and from time to time, upon
----------------
not less than ten (10) days prior to request by Lessor or Sublessor, execute,
acknowledge and deliver to Lessor or Sublessor, as the case may be, a statement
certifying the date of commencement of this Sublease, that the Sublease is
unmodified and in full force and effect (or if there have been any
modifications, that the Sublease is in full force and effect, as modified, and
stating the date of the modifications), and further stating the dates to which
the rental has been paid, and setting forth such other matters as may reasonably
be required by the Lessor or the Sublessor, as the case may be. Sublessor agrees
to provide Sublessee with similar statements within ten (10) days following
written request therefor by Sublessee. The parties intend that any such
statement delivered pursuant to this paragraph may be relied upon by any
mortgagee or beneficiary of a deed of trust or by any prospective purchaser of
the Premises.
24. General.
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24.1 Counterparts. This Sublease may be executed in counterparts, each of
------------
which shall be deemed an original for all purposes and together shall constitute
one instrument.
24.2 Construction of Sublease Provisions. This Sublease shall not be
-----------------------------------
construed either for or against Sublessee or Sublessor, but shall be construed
in accordance with the general tenor of the language to reach a fair and
equitable result.
24.3 Entire Agreement. This Sublease, together with all exhibits attached
----------------
hereto, is the entire agreement between the parties with respect to the
Premises, and there are no binding agreements or representations between the
parties except as expressed herein. Any agreements, warranties or
representations not expressly contained herein shall in no way bind either
Sublessor or Sublessee, and Sublessor and Sublessee expressly waive all claims
for damages by reason of any statement, representation, warranty, promise or
agreement, if any, not contained in this Sublease. This Sublease supersedes and
cancels any and all previous negotiations, arrangements, brochures, agreements
and understandings, whether written or oral, between Sublessor and Sublessee
with respect to the Premises. No addition to, or modification of, any term or
provision of this Sublease shall be effective until and unless set forth in a
written instrument signed by both Sublessor and Sublessee.
-24-
<PAGE>
24.4 Exhibits. All exhibits attached to this Sublease shall be deemed to
--------
be incorporated herein by the individual reference to each such exhibit, and all
such exhibits shall be deemed a part of this Sublease as though set forth in
full in the body of the Sublease.
24.5 Attorneys' Fees. Any reference to "attorneys' fees" contained in this
---------------
Sublease or the Lease shall include, without limitation, an allocable portion of
the internal legal costs of Sublessor or Sublessee, as the case may be.
25. Conditions Precedent to Sublease. This Sublease is expressly conditioned
--------------------------------
upon Lessor's consent hereto. Sublessor agrees to use reasonable efforts to
obtain the consent of Lessor to this Sublease as soon as reasonably possible
following execution of this Sublease by Sublessor and Sublessee. In the event
that Consent (as defined below) is not obtained within fifteen (15) days
following the Submittal of this Sublease by Sublessor to Lessor for consent,
either Sublessor or Sublessee shall have the right to terminate this Sublease by
providing written notice thereof to the other unless Consent is obtained prior
to the giving of any such notice, in which event such notice shall be of no
force or effect. In the event such written notice of termination is given
following the lapse of such fifteen (15) day period and prior to Consent being
obtained, this Sublease shall be deemed null and void and neither Sublessor nor
Sublessee shall have any liability or obligations to the other hereunder. For
purposes of this paragraph, "Consent" shall mean the date upon which Lessor's
unconditional consent to this Sublease has been obtained or, in the event such
consent is conditional, the date upon which such conditions have been fully
satisfied (or waived by Lessor).
In addition, notwithstanding any other provision herein to the contrary,
this Sublease and Sublessee's obligations hereunder shall be Subject to the
following conditions precedent, each of which shall be satisfied or waived by
Sublessee in writing within thirty (30) days following the Effective Date: (a)
approval by Sublessee of the environmental status of the Second Property and the
areas located within the vicinity of the Second Property, as shown in a "Phase
I" environmental report to be prepared by an environmental consultant acceptable
to Sublessee, (b) Sublessee's confirmation that all permits and approvals
required by any governmental authorities for Sublessee's use and occupancy have
been obtained, and (c) the execution by Sublessor, Sublessee and the tenant of
the adjacent building of a letter agreement, confirming Sublessee's exclusive
right to park in the areas designated for parking on the site plan attached
hereto as Exhibit B. If the conditions referred to in the preceding sentence are
---------
not satisfied or waived by Sublessee in writing within thirty (30) days after
the Effective Date, then this Sublease automatically shall terminate on said
thirtieth (30th) day. In the event the Commencement Date has occurred prior to
such termination, Sublessee shall immediately surrender possession of the
Premises to Sublessor in the condition required by this Sublease as of the
effective date of the termination hereof. Sublessee shall have
-25-
<PAGE>
no claim for reimbursement for the cost of any work or alterations performed by
Sublessee prior to such termination. If the Premises are not so surrendered by
Sublessee, Sublessee shall indemnify, defend and hold Sublessor harmless from
and against any loss, damage, expense, claim or liability resulting from delay
by Sublessee in so surrendering the Premises including, without limitation, any
claims made by any succeeding tenant or losses to Landlord due to lost
opportunities to lease to succeeding tenants.
IN WITNESS WHEREOF, the parties have executed this Sublease effective as of
the date first set forth above.
SUBLESSOR
INTERMEDICS, INC.,
a Delaware corporation
By: ________________________________
Its ________________________________
SUBLESSEE
POWER INTEGRATIONS, INC.,
a California corporation
By: ________________________________
Its ________________________________
-26-
<PAGE>
EXHIBIT "A"
SECOND LEASE
THIS LEASE is made and entered into this 25th day of October, 1982, by and
between MATHILDA DEVELOPMENT, a California Limited Partnership, hereinafter
called "Lessor", and INTERMEDICS, INC., a Texas corporation, hereinafter called
"Lessee".
WITNESSETH
WHEREAS, Lessor and Lessee entered into a certain Lease Agreement on the
twelfth (12th) day of December, 1979, (the First Lease") for the lands and
certain building improvements constructed thereon in the City of Sunnyvale,
County of Santa Clara, California, more particularly described as Parcel 1 in
Exhibit A attached to the First Lease; and WHEREAS, Lessor and Lessee entered
into a certain Option Agreement ("Option Agreement") on the twelfth (12th) day
of December, 1979 to lease property described as Parcel 2 in Exhibit A attached
to the First Lease together with a building to be constructed thereon (the
"Second Property"); and
WHEREAS, Lessee has exercised said option and said option agreement
requires the execution of a new lease (the Second Lease") for the Second
Property.
NOW, THEREFORE, it is mutually agreed by and between the above parties as
follows:
1. Premises. Lessor hereby leases to Lessee, and Lessee hereby hires from
--------
Lessor, on the terms and conditions hereinafter set forth, those certain
premises described in Exhibit "A" attached hereto (the "Second Property" or the
"Property") improved in accordance with plans and specifications which are
marked Exhibit "B" and made a part hereof by reference.
2. Term. The term of this Lease shall be for a period of fifteen (15) years
----
commencing on the first day of August, 1983 and ending at midnight on the 31st
day of July, 1998.
3. Rental.
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(a) Lessee agrees to pay to Lessor as basic rental for the Property, the
sum of Seven Million, Two Hundred Fifty One Thousand Seventy Five Dollars
($7,251,075.00), payable in lawful money of the United States on or before the
first day of each and every month as follows:
(i) Forty Thousand Two Hundred Eighty-Three and 75/100 Dollars
($40,283.75) upon execution of the Lease constituting the rental for the first
month of the term hereof,
<PAGE>
and Forty Thousand Two Hundred Eighty Three and 75/100 Dollars ($40,283.75) on
the first day of the second month of the term and on the first day of each
succeeding month through the sixtieth month of the term.
(ii) on the first day of the sixty-first month of the term hereof,
and on the first day of each succeeding month through the one hundred twentieth
month hereof, the sum of Forty Thousand Two Hundred Eighty-Three and 75/100
Dollars ($40,283.75), plus such increase in the rental as shall be computed as
follows:
Commencing on the sixty first month of the term hereof, the
monthly basic rental shall be increased based on the percentage increase in the
Consumer Price Index, published by the U.S. Department of Labor, San Francisco-
Oakland Average for All Urban Consumers, All Items (the "Consumer Price Index"),
as such Index of the sixty-first month of the term hereof bears to such Index of
the date of occupancy hereof; provided, that in no event, however, shall the new
basic monthly rental exceed one hundred forty percent (140%) of the basic
monthly rental due during the preceding five lease years, nor shall the new
basic monthly rental be less than the basic monthly rental due in the preceding
five lease years.
(iii) Commencing on the one hundred twenty first month of the
term hereof, the basic monthly rental for the remainder of the original term
hereof shall be the basic monthly rental for the preceding five Lease years
increased based upon the aggregate of the annual percentage increases in the
Consumer Price Index for each of the preceding five (5) lease years; provided,
however, in no event shall the new basic monthly rental exceed one hundred forty
percent (140%) of the basic monthly rental due during the preceding five lease
years, nor shall the new basic monthly rental be less than the basic monthly
rental due in the preceding five lease years.
(iv) By provisions hereof, Lessee enjoys the option of renewing
this Lease for two consecutive additional five year terms, as set forth
hereinafter. In the event Lessee should exercise such option to renew, Lessee
agrees to pay to Lessor those rentals determined by the formula set forth in
Paragraph 38 hereof.
(b) All rentals, and additional rentals, due Lessor shall be timely
paid, free from all claims and demands against Lessor of any kind, nature or
description whatsoever, and without
2.
<PAGE>
deduction or offset, at such place or places as may be designated from time to
time by Lessor. If the Lease term commenced other than on the first day of a
calendar month, the first and last month's rental shall be prorated accordingly.
Should Lessee assume beneficial occupancy of all or a portion of the premises
before the commencement of the full lease term, Lessee shall pay rent to Lessor
at a rate of four and four tenths cents ($.044) for each square foot of the
building so occupied for each day so occupied, beginning an the date of such
occupancy or May 1, 1983, whichever is later, until such time as the full
monthly rental shall commence to be due as provided herein.
In the event any monthly rental payment provided for herein is not paid
within ten (10) days of the due date thereof (i.e., on or before the tenth day
of the month), Lessee shall pay to Lessor a sum equal to any late payment
charge, or penalty, assessed by the lending institution holding any notes
secured by a Deed of Trust on the Property; provided, however, that if said
payment is actually delivered to Lessor after the tenth day of the month, but on
or before the date which is seven (7) days prior to the date of the month on
which the regular monthly payment on said note is due, which date Lessor shall
inform Lessee at commencement of the term of this Lease and promptly upon any
Subsequent change thereof, Lessee shall have no such obligation, but shall be
required to pay a One Hundred Fifty Dollar ($150.00) late charge.
(c) Lessor and Lessee hereby agree that the rental set forth in 3(a) and
3(b) herein has been determined by the formula established in the Option
Agreement as amended and as act forth kit the "Revised Rental Proposal" dated
July 29, 1982 from Mathilda Development to Intermedics. The parties further
agree that upon completion of the building on the Second Property, Mathilda
shall render a certified statement of costs ("Actual Costs") along with a copy
of the take-out loan commitment to Intermedics and that the parties will enter
into an amendment to this Lease setting forth the rental as determined by the
formula set forth in the Option Agreement using the actual construction cost of
the building on the Second Property and modifying the above subparagraphs of
this lease to reflect the final rental amounts; provided however, that so long
as the costs of tenant improvements are no greater than the amount specified in
the Revised Rental Proposal, the basic rental shall not exceed that provided for
in Paragraph 3(a) above,
4. Security Deposit. Lessee has deposited with Lessor Twenty Thousand
Dollars ($20,000.00) as security for the full
3.
<PAGE>
and faithful performance of each and every term, provision, covenant and
condition of this Lease. In the event Lessee defaults in respect of any of the
terms, provisions, covenants, or conditions of this Lease, including, but not
limited to the payment of rent, Lessor may use, apply or retain the whole or any
part of such security for the payment of any rent in default or for any other
sum which Lessor may spend or be required to spend by reason of Lessee's
default. Should Lessee faithfully and fully comply with all of the terms)
provisions, covenants and conditions of this Lease, the security or any balance
thereof shall be returned to Lessee or, at the option of Lessor, to the last
Sublessee of Lessee's interest in this Lease at the expiration of the term
hereof. Lessee shall not be entitled to any interest on said security deposit
5. Possession. If Lessor, for any reason whatsoever, cannot deliver
possession of the said premises to Lessee by the commencement of the said term,
as hereinbefore specified in Paragraph 2 of this Lease, this Lease shall not be
void or violable, nor shall Lesser, or Lessor's agents, be liable to Lessee for
any loss or damage resulting therefrom; but in that event, the commencement and
termination dates of the Lease and all other dates affected thereby shall be
revised to conform to the date of Lessor's delivery of possession. The above is,
however, Subject to the provision that the period of delay of delivery of the
premises shall not exceed (i) ninety (90) days from the commencement date
herein, plus (ii) any additional time permitted under Paragraph 41(e). If the
period of delay of delivery exceeds the foregoing, Lessee, at his or its option,
may declare this Lease null and void and Lessor shall return any security
deposit and rental advanced by Lessee.
6. Improvements and Completion.
----------------------------
(a) Lessor shall proceed with due diligence, and use its best efforts,
to construct the building and all improvements to the Property, in accordance
with the working drawings, plans and specifications (herein called the "plans"
and marked Exhibit "B"). The parties acknowledge that the final plans have not
yet been agreed upon and that they will be Substituted for Exhibit B at such
time as they are agreed upon.
Said building and improvements shall be deemed to have been completed, and
Lessor shall be deemed to have delivered possession, and rent shall commence one
hundred (100) days following completion of the building shell improvements
required to be constructed by Lessor, including the parking lot, utilities to
the building and satisfactory access to the
4.
<PAGE>
interior to the building and satisfactory access to the interior such that
construction of the interior improvements can be commenced, all as certified by
the independent project structural engineer, provided that such date of
possession and rental commencement shall be extended by any period of delay in
construction of interior improvements due to causes set forth in Paragraph
41(e), the aforesaid building and improvements shall be deemed to have been
completed and rent shall commence at such time as the shell and interiors are
completed, except for items of specialized or unique character required for
Lessee's special needs which are uncompleted due to the unavailability of such
items after reasonable efforts to obtain such items have been made by Lessor.
Lessor shall give Lessee at least thirty (30) days written notice prior to the
anticipated completion date and permit Lessee to enter upon the premises to
install its fixtures and equipment therein so long as Lessee does not materially
interfere with the construction.
(b) All major construction Subcontracts shall be Subject to competitive
bidding procedures. All construction contracts and Subcontracts shall be.
Subject to approval by Lessor and by Lessee, which approval shall not be
unreasonably withheld. All construction contracts shall be between Lessor,
Lessee and the contractor. ZYMOS, a California corporation, is hereby authorized
to act as Lessee's agent with respect to such contracts.
7. Purpose. Lessee agrees to use and occupy the premises during the term
-------
hereof for the purpose of light manufacturing and related offices for
engineering, design and related needs, and for no other purpose.
8. Uses Prohibited. Lessee shall not commit or suffer to be committed any
---------------
waste or nuisance upon the said premises nor shall it in any way violate any
law, ordinance, rule or regulation affecting the occupancy or use of the
premises which is, or may hereafter be, enacted or promulgated by governmental
authorities; nor shall it allow the premises to be used for any improper,
immoral or unlawful purpose; nor shall it place any materials in the drainage
system which are damaging or loads upon the floor, walls, or ceiling which
exceed the limits established in the original design of the building. No waste
material or refuse shall be dumped upon or permitted to remain upon any part of
the leased premises outside of the areas designated for such purposes. No
materials, supplies, equipment, finished product or
5.
<PAGE>
semi-finished project, nor materials or articles of any nature shall be put upon
or permitted to remain upon any portion of the leased premises outside of the
areas designated for such purpose or the building proper.
9. Acceptance of Premises and Covenant to Surrender. By entering the
premises, Lessee shall accept the premises as being in good and sanitary order,
condition and repair, and accept the building and other improvements in their
then present condition; provided that for a period of ninety (90) days following
the date of such entry, Lessee shall have the right to inform Lessor of any fact
or condition which Lessee has discovered in the construction of the building
and/or improvements that would indicate a failure to construct the same in
reasonable accordance with plans and specifications. In the event that Lessor is
informed of any such facts or failures within the above provided times, Lessor
shall correct the condition complained of as soon as it is reasonably
practicable, and shall bear the entire cost of such corrections, Lessor shall
assign to Lessee any and all guaranties and warranties from contractors and
material suppliers for any portion of the building or improvements which Lessee
is required to repair or maintain pursuant to this Lease.
On the last day of the term hereof or on the sooner termination of the
Lease, Lessee agrees to surrender said premises unto Lessor in good condition
and repair, reasonable wear and tear excepted, except as otherwise provided
herein. The Lessee also agrees to surrender to Lessor all alterations,
additions, or improvements which may have been made in, to or on the premises by
Lessee, except as otherwise provided in this Lease. Lessee, on or before the end
of the term or sooner termination of this Lease, shall remove all his or its
personal property and trade fixtures from the premises, and all property not so
removed shall be deemed to be abandoned by Lessee. Any property so abandoned
shall be removed by Lessee from the premises, at Lessor's option, within five
days of Lessor's request, or, should Lessee fail to remove same, Lessee shall
pay Lessor for the actual costs expended by Lessor in removing the property. If
the premises be not surrendered at the end of the term or sooner termination of
this Lease) Lessee shall indemnify Lessor against loss or liability resulting
from delay by Lessee in so surrendering the premises, including, without
limitation, any claims made by any succeeding tenant founded on such delay.
6.
<PAGE>
10. Quiet Enjoyment by Lessee. Lessor covenants and warrants that upon
-------------------------
Lessee's paying the rent and observing and performing all of the terms,
covenants and conditions on Lessee's part to be observed and performed
hereunder, Lessee shall and may peaceably and quietly enjoy the premises hereby
demised, subject, nevertheless, to the terms and conditions of this Lease.
11. Alterations and Additions. Excepting only non-structural alterations
-------------------------
not exceeding Ten Thousand Dollars ($10,000.00) in cost for any item of work,
Lessee shall not make, or suffer to be made, any alteration or addition to said
premises, or any part thereof, without the written consent of Lessor first had
and obtained by Lessee, which consent shall not be unreasonably withheld. Any
addition or alteration to the said premises, except movable furniture and trade
fixtures, shall become, at the option of Lessor, a part of the realty and belong
to the Lessor. Alterations and additions which are not to be deemed as trade
fixtures shall include heating, lighting, electrical systems, air conditioning,
partitioning (except as stated below), carpeting, or any other installation
which has become an integral part of the leased premises. Notwithstanding the
above, Lessor agrees that additions and alterations installed by Lessee which do
not become an integral part of the leased premises, such as, but not limited to,
portable metal partitioning shall be considered movable furniture or trade
fixtures and shall remain the property of the Lessee. Lessee agrees not to
proceed to make such alterations or additions, after having obtained consent
from Lessor to do so, until two days from the receipt of such consent, in order
that Lessor may post appropriate notices to avoid liability to contractors or
material suppliers for payment of Lessee's improvements. Lessee will at all
times permit such notices to be posted and to remain posted until the completion
of the work.
12. Maintenance of Premises.
-----------------------
(a) Lessor warrants the premises, and every part thereof without
limitation, for a period of one year following commencement of the term hereof,
against all defaults in material and workmanship. Lessor shall promptly remedy
or correct any such defects or deficiencies upon written notice thereof from
Lessee.
(b) Except for Lessor's warranty set forth in Subparagraph (a), Lessor's
obligation to repair construction defects as set forth in Paragraph 9, and
latent structural
7.
<PAGE>
defects thereafter appearing, for repair of which Lessor shall be solely
responsible, Lessee shall, at its sole expense, keep and maintain said premises
and appurtenances and every part thereof, including but not limited to, roof,
walls, glazing, sidewalks, parking areas, plumbing, electrical systems, heating
and air conditioning installations, and the exterior and interior of the
premises in good and sanitary order, condition, and repair, and Lessee shall be
responsible for any loss or damages resulting from the negligence or willful
misconduct of the Lessee, its agents, employees or contractors. Lessee agrees to
water, maintain and replace, when necessary, any shrubbery and landscaping
provided by lessor on the leased premises; provided, that Lessee's said
obligation shall be appropriately limited and reduced in the event of any
shortage or reduced availability of water. Lessee hereby waives all rights to
make repairs at the expense of Lessor as provided in Section 1942 of the Civil
Code of the State of California, and waives all rights provided by Section 1941
of said Civil Code
13. Abandonment. Lessee shall not vacate or abandon the premises at any
-----------
time during the term; and if Lessee shall abandon, vacate or surrender said
premises, or be dispossessed by process of law, any personal property belonging
to Lessee and left on the premises shall be deemed to be abandoned, at the
option of the Lessor, except such property as may be mortgaged to Lessor.
14. Freedom from Liens. Lessee shall not create or permit to the created
------------------
or to remain, and covenants to remove and discharge promptly, at its cost and
expense, all liens, claims, stop notices, encumbrances and charges upon the
premises or Lessee's leasehold interest therein which arise out of the use or
occupancy of the premises by Lessee or anyone using or occupying the premises
with the consent or sufferance of Lessee, or by reason of labor or materials
furnished or claimed to have been furnished to Lessee for any construction,
alteration, addition or repair of any part of the premises. Lessee shall give
Lessor ten (10) days notice prior to commencing any work on the premises, so
that Lessor shall have reasonable time within which to post notices of
nonresponsibility.
15. Advertisements and Signs. Lessee may place or permit to be placed in,
------------------------
upon, or about the premises any signs, advertisements, or notices that Lessee
shall determine appropriate. Subject to compliance with the laws and
8.
<PAGE>
regulations of the applicable city or other governmental authority. Any signs so
placed on the premises shall be placed upon the understanding and agreement that
Lessee will remove same upon termination of its tenancy herein created, and
shall repair any damage or injury to the premises caused thereby. Any such sign
affecting the structural integrity of the building shall be erected only upon
receiving Lessor's consent, which consent shall not be unreasonably withheld.
16. Insolvency or Bankruptcy. Either (a) the appointment of a receiver or
------------------------
trustee to take possession of all or Substantially all of the assets of Lessee,
provided that such appointment shall not be vacated or set aside within thirty
(30) days; or (b) a general assignment by Lessee for the benefit of creditors;
or (c) the filing of a voluntary petition in bankruptcy by the Lessee, or a
final adjudication that Lessee is bankrupt, shall constitute a breach of this
Lease by Lessee. Upon the happening of any such event, this Lease shall at
Lessor's option terminate ten (10) days after notice of termination from Lessor
to Lessee and Lessee agrees to then vacate the premises on the date of such
termination.
17. Entry by Lessor. Upon prior written notice, Lessee shall permit Lessor
---------------
and his agents to enter into and upon said premises, at such times as Lessor and
Lessee mutually agree, for the purpose of inspecting the same or for the purpose
of maintaining the building in which said premises are situated, or for the
purpose of making repairs, alterations or additions to any other portion of said
building, including the erection and maintenance of such scaffolding, canopies,
fences and props as may be required without any rebate of rent and without any
liability to Lessee for any loss of occupation or quiet enjoyment of the
premises thereby occasioned, provided, that Lessor shall act so as to avoid any
unnecessary interference with Lessee's business operations. Lessee shall permit
Lessor and his agents, at any time within ninety (90) days prior to the
expiration of this Lease, to place upon said premises any usual or ordinary "For
Sale" or "For Rent" signs and exhibit the premises to prospective tenants at
reasonable hours. Lessee shall not unreasonably refuse to agree to permit Lessor
or its agents to enter the premises for the purposes stated herein.
18. Assignment and Subletting.
--------------------------
(a) Excepting only as set forth hereinunder, Lessee shall not assign this
Lease, or any interest therein, and shall
9.
<PAGE>
not Sublet the said premises or any part thereof, or any right or privilege
appurtenant thereto, or suffer any other person (the agents and servants of
Lessee excepted) to occupy or use the said premises, or any portion thereof,
without the written consent of Lessor first had and obtained, which consent
shall not be unreasonably withheld. A consent to one assignment, Subletting,
occupation or use by any other person, shall not be deemed to be a consent to
any Subsequent assignment, Subletting, occupation or use by another person. Any
such assignment or Subletting without such consent shall be void, and shall, at
the option of the Lessor, terminate this Lease.
This Lease shall not, nor shall any interest therein, be assignable, as to
the interest of the Lessee, by operation of law, or otherwise, without the
written consent of Lessor.
(b) In the event Lessee wishes to Sublet the premises or any part thereof,
or suffer any other person to occupy or use the said premises, or any portion
thereof, Lessee shall so notify Lessor in writing, and shall disclose to Lessor
the identity of the proposed Sublessee and the use which the proposed Sublessee
intends to make of the premises. Lessor shall, within fifteen (15) days after
such notice is given, notify Lessee in writing whether or not Lessor consents to
such Sublease; failure of Lessor to so respond shall be deemed consent. In the
event Lessor shall so consent to Sublease, Lessee shall remain liable for the
performance by the Sublessee of the terms of this Lease, unless released from
such liability by Lessor in writing. In the event Lessor reasonably elects not
to consent to such Subletting, then Lessee shall continue as lessee under all of
the terms of this Lease.
(c) Notwithstanding anything to the contrary contained herein, Lessee may,
without further consent of lessor, Sublet all or any portion of the premises to
ZYMOS, a California corporation. Lessee shall, in the event of such Sublease,
remain liable for the performance by the Sublessee of the terms hereof.
19. Surrender of Lease. The voluntary or other surrender of this Lease by
-------------------
Lessee, or a mutual cancellation thereof, shall not work a merger, and shall, at
the option of Lessor, operate as an assignment to him of any or all Subleases or
Subtenancies.
20. Security. Nothing herein provided, and no security or guaranty which
--------
may now or hereafter be furnished Lessor for the payment of the rent herein
reserved, or for the performance by Lessee of the other agreements in this Lease
contained, shall
10.
<PAGE>
in any way constitute a bar or defense to any action in unlawful detainer or for
the recovery of the premises which Lessor may commence for breach of any
agreement, term or condition of this Lease.
21. Transfer of Security. Any security given by Lessee at any time to
--------------------
secure the faithful performance of all or any of the covenants of this Lease on
the part of Lessee may be transferred and/or delivered by Lessor only upon the
same terms and conditions as set forth in this Lease, to the purchaser of the
reversion in the event that the reversion be sold, and thereupon Lessor shall be
discharged from any further liability in reference thereto.
22. Eminent Domain.
---------------
(a) If the whole of the premises shall be taken or condemned by any
competent authority for any public or quasi-public use or purpose, then the term
of this Lease shall automatically end upon the date when the possession so taken
shall be required for such use or purpose, and current rent and taxes shall be
apportioned as of the date of such termination.
(b) If only part of the premises shall be so taken and a part
thereof remains which Is reasonably susceptible for occupation by Lessee
hereunder for the purposes for which Lessee has entered into this Lease, this
Lease shall, as to the part so taken, terminate as of the date when the
possession so taken shall be required, and the rent and all other sums payable
by Lessee on account of the premises hereunder, shall be adjusted so that the
Lessee shall be required to pay for the remainder of the term only such portion
of such sums as the original cost of the improvements of the part remaining
after such taking bears to the original cost of the entire improvements prior to
such taking. If, after the taking of a portion of the premises, there does not
remain a portion reasonably susceptible for Lessee's occupation hereunder, this
Lease shall thereupon automatically terminate in the manner as if the whole
premises had been taken. Whether all or part of the premises be taken, all
compensation awarded upon such taking with respect to the real property and
Improvements shall go to the Lessor, and the Lessee shall have no claim thereto,
nor shall Lessee have claim against Lessor for any loss, damage, or for any
other reason alleged to result therefrom, provided, however, that Lessee shall
in no event be precluded hereby from perfecting its own claim against the
authority or taker for damages for the taking of its leasehold interest,
11.
<PAGE>
personal property, fixtures, or expenses incurred in, or as a result of, any
eminent domain action.
23. Recordation. Neither party, without the consent of the other, shall
-----------
cause or permit the original or any copy of this Lease to be recorded, filed or
published in any public place, but either party may, after execution of this
Lease, record a memorandum thereof at such party's sole expense, provided such
recordation shall not be made prior to recordation of such deed(s) of trust as
Lessor's mortgage lender may require.
24. Subordination. At Lessor's option, this Lease shall be Subordinated to
-------------
any mortgage or deed of trust which is now or shall hereafter be plated upon the
premises, and Lessee agrees to execute and deliver any instrument, releases or
other documents, without cost to it, which may be deemed necessary to further
effect the Subordination of this Lease to any such mortgage or deed of trust;
provided that the mortgagee or beneficiary under such deed of trust, prior to
the commencement of the lease term or at the time such Subordination is
requested, shall deliver to Lessee a written undertaking on its behalf and on
behalf of its successors and assigns to permit Lessee to occupy the premises
under the terms of this Lease so long as Lessee is not in default if there shall
be a foreclosure or sale under such mortgage a deed of trust, or conveyance in
lieu of foreclosure. or similar transfer, which undertaking shall be binding
upon any Subsequent assignee or transferee of such parties. Failure of Lessee to
execute any such instruments, releases or documents shall constitute a default
hereunder.
25. Effect of Conveyance. The term "Lessor" as used in this tease, means
--------------------
only the owner for the time being of the land and building containing the
premises, so that, in the event of any sale of said land or building, the
Lessor shall be and hereby is entirely freed and relieved of all covenants and
obligations of the Lessor hereunder thereafter accruing. If any security be
given by the Lessee to secure the faithful performance of all or any of the
covenants of this Lease on the part of Lessee, the Lessor may transfer and
deliver the security, as such, to the purchaser at any such sale, and thereupon
the Lessor shall be discharged from any further liability in reference thereto.
26. Offset Statement. Lessee shall, at any time and from time to time,
upon not less than ten (10) days prior to request by Lessor, execute,
acknowledge and deliver to Lessor a statement certifying the date of
commencement of this Lease,
12.
<PAGE>
that the Lease is unmodified and in full force and effect (or if there have been
any modifications, that the Lease is in full force and effect, as modified, and
stating the date of the modifications), and further stating the dates to which
the rental has been paid, and setting forth such other matters as may reasonably
be required by the Lessor. Lessor and Lessee intend that any such statement
delivered pursuant to this paragraph may be relied upon by any mortgagee or
beneficiary of a deed of trust or by any prospective purchaser of the premises.
27. Waiver. The waiver by Lessor or Lessee of any breach of any term,
------
covenant or condition, herein contained shall not be deemed to he a waiver of
such term, covenant or condition or any Subsequent breach or the same or any
other term, covenant or condition thereon contained. The Subsequent acceptance
of rent hereunder by Lessor shall not be deemed to be a waiver of any preceding
breach by Lessee of any term, covenant or condition of this Lease, other than
the failure of Lessee to pay the particular rental so accepted, regardless of
Lessor 5 knowledge of such preceding breach at the time of acceptance of such
rent.
28. Holding Over. Any holding over after the expiration of the said term,
------------
with the consent of Lessor, shall be construed to be a tenancy from month to
month, at a rental to be negotiated by Lessor and Lessee prior to the expiration
of said term, and shall otherwise be on the terms and conditions herein
specified, so far as applicable.
29. Litigation Guaranty. In case suit should be brought for the possession
-------------------
of the premises, for the recovery of any sum due hereunder, or because of the
breach of any other covenant herein, the losing party shall pay to the
prevailing party reasonable attorney's fees and other expenses incurred in the
litigation, which shall be deemed to have accrued on the commencement of such
action and shall be enforceable whether or not such action is prosecuted to
judgment.
30. Default. For purposes of determining rights and obligations under this
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Lease, the occurrence of any one of the following events shall be considered a
breach of this Lease: (a) in the event that Lessee shall fail to pay any one or
more of said installments of rent when the same shall be due and such default
shall continue for ten (10) days after written notice thereof by registered
mail; (b) in the event an execution or other legal process' is levied upon the
property of the Lessee located on the premises or upon the interest of the
Lessee in the Lease, unless such execution or levy be
13.
<PAGE>
discharged of record within thirty (30) days; (c) in the event of a breach as
determined pursuant to Paragraph 16 of this Lease; (d) in the event the Lessee
shall violate any of the other terms, conditions, covenants, stipulations, or
agreements on the part of the Lessee, herein contained, and fails to remedy the
same within thirty (30) days after written notice thereof by registered mail by
the Lessor to the Lessee.
In the event of any breach of this Lease by the Lessee, as defined above,
or an abandonment of the premises by the Lessee, the Lessor has the option of
(1) removing all persons and property from the premises and repossessing the
premises in which case any of the Lessee's property which the Lessor removes
from the premises may be stored in a public warehouse or elsewhere at the cost
of, and for the account of Lessee, or (2) allowing the Lessee to remain in full
possession and control of the premises. If the Lessor chooses to repossess the
premises, the lease will automatically terminate in accordance with provisions
of the California Civil Code, Section 1951.2. In the event of such termination
of the Lease, the Lessor may recover from the Lessee: (1) the worth at the time
of award of the unpaid rent which had been earned at the time of termination
including interest at seven percent (7%) per annum; (2) the worth at the time of
award of the amount by which the unpaid rent which would have been earned after
termination until the time of award exceeds the amount of such rental loss that
the Lessee proves could have been reasonably avoided including interest at seven
percent (71) per annum; (3) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (4) any other amount necessary to compensate the Lessor
for all the detriment proximately caused by the Lessee's failure to perform his
obligation under the Lease or which in the ordinary course of things would be
likely to result therefrom. As used herein, the phrase "worth at the time of
award" shall be defined in accordance with the provisions of the California
Civil Code, Section 1951.2(b). If the Lessor chooses not to repossess the
premises, but allows the Lessee to remain in full possession and control of the
premises, then in accordance with provisions of the California Civil Code,
Section 1951.4, the Lessor may treat the Lease as being in full force and
effect, and may collect from the Lessee
14.
<PAGE>
all rents as they become due through the termination date of the Lease as
specified in the Lease. For the purpose of this paragraph, the following do not
constitute a termination of Lessee's right to possession;
(a) Acts of maintenance or preservation or efforts to relet the Property.
(b) The appointment of a receiver on the initiative of the Lessor to
protect his interest under this Lease.
31. Taxes. Lessee shall be liable for and shall promptly pay to Lessor, as
-----
additional rental during the term of this Lease, all taxes, levies, fees, water
or sewer rents and charges, special assessments. and other governmental chine of
every character (herein collectively called "taxes"), against the premises
during the term hereof. Such taxes shall be prorated between the parties hereto
for the first and last year of the lease term. Lessee may pay any such taxes in
installments if payment may be so made without penalty. Lessee shall pay for all
taxes levied against lessee's fixtures, equipment and personal property situated
on the leased premises, and all additions and leasehold improvements made, added
or installed by Lessee, whether such fixtures, equipment, personal property,
additions or leasehold improvements are assessed as real or personal property.
Lessor shall notify Lessee, at least thirty (30) days prior to the due date, of
the time on which property taxes shall be due and payable to the taking
authorities, and shall provide Lessee with a copy of the tax bills related to
the premises. Lessee shall pay to Lessor the total amount of such taxes not less
than five (5) days prior to the date such shall be due and payable. Lessee may
contest the amount or validity of any taxes by appropriate proceeding. However,
Lessee shall promptly pay such taxes unless such proceeding shall operate to
prevent or stay the collection of the tax so contested. Lessor, at Lessee's sole
expense, shall join in any such proceeding if any law. shall so require.
32. Destruction of Premises.
------------------------
(a) If ten percent (lot) or less of the premises and the building of which
the same are a part is damaged by an uninsured peril, Lessor shall promptly and
diligently proceed to repair and restore the same to Substantially the same
condition as existed prior to such damage or destruction; provided, however,
that should such damage be caused by the act, negligence of fault or omission of
any duty with respect
15.
<PAGE>
to the same by Lessee, its agents, servants, employees or invitees, Lessee and
not Lessor shall be so obligated to repair and restore. If the premises are
damaged by an uninsured peril rendering more than ten percent (lot) of the
premises unusable for the conduct of Lessee's business, Lessor may upon written
notice, given to Lessee within thirty (30) days after the occurrence of such
damage, elect to terminate this Lease; provided, however, Lessee may, within
thirty (30) days after receipt of such notice, elect to make any required
repairs and/or restoration, in which event this Lease shall remain in full force
and effect, and Lessee shall thereafter diligently proceed with such repairs
and/or restoration. During any such repairs or restoration, rent and all other
amounts to be paid by Lessee on account of the premises shall bate in proportion
to the area of the premises rendered not reasonably suitable for the conduct of
Lessee's business.
(b) If the premises are damaged or destroyed by fire or other insured
peril, Lessor shall promptly and diligently proceed to repair and restore the
same to Substantially the same condition as existed prior to such damage or
destruction; provided, however, that Lessor shall not be obligated to repair and
restore until either the insurer acknowledges that the loss is covered by
insurance and sufficient proceeds of such insurance are made available to Lessor
to pay the costs (including a reasonable allowance for contractor's profit and
overhead not to exceed ten percent (lot) of the repairs and/or restoration) or
the Lessee agrees to pay such costs to Lessor. If the existing laws do not
permit the restoration, either party can terminate this Lease immediately by
giving notice to the other party.
If the cost of restoration exceeds the amount of proceeds received from the
insurance required under Paragraph 3S, and Lessee has not agreed to pay the
excess cost of repairs and/or restoration to Lessor, Lessor can elect to
terminate this Lease by giving notice to Lessee within fifteen (15) days after
determining that the restoration cost will exceed the insurance proceeds. In the
case of destruction to the premises, if Lessor elects to terminate this Lease,
Lessee, within thirty (30) days after receiving Lessor's notice to terminate,
can agree to pay to Lessor the difference between the amount of insurance
proceeds and the cost of restoration in which case Lessor shall restore the
premises. Lessor shall give Lessee satisfactory evidence that all sums
contributed by Lessee as provided in this paragraph have been expended by Lessor
in paying the cost of restoration.
16.
<PAGE>
If Lessor elects to terminate this Lease and Lessee does not elect to
contribute toward the cost of restoration as provided herein, this Lease shall
terminate and all of the proceeds of the insurance shall be paid to Lessor;
provided) however, that in the event such proceeds shall include any amounts
paid for damage to or destruction of property belonging to Lessee, Lessor shall
within ten (l0)days of receipt, pay over such amounts to Lessee in the
following manner: Out of the gross proceeds paid by insurance to Lessor, Lessor
shall retain an amount equivalent to the current replacement cost of the
building and improvements owned by Lessor; after Lessor has been so paid from
the insurance proceeds. if there remains a balance of such insurance proceeds
which represent payment for damage to or destruction of improvements added by
Lessee after the date of Lessee's occupancy of the premises, then, to the extent
of any remaining balance of the insurance proceeds and to the extent of Lessee's
direct costs of making such added improvements, Lessor shall be obligated to pay
over to Lessee such insurance proceeds During any such repair or restoration
described in this paragraph, rent and any other amounts to be paid by Lessee on
account of the premises shall abate in proportion to the area of the premises
rendered unusable by such damage or destruction; provided, however, that Lessor
shall have no liability by reason of injury to or interference with Lessee's
business or property arising from the making of any repairs, alterations, or
improvements in or to any portion of the premises or in or to fixtures,
appurtenances and equipment therein. If the premises are destroyed or
Substantially damaged within one year of the end of this Lease term or a renewal
period, Lessor or Lessee shall each of the option to cancel the Lease, and all
insurance proceeds on the real property shall be paid to Lessor; provided, that
if an option then exists to extend the term hereof, and Lessee exercises such
option, the parties shall proceed with repairs and restoration as set forth
above and the Lease shall not terminate except as provided above.
In the event Lessee shall have paid all or a portion of the costs of any
repairs or restorations for which Lessor Subsequently receive insurance
proceeds, then to the extent that such insurance proceeds and Lessee's payments
exceed Lessor's cost of repair and(or restoration, Lessor shall reimburse Lessee
to the extent of Lessee's payments.
<PAGE>
33. Waiver of Damages and Indemnification of Lessor. Lessor shall not be
-----------------------------------------------
liable to Lessee for any injury or damage that may result to any person or
property by or from any cause whatsoever other than the injuries or damages
caused by the negligence or misconduct of Lessor, its agents, servants,
employees, invitees, or contractors. Without limiting the generality of the
foregoing waiver, it is expressed extended to injury or damage caused by water
or vapor leakage of any character from the roof, walls, pipes or any other part
of the Property, or caused by gas, oil, electricity, or any other cause in or
about the premises or the building. Lessee agrees to hold Lessor harmless for,
and to defend Lessor against, any and all claims or liability for any death of
or injury to any person or damage to any property whatsoever, occurring in, on
or about the area or facilities of the building (including without limiting the
parking areas) excepting only to the extent that such death, injury or damage
shall be caused by the negligence or misconduct of the Lessor, its agents,
employees or contractors.
34. Waiver of Subrogation. Each of the parties hereto agrees to waive any
---------------------
and all claims against the other party for any loss, to the extent such loss is
repaid by proceeds of insurance maintained by the party that sustained the loss.
improvements, and the premises as set forth below:
35. Insurance. Lessee shall procure and maintain in force and effect,
---------
during the term of this Lease, policies of insurance covering the building,
improvements, and the premises as set forth below:
(a) Such policy(ies) shall insure on a. "blanket" basis the building value
and all improvements to the premises installed by the Lessee or the Lessor.
(b) Such insurance shall be written on a "full replacement value basis"
including a replacement cost endorsement and shall also contain a "stipulated
amount clause" or its equivalent.
(c) The insurer and terms of coverage shall be Subject to the approval of
the Lessor.
(d) As a basis for continuance of the "stipulated amount clause", Lessee
shall adjust such amount annually in accordance with reasonably acceptable
industrial building cost indices for the State of California. Lessor shall have
thirty (30) days from receipt to notify Lessee of any exceptions taken to
the
18.
<PAGE>
amount so stipulated. If so notified, Lessee shall cause the stipulated amount
to be amended to Lessor's reasonable requirements. Lessee acknowledges that
Lessor's mortgage lender may require an amount to be stipulated at least equal
to the amount loaned, and Lessee agrees that, if so required, such amount is
reasonable. Anything in this Lease to the contrary notwithstanding, the
stipulated amount shall not exceed the replacement value of the building and
improvements.
(e) The policy(ies) written to cover this Property shall name the Lessor
and Lessee as named insureds and any bank or other mortgage lender with an
interest in the Property shall be included as a loss payee, and a certified copy
of the policy(ies) shall be furnished to the Lessor.
(f) Such policy(ies) shall be written so as to insure losses arising from
all risks including, but not limited to, the perils of fire, extended coverage
(including explosion), vandalism and malicious mischief, earthquake, collapse,
liquid damage, and sprinkler leakage coverage which sprinkler leakage coverage
shall be equivalent to at least twenty-five percent (25%) of replacement value,
as determined above.
(g) The policy(ies) required under this Paragraph 35 shall expressly
provide that it (they) shall not be cancelled or altered without thirty (30)
days prior written notice to the Lessor.
(h) Copies of all insurance amendments, notices and correspondence relating
to the same concerning this property shall be forwarded to the Lessor within
fifteen (15) days after receipt by Lessee.
(i) Lessee shall pay all costs and premiums for insurance coverages
required by this Paragraph 35. In the event Lessee fails to maintain insurance
or insurance is cancelled, the Lessor may procure and maintain in force and
effect during the term of this Lease, policies of insurance covering the
building, improvements and the premises as set forth above, and Lessee shall
pay, as additional rent, all costs and premiums for insurance coverages required
by this Paragraph 35 within fifteen (is) days of Lessor's invoice of same, which
shall include a copy of such Invoice to Lessor from its insurance broker or
carrier.
36. Indemnification of Lessor and Lessee's Liability Insurance.
-----------------------------------------------------------
(a) Lessee, as a material part of the consideration to be rendered to
Lessor, waives all claims against Lessor for
19.
<PAGE>
damages to goods, wares and merchandise, and all other personal property in,
upon or about said premises and for injuries to persons in or about said
premises, from any cause arising at any time except to the extent such injuries
or damages are caused by the negligence or willful misconduct of the Lessor, its
agents, servants, employees, invitees, or contractors, and Lessee will hold
Lessor exempt and harmless from any damage or injury to any person or to the
goods, wares and merchandise and all other personal property of any person,
arising out of and in connection with the use or occupancy of the premises by
Lessee, or from the failure of Lessee to keep the premises in good condition and
repair except to the extent any such injuries or damages art caused by the
negligence or willful misconduct of the Lessor, its agents, servants, employees,
invitees, or contractors. Lessee shall secure and keep in force a public
liability insurance and property damage policy covering the leased premises,
including parking areas, insuring the Lessee and naming Lessor (Lessor's
mortgage lender, if required) as additional insured(s) with regard to Lessee's
use or occupancy of the leased premises. A copy of the said policy shall be
delivered to Lessor and the minimum limits of coverage thereto shall be not less
than $3,000,000.00 per occurrence for personal injury and for damage to
property.
(b) All policies required to be maintained by Lessee pursuant to the terms
of this Lease shall be issued by companies of recognized financial standing
authorized to do insurance business in California. Lessee shall pay all the
premiums and costs therefor and shall deliver to Lessor annually copies of or
certificates of the insurer that said policies are in effect. Should Lessee fail
to effect, maintain or renew any insurance provided for in this Lease, or to pay
any cost of premium therefor, or to deliver to Lessor any of such policies or
certificates, then in any of said events, Lessor, at its option, but without
obligation to do so, may, upon five (5) days written notice to Lessee of its
intention so to do, procure such insurance and any sums expended by it to
procure any such insurance shall be additional rent hereunder and shall be
repaid by Lessee within five (5) days following the date on which written notice
of such expenditure shall be given by Lessor to Lessee. Lessee shall obtain a
written undertaking from each insurer that cancellation or reduction in coverage
of said policy(ies) cannot be had without notification to Lessor and any loss
payee at least thirty (30) days prior thereto.
20.
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37. Utilities and Services. Lessee shall pay for all gas, heat, light,
----------------------
power, telephone or other communication service, janitorial, gardener, and
garbage disposal service and all other utilities and services supplied or
required to be supplied to the premises.
38. Option to Renew. Providing Lessee is not in breach hereunder at the
---------------
time of the exercise of this option, Lessee shall have the option to renew this
Lease for two additional terms of five Cs) years each. The terms of lease shall
be the same terms and conditions set forth in this Lease, excepting that the
rental due Lessor shall be increased as hereinafter provided, and there shall be
no other options to renew the lease covenant excepting as contemplated in this
paragraph. Any such renewal option shall be exercised, if at all, by written
notice given by Lessee to Lessor not later than one hundred eighty (180) days
prior to the expiration of the then agreed Lease term.
(a) In the event Lessee does not exercise the first rental option in the
manner set forth in this Paragraph 38, then the entirety of this Paragraph 38
shall be null and void.
(b) For purposes of computing the rental increases, the rental amounts
paid at the date of occupancy shall be used as the basic monthly rental against
which to multiply the Consumer Price Index in the manner hereinafter set forth.
(c) Should the Lessee exercise either or both options to renew, as herein
provided, the basic monthly rental due Lessor shall be increased in the same
percentage relationship as the Consumer Price Index (being that most recent
index determinable on the date the option renewal term commences) as such bears
to this same index as of the date of occupancy, provided, however, that in no
event shall the new basic monthly rental amounts be less than the basic monthly
amount due in the preceding five lease years.
(d) The basic monthly rental due Lessor for the second five year option
term shall be similarly increased over that due for the first five year option
term, (i.e. The same percentage increase in the Consumer Price Index between the
date the first option term commenced and the date the second option term
commences, shall be applied to the basic monthly rent due for the first option
term) excepting that in no event shall the said monthly rental due for the
second five year option term be more than one hundred forty percent (140%) of
the basic monthly rental due for the first five year option term, nor shall the
basic monthly rental amount due for the
21.
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second five year option term be less than that basic monthly amount due for the
first five year option term.
39. Notices. All notices, consents, waiver or other communications which
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this Lease requires to permit either party to give to the other shall be in
writing and shall be served personally or forwarded by registered or certified
mail, return receipt requested, made upon or addressed to the respective parties
as follows:
To Lessor: Mathilda Development
C/O The Cortana Corporation
5803 E. Bayshore Road
P.O. Box 10845
Palo Alto, a 94303
To Lessee: At Premises
with a copy to: Intermedics, Inc.
240 Tarpon Inn Village
Freeport, TX 77541
Attn: President
and a copy to; Jonathan Golden
Arnall, Golden & Gregory
1000 Fulton Federal Building
Atlanta, GA 30303
and a copy to ZYMOS: At Premises.
and a copy to: Gregory N. Gallo
Ware, Fletcher Freidenrich
525 University Avenue
Palo Alto, CA 94301
or to such other address as may be contained in a notice from either party to
the other given pursuant to this paragraph. Notice by registered or certified
mail shall be deemed to be given forty-eight (48) hours from the time of
postmarking, if mailed within the continental limits of the United States
(excluding Alaska). Rental payments required by this Lease shall be delivered to
Lessor at Lessor's address provided in this paragraph.
40. Marginal Captions. The marginal headings or titles to the paragraphs
-----------------
of this Lease are not a part of this Lease and shall have no effect upon the
construction or interpretation of any part thereof.
41. Miscellaneous.
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(a) All provisions of this Lease shall be deemed and construed to be
"covenants" as though the words importing such covenants were used in each
separate paragraph hereof.
22.
<PAGE>
(b) This Lease shall be construed and enforced in accordance with the laws
of the State of California.
(c) This Lease and the covenants and agreements herein contained shall
bind and inure to the benefit of the parties hereto, their heirs, successors,
executors, administrators and assigns.
(d) The words "Lessor" and "Lessee" as used herein shall include the
plural as well as the singular. Words used in the neuter include the masculine
and feminine gender. If there be more than one Lessor or Lessee the obligations
hereunder imposed upon Lessor or Lessee shall be joint and several.
(e) Time is of the essence of the tease. This lease and the obligations of
the parties hereunder shall not be affected or diminished because the Lessor is
unable to fulfill any of its obligations hereunder (other than the payment of
money) or is delayed in doing so, unless such inability or delay is caused by
reason of strike or other union-related labor troubles, civil commotion,
invasion, rebellion, hostilities, military or usurped power, sabotage,
governmental regulations or controls, inability to obtain any material, service
or financing, acts of God or by any other cause beyond its control.
42. Warranty. Lessee warrants to Lessor that Lessee conducts business as a
--------
corporation organized in the State of Texas, and that said corporation is fully
empowered and legally authorized to execute this agreement in the State of
California. Lessee further warrants to Lessor that Lessee will provide an
appropriate certificate of the Corporation Secretary or copy of Resolution of
the corporate directors establishing the authority of the officers to execute
this document. Lessee agrees to provide Lessor copies of the published financial
statements and reports of the corporation in the same manner as if Lessor were a
shareholder of the common stock of the corporation.
43. Severability. If any term or provision of this Lease Agreement, or the
------------
application thereof to any person or circumstance, shall, to any extent, be
invalid or unenforceable, the remainder of this Lease Agreement, or the
application of such terms or provisions to persons or circumstances other than
those to which it is invalid or unenforceable, shall not be affected thereby,
and each term and provision of this Lease Agreement shall be valid and
enforceable to the fullest extent permitted by law.
23.
<PAGE>
44. Further Instruments. Lessee, at no cost or expense to Lessee, shall
-------------------
execute such documents and instruments as Lessor may request as are reasonably
necessary and appropriate for governmental approval of the subdivision of the
Property from the adjacent property owned by Lessor.
45. Entire Agreement. This instrument contains all of the agreements and
----------------
conditions made between the parties hereto and may not be modified orally or in
any other manner than by an agreement in writing signed by all of the parties
hereto or their respective successors in interest.
IN WITNESS WHEREOF, the parties hereto have executed this Lease the day and
year first above written.
"LESSEE"
INTERMEDICS, INC.,
a Texas Corporation
By ________________________
By ________________________
"LESSOR"
MATHILDA DEVELOPMENT, a California
Limited Partnership
THE CORTANA CORPORATION,
Managing General Partner
By ________________________
James G. Walker, President
By ________________________
Jack G. Hiehle, Secretary
24.
<PAGE>
FIRST AMENDMENT TO SECOND LEASE
THIS FIRST AMENDMENT (the "First Amendment") to the Lease dated October 28,
1982 (the "Lease") by and between MATHILDA DEVELOPMENT, a California limited
partnership (the "Lessor") and INTERMEDICS, INC., a Texas corporation (the
"Lessee") is entered into effective the 7th day of October, 1983.
Whereas, the rental set forth in Paragraph 3(a) and 3(b) of the above
referred to Lease was determined by the formula established in that certain
Option Agreement between the parties and, pursuant to Paragraph 3(c), the
parties agreed that upon completion of the building, the parties would enter
into an amendment to the Least setting forth the rental as determined by the
formula set forth in the Option Agreement between the parties using the actual
construction costs of the building; and
Whereas, the building which is the Subject of this Lease has nearly been
completed and the parties desire to re-estimate the rentals on a preliminary
basis using actual costs incurred to date and estimates for the costs to be
incurred through completion.
Now therefore it is mutually agreed by and between the parties hereto:
1. Paragraph 3(a)(i) and (ii) are hereby amended to read in full as
follows:
"3. Rental.
(a) Lessee agrees to pay to Lessor as basic rental for the Property, the
sum of Six Million Three Hundred Ninety Thousand Dollars ($6,390,000.00),
payable in lawful money of the United States on or before the first day of each
and every month as follows:
(i) Thirty Five Thousand Five Hundred Dollars ($35,500.00) upon
execution of the Lease constituting the rental for the first month of the term
hereof, and Thirty Five Thousand Five Hundred Dollars ($35,500.00) on the first
day of the second month of the term and on the first day of each succeeding
month through the sixtieth month of the term.
25.
<PAGE>
(ii) On the first day of the sixty-first month of the term hereof, and
on the first day of each Succeeding month through the one hundred twentieth
month hereof, the sum of Thirty Five Thousand Five Hundred Dollars ($35,500.00),
plus such increase in the rental as shall be computed as follows:
Commencing on the sixty first month of the term hereof, the monthly
basic rental shall be increased based on the percentage increase in the Consumer
Price Index, published by the U.S. Department of Labor, San Francisco-Oakland
Average for All Urban Consumers, All Items (the "Consumer Price Index"), as such
Index of the sixty first month of the term hereof bears to such Index of the
date of occupancy hereof; provided, that in no event, however, shall the new
basic monthly rental exceed one hundred forty percent (140%) of the basic
monthly rental due during the preceding five lease years, nor shall the new
basic monthly rental be less than the basic monthly rental due in the preceding
five lease years."
2. The parties further agree that the rental set forth above are
estimates and further agree that upon final completion of the building, they
will enter into a further amendment to the Lease setting forth the rental
pursuant to the provisions of Paragraph 3(c) of the above referred to Lease with
the sole exception being that so long as the costs of tenant improvements are no
greater than the amount specified in the Revised Rental Proposal, the basic
rental shall not exceed the amount specified in Paragraph 3(a) prior to this
First Amendment, i.e., Forty Thousand Two Hundred Eighty Three and 75/100
Dollars ($40,283.75) per month.
3. Paragraph 2 is hereby amended to read in full as follows:
"2. Term. The term of this Lease shall be for a period of fifteen years
----
fifteen (15) days commencing on October 17, 1983 and ending at midnight on the
31st day of October, 1998."
4. In the event of any conflict between the terms and conditions of this
First Amendment and the terms and conditions of the Lease, the terms and
conditions of this First Amendment to Second Lease shall prevail.
26.
<PAGE>
In witness whereof, the parties have executed this First Amendment to
Second Lease, effective as of the date first hereinabove written.
"LESSOR"
MATHILDA DEVELOPMENT, a California
Limited Partnership
THE CORTANA CORPORATION,
Managing General Partner
By ____________________________________
David A. Wollenberg, President
By ____________________________________
Jack G. Hiehle, Secretary
"LESSEE"
INTERMEDICS, INC.,
a Texas Corporation
By ____________________________________
By ____________________________________
27.
<PAGE>
SECOND AMENDMENT TO SECOND LEASE
THIS SECOND AMENDMENT (the "Second Amendment") to the Lease dated October
28, 1982 (the "Lease") by and between MATHILDA DEVELOPMENT, a California limited
partnership (the "Lessor") and INTERMEDICS, INC., a Texas corporation (the
"Lessee") is entered into effective the 7th day of October, 1983.
Whereas, the rental set forth in Paragraph 3(a) and 3(b) of the above
referred to Lease was determined by the formula established in that certain
Option Agreement between the parties and, pursuant to Paragraph 3(c), the
parties agreed that upon completion of the building, the parties would enter
into an amendment to the Least setting forth the rental as determined by the
formula set forth in the Option Agreement between the parties using the actual
construction costs of the building; and
Whereas, the building which is the Subject of this Lease has nearly been
completed and the parties desire to re-estimate the rentals on a preliminary
basis using actual costs incurred to date and estimates for the costs to be
incurred through completion.
Now therefore it is mutually agreed by and between the parties hereto:
1. Paragraph 3(a)(i) and (ii) are hereby amended to read in full as
follows:
"3. Rental.
------
(a) Lessee agrees to pay to Lessor as basic rental for the Property, the
sum of Six Million Five Hundred Eighteen Thousand Four Hundred Thirty and 80/100
Dollars ($6,518,130.80), payable in lawful money of the United States on or
before the first day of each and every month as follows:
(i) Thirty Six Thousand One Hundred Thirteen and 19/100 Dollars
($36,113.19) upon execution of the Lease constituting the rental for the first
month of the term hereof, and Thirty Six Thousand One Hundred Thirteen and
19/100 Dollars
28.
<PAGE>
($36,113.19) on the first day of the second month of the term and on the first
day of each succeeding month through the sixtieth full calendar month of the
term. Rent for the partial month preceding the first full calendar month shall
be prorated.
(ii) On the first day of the sixty-first month of the term hereof, and
on the first day of each succeeding month through the one hundred twentieth
month hereof, the sum of Thirty Six Thousand Five Hundred Dollars ($35,500.00).
plus such increase in the rental as shall be computed as follows:
Commencing on the sixty first month of the term hereof, the monthly
basic rental shall be increased based on the percentage increase in the Consumer
Price Index, published by the U. S. Department of Labor, San Francisco-Oakland
Average for All Urban Consumers, All Items (the "Consumer Price Index"), as such
index of the sixty first month of the term hereof bears to such index of the
date of occupancy hereof; provided, that in no event, however, shall the new
basic monthly rental exceed one hundred forty percent (140%) of the basic
monthly rental due during the preceding five lease years, nor shall the new
basic monthly rental be less than the basic monthly rental due in the preceding
five lease years."
2. In the event of any conflict between the terms and conditions of this
Second Amendment and the terms and conditions of the Lease and the prior
amendment, the terms and conditions of this Second Amendment to Second Lease
shall prevail.
In witness whereof, the parties have executed this Second Amendment to
Second Lease, effective as of the date first hereinabove written.
"LESSOR"
MATHILDA DEVELOPMENT, a California
Limited Partnership
THE CORTANA CORPORATION,
Managing General Partner
By ________________________
David A. Wollenberg, President
By ________________________
Jack G. Hiehle, Secretary
29.
<PAGE>
"LESSEE"
INTERMEDICS, INC.,
a Texas Corporation
By ________________________
By ________________________
30.
<PAGE>
THIRD AMENDMENT TO SECOND LEASE
THIS THIRD AMENDMENT (the "Third Amendment") to the Lease dated October 28'
1982 (the "Lease") by and between MATHILDA DEVELOPMENT, a California limited
partnership (the "Lessor") and INTERMEDICS, INC., a Texas corporation (the
"Lessee") is entered this 2nd day of February, 1988 by the undersigned.
--- --------
WHEREAS, Lessee has assigned its interest in the Lease to ZYMOS, INC. (the
"Assignee") effective February 1, 1988 and Lessor has consented thereto; and
WHEREAS, Assignee has requested and Lessor has provided additional tenant
improvements to the building costing One hundred Thousand Dollars ($100,000.00);
and
WHEREAS, as consideration for the additional tenant improvements provided
by Lessor, Assignee has agreed to increase the monthly rent due Lessor under the
Lease;
NOW THEREFORE, it is mutually agreed by and between the parties hereto:
1. Beginning February 15, 1988 and continuing through January 31, 1993
the basic monthly rental shall be increased by One Thousand Five
hundred Fifty Two and 67/100 Dollars ($1,552.67) over the basic
monthly rental set forth In the Lease as previously amended.
Therefore, on February 1, 1988 and on the first day of each month
thereafter to and including the first day of October, 1988, Lessee
shall pay to Lessor the sum of Thirty Seven Thousand Six Hundred Sixty
Five and 67/100 Dollars ($37,665.67) as basic monthly rental for the
Property. Similarly, the sum of One Thousand Five Hundred Fifty Two
and 67/100 Dollars ($1,552.67) shall be added to the basic monthly
rent due for the sixty (60) month period beginning November 1, 1988
(the sixty-first month of the Lease) as such amount is calculated
pursuant to Paragraph 3 of the Lease, as amended and the same sum
shall be added to the basic monthly rent due for the fifty one (51)
month period beginning November 1, 1993 (the one hundred twenty first
month of the Lease) as such amount Is calculated pursuant to Paragraph
3 of the Lease, as amended.
2. In the event of any conflict between the terms and conditions of this
Third Amendment and the terms and conditions of the Lease and the
prior Amendments, the terms and conditions of this Third Amendment to
Second Lease shall prevail.
IN WITNESS WHEREOF, the parties have executed this Third Amendment to
Second Lease, on the date first written above.
31.
<PAGE>
"LESSOR"
MATHILDA DEVELOPMENT, a California
Limited Partnership
THE CORTANA CORPORATION,
Managing General Partner
By ________________________
David A. Wollenberg, President
By ________________________
Jack G. Hiehle, Secretary
"LESSEE"
INTERMEDICS, INC.,
a Texas Corporation
By ________________________
By ________________________
32.
<PAGE>
EXHIBIT "B" - SECOND PROPERTY
<PAGE>
CONSENT
MATHILDA DEVELOPMENT, a California limited partnership ("Lessor"), as
lessor under the Lease attached hereto as Exhibit A, hereby consents to the
---------
Subletting of the Premises described herein on the terms and conditions
described in this Sublease. This consent shall apply only to this Sublease and
shall not be deemed to be a consent to any other Sublease or any further
Subletting.
Lessor hereby affirms that (i) notwithstanding that the "Second Lease"'
attached hereto as Exhibit A does not include a description of the "Second
Property" (as that term is defined in the Lease), the Second Lease and the First
Amendment to Second Lease, the Second Amendment to Second Lease, and the Third
Amendment to Second Lease attacked thereto as Exhibit A constitute the full and
---------
complete agreement by and between Lessor and Sublessor with respect to the
Premises and the Second Property, and (ii) the site plan attached hereto as
Exhibit B is a full, complete and correct description of the Second Property.
- ---------
Lessor further hereby affirms that the Lease is in full force and effect and
that the Lease has not been amended or modified in any way except as evidenced
in Exhibit A and except that notwithstanding any provision in the Lease to the
---------
contrary, Lessor has agreed to carry the insurance required to be carried under
Paragraph 35 of the Lease. Lessor acknowledges that there is presently no
default by Sublessor under any obligation or provision contained in the Lease,
and Lessor agrees to give Sublessee written notice of any default under the
Lease.
Lessor hereby Agrees that the waiver of claims and Subrogation rights set
forth in Paragraph 34 of the Lease (as modified by Paragraph l2.1(b) hereof)
shall be deemed an agreement by and among Lessor, Sublessor, and Sublessee.
Lessor acknowledges that Paragraph 19 of the Sublease creates a right in
Sublessee to assign the Sublease to an "Affiliate" without the consent of
Sublessor or Lessor, and Lessor hereby agrees to the terms of said Paragraph 19,
provided that Lessor is given written notice of such assignment within 15
(fifteen) business days after it occurs.
Lessor agrees that to the extent any approval or consent is required from
Lessor under the Lease, Lessor shall not unreasonably withhold, delay or
condition such approval or consent, and Lessor shall respond to any such request
within 30 (thirty) days following receipt of request for such approval or
consent.
LESSOR:
MATHILDA DEVELOPMENT,
a California limited partnership
By: _________________________
Its: ________________________
By THE CORTANA CORPORATION
MANAGING GENERAL PARTNER
<PAGE>
EXHIBIT 10.14
FOUNDER STOCK PURCHASE AGREEMENT
--------------------------------
THIS AGREEMENT is made as of the 13TH day of April, 1988, by and between
Power Integrations, Inc., a California corporation (the "Company"), and Steven
J. Sharp ("Purchaser").
WITNESSETH:
----------
WHEREAS, the Company desires to issue and the Purchaser desires to acquire
stock of the Company as herein described, on the terms and conditions
hereinafter set forth.
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. Number of Shares and Price Per Share. The Purchaser hereby agrees to
------------------------------------
purchase from the Company and the Company agrees to sell to the Purchaser Three
Hundred Thirty Thousand (330,000) shares of the Company's Common Stock (the
"Stock") for a purchase price of $3,300 (or $0.01 per share). The closing of
such purchase shall occur immediately upon execution of this Agreement. Payment
of the purchase price will be made at the closing by the Purchaser's delivery to
the Company of a check representing the aggregate purchase price.
2. Unvested Share Repurchase Option. In the event the Purchaser's
--------------------------------
employment with the Company is terminated for any reason (other than death or
disability), with or without cause, or if the Purchaser or the Purchaser's legal
representative attempts to sell, exchange, transfer, pledge or otherwise dispose
of any shares purchased pursuant to this Agreement which have not vested in the
Purchaser pursuant to Section 2(a) (the "Unvested Shares"), the Company shall
have the right to reacquire the Unvested Shares under the terms set forth in
this Section 2 (the "Unvested Share Repurchase Option").
(a) Vesting of Shares. All of the Stock will initially be subject to
-----------------
the Unvested Share Repurchase Option, which will lapse with respect to 1/12 of
such shares (i.e., 27,500 shares) for each full month of the Purchaser's
continuous employment with the Company from April 1, 1988 through July 31, 1988
with fractional months not counted and thereafter will lapse with respect to
1/30 of such shares (i.e. 11,000 shares) for each full month of Purchaser's
continuous employment with the Company from August 1, 1988 through March 31,
1990, with fractional months not counted. Shares of Stock that are not subject
to the Unvested Share Repurchase Option are "Vested Shares."
1.
<PAGE>
(b) Exercise of Unvested Share Repurchase Option. If the
--------------------------------------------
Purchaser's employment with the Company is terminated for any reason (other than
death or disability), with or without cause, or if the Purchaser or the
Purchaser's legal representative attempts to dispose of any Unvested Shares
other than as allowed in this Agreement, the Company may exercise the Unvested
Share Repurchase Option by written notice to the Escrow Agent (as defined in
Section 10) and to the Purchaser or the Purchaser's legal representative within
sixty (60) days after such termination or after the Company has received notice
of the attempted disposition.
(c) Payment for Shares and Return of Shares. Payment by the Company
---------------------------------------
to the Escrow Agent on behalf of the Purchaser or the Purchaser's legal
representative shall be made in cash within sixty (60) days after the date of
the mailing of the written notice of exercise of the Unvested Share Repurchase
Option. For purposes of the foregoing, cancellation of any promissory note of
the Purchaser to the Company shall be treated as payment to the Purchaser in
cash to the extent of the unpaid principal and any accrued interest cancelled.
The purchase price per share being purchased by the Company pursuant to the
Unvested Share Repurchase Option shall be $0.01 per share, adjusted
appropriately to reflect any stock split, stock dividend, recapitalization, etc.
Within thirty (30) days after payment by the Company, the Escrow Agent shall
give the shares which the Company has purchased to the Company and shall give
the payment received from the Company to the Purchaser.
(d) Early Termination of Unvested Share Repurchase Option.
-----------------------------------------------------
The other provisions of Section 2 notwithstanding, the Company's Board of
Directors may terminate the Unvested Share Repurchase Option in the event of (1)
a merger in which the Company is not the surviving corporation; (2) a merger or
the sale or exchange by the shareholders of the Company of all or substantially
all of the stock of the Company where the shareholders before such merger or
sale or exchange do not retain, directly or indirectly, at least a majority of
the beneficial interest in the voting stock of the surviving Company; (3) the
sale or exchange of all or substantially all of the Company's assets (other than
a sale or transfer to a subsidiary of the Company as defined in section 425(f)
of the Code); or (4) in such other event as the Company's Board of Directors may
determine to be appropriate. The Unvested Share Repurchase Option will terminate
in the event of Purchaser's death or termination of employment due to permanent
and total disability as defined in Section 72(m) of the Internal Revenue Code of
1986, as amended.
2.
<PAGE>
(e) Transfers Not Subject to the Unvested Share Repurchase Option.
-------------------------------------------------------------
The Unvested Share Repurchase Option shall not apply to a transfer to the
Purchaser's ancestors, descendants or spouse or to a trustee for their benefit
or the benefit of the Purchaser, provided that such transferee shall agree in
writing (in a form satisfactory to the Company) to take the stock subject to all
the terms and conditions of this Section 2.
(f) Legends. The Company may at any time place a legend or
-------
legends referencing the Unvested Share Repurchase Option on any shares subject
to the Unvested Share Repurchase Option.
(g) Assignment of Unvested Share Repurchase Option. The Company may
----------------------------------------------
assign the Unvested Share Repurchase Option to one or more persons, who shall
have the right to exercise the Unvested Share Repurchase Option in his or her
own name for his or her own account.
3. Stock Dividends, etc. If, from time to time, there is any stock
--------------------
dividend, stock split or other change in the character or amount of any of the
outstanding stock of the Company, then in such event any and all new substituted
or additional securities to which Purchaser is entitled by reason of Purchaser's
ownership of Unvested Shares shall be immediately subject to the Unvested Share
Repurchase Option with the same force and effect as the Unvested Shares.
4. Right of First Refusal. The Purchaser cannot transfer, assign or
----------------------
otherwise dispose of, voluntarily or involuntarily, any Unvested Shares or any
interest in those shares. Before any Vested Shares registered in the name of
Purchaser may be sold or transferred (including transfer by operation of law)
other than to Purchaser's spouse, descendants, ancestors, or trusts for their
benefit or the benefit of the Purchaser, such shares shall first be offered to
the Company, which will have the right to purchase all or any part of the
Vested Shares proposed to be transferred ("Right of First Refusal"), in the
following manner:
(a) Transfer Notice. The Purchaser or his or her legal
---------------
representative shall first give written notice (the "Transfer Notice") of any
proposed transfer to the Company. The Transfer Notice shall name the proposed
transferee, state the number of shares of Stock to be transferred, the price per
share and all other terms of the offer. The Transfer Notice shall be signed by
the Purchaser or his or her representative and the prospective transferee and
must constitute a binding agreement for the transfer of the Stock subject only
to the Right of First Refusal.
3.
<PAGE>
(b) Bona Fide Determination. Within thirty (30) days of delivery of
-----------------------
the Purchaser's notice of a proposed transfer, the Company's Board of Directors
shall determine the bona fide nature of the proposed transfer and give the
Purchaser written notice of its determination. If the proposed transfer is
deemed to be bona fide, the remaining subsections of this section shall apply to
the sale. If the proposed transfer is deemed not to be bona fide, the Purchaser
will be responsible for providing additional information to the Board to show
the bona fide nature of the proposed transfer and no Stock will be transferred
on the books of the Company until the Board has approved the proposed transfer
as bona fide.
(c) Failure to Exercise. If the Company elects not to or fails to
-------------------
exercise in full the Right of First Refusal within thirty (30) days from the
later of the date the Transfer Notice is delivered to the Company or thirty (30)
days after the date the transfer is determined to be bona fide (if the Purchaser
is required to provide additional information as provided in Section 4(b)), the
Purchaser may, by the later of sixty (60) days after the delivery of the
Transfer Notice to the Company or thirty (30) days after the date the transfer
is determined to be bona fide (if the Purchaser is required to provide
additional information as provided in Section 4(b)), conclude a transfer of the
shares of Stock subject to the Transfer Notice which have not been purchased by
the Company pursuant to exercise of the Right of First Refusal on the terms and
conditions described in the Transfer Notice. Any proposed transfer on terms and
conditions different from those described in the Transfer Notice, as well as any
subsequent proposed transfer by the Purchaser, shall again be subject to the
Right of First Refusal and shall require compliance by the Purchaser with the
procedure described in this Section 4. If the Company exercises the Right of
First Refusal, the parties shall consummate the sale of shares of Stock on the
terms set forth in the Transfer Notice by the later of sixty (60) days after the
delivery of the Transfer Notice to the Company or thirty (30) days after the
date the transfer is determined to be bona fide (if the Purchaser is required to
provide additional information as provided in Section 4(b)); provided, however,
in the event the Transfer Notice provides for the payment for the shares of
Stock other than in cash, the Company shall have the option of paying for the
shares of Stock by the discounted cash equivalent of the consideration described
in the Transfer Notice as reasonably determined by the Company.
(d) Condition to Transfer. All transferees of shares of Stock or
---------------------
any interest therein other than the Company shall be required as a condition of
such transfer to agree in writing (in a form satisfactory to the Company) that
4.
<PAGE>
they will receive and hold such shares of Stock or interests subject to the
provisions of this Agreement, including the Right of First Refusal.
(e) Termination. The Right of First Refusal will terminate at such
-----------
time as a public market exists for the Company's Common Stock (or any other
stock issued by the Company, or any successor, in exchange for the Stock). For
the purpose of this Agreement, a "public market" shall be deemed to exist if (i)
such stock is listed on a national securities exchange (as that term is used in
the Securities Exchange Act of 1934) or (ii) such stock is traded on the over-
the-counter market and prices therefore are published daily on business days in
a recognized financial journal.
(f) Permitted Transfers. The Right of First Refusal shall not apply
-------------------
to a transfer (inter vivos or upon death) to the Purchaser's ancestors or
descendants or spouse or to a trustee for their benefit provided that such
transferee shall agree in writing (in a form satisfactory to the Company) to
take the Stock subject to all the terms of the Plan, including the Right of
First Refusal.
5. Piggyback Registration Rights.
-----------------------------
(a) The terms "register", "registered" and registration"
-------- ---------- ------------
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act of 1933, as amended, and the
declaration or ordering of the effectiveness of such registration statement.
(b) If the Company shall determine to register any of its
securities either for its own account or the account of a stockholder(s)
exercising demand registration rights, other than a registration relating solely
to employee benefit plans, or a registration relating solely to a transaction
within the scope of Rule 145 promulgated under the Securities Act of 1933, or a
registration 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 the Stock, the Company
will promptly give to the Purchaser written notice thereof and include in such
registration (and any related qualification under blue sky laws), and in any
underwriting involved therein, the number of Vested Shares specified in a
written request made by the Purchaser within fifteen (15) days after receipt of
such written notice from the Company, except as set forth in Section 5(b) below.
(c) If the registration of which the Company gives notice is
for a registered public offering involving an underwriting, the right of any
Purchaser to registration
5.
<PAGE>
shall be conditioned upon the Purchaser's participation in such underwriting and
the inclusion of such Purchaser's Stock in the underwriting pursuant to an
underwriting agreement in customary form with the underwriter or underwriters
selected by the Company. Notwithstanding any other provision of this Section 5,
if the underwriter reasonably determines that marketing factors require a
limitation on the number of shares to be underwritten the underwriter may
exclude some or all of the Stock, as follows: with respect to stockholders
exercising demand registration rights or exercising piggyback rights superior,
as to inclusion of shares in a registration, to those of the Purchaser (for
example, the rights under the Registration Rights Agreement to be entered into
in or around April 1988 by the Company and purchasers of the Company's Series A
Preferred Stock, amendments to those rights that may occur from time to time,
and similar rights that may be granted in the future), the number of shares that
may be included by the Purchaser shall be cut back entirely before any
limitation on the number of shares that may be included by such stockholders.
With respect to stockholders exercising other registration rights (i.e., rights
on a parity with the Purchaser's rights), the number of shares that may be
included in the registration and underwriting will be allocated in proportion,
as nearly as practicable, to the respective amounts of securities of the Company
owned by each.
(d) All expenses of the registration shall be borne by the
Company, except underwriting discounts and selling commissions applicable to the
sale of any Stock and any other securities of the Company being sold in the same
registration by other stockholders, which shall be borne by the Purchaser and
such other stockholders pro rata on the basis of the number of their shares
registered.
6. Dissolution of Marriage.
-----------------------
(a) In the event of the dissolution of Purchaser's marriage,
Purchaser shall have the right and option to purchase from his or her spouse all
or any portion of shares of Stock (i) awarded to the spouse pursuant to a decree
of dissolution of marriage or any other order by any court of competent
jurisdiction and/or by any property settlement agreement (whether or not
incorporated by reference in any such decree), or (ii) gifted to the spouse by
Purchaser prior to the dissolution, at the fair market value of said Stock at
the time of such decree, other order or property settlement as determined by the
Company's Board of Directors, upon the terms set forth below. If either
Purchaser or Purchaser's spouse disputes the fair market valuation of the Stock
by the Board of Directors, such fair market value shall be determined by
arbitration in accordance with the rules of the
6.
<PAGE>
American Arbitration Association. Purchaser shall exercise his or her right, if
at all, within thirty (30) days of the entry of any such decree or property
settlement agreement by delivery to Purchaser's former spouse of written notice
of exercise, specifying the number of shares of Stock Purchaser elects to
purchase. The purchase price for the Stock shall be paid by delivery of a
promissory note for the purchase price bearing interest at the rate of ten
percent (10%) per annum payable in four (4) equal annual installments of
principal and interest, commencing on the anniversary date of the exercise of
the option; provided, however that if, subsequent to the date any or all
--------
of the Stock is awarded to Purchaser's former spouse as provided above, the
Company exercises its Unvested Share Repurchase Option with respect to any or
all of the Stock so awarded, the amount remaining due under such promissory note
shall be reduced by the difference between the fair market value of such Stock
determined as set forth above and the amount received by Purchaser for such
Stock upon exercise by the Company of the Unvested Share Repurchase Option.
(b) In the event Purchaser does not exercise his right to purchase
all of the Stock awarded to Purchaser's former spouse, Purchaser shall provide
written notice to the Company of the number of shares of Stock available for
purchase within thirty (30) days of the entry of the decree. The Company shall
then have the right for the next thirty (30) days to purchase any of the Stock
not acquired by Purchaser directly from Purchaser's former spouse in the manner
provided in Section 6(a) at the same price and on the same terms that were
available to Purchaser.
(c) Nothing contained in this Section 6 shall affect or impair the
Unvested Share Repurchase Option in favor of the Company as set forth in Section
2 above.
7. Consent of Spouse. If the Purchaser is married on the date of this
-----------------
Agreement, the Purchaser's spouse shall execute a Consent of Spouse in the form
of Exhibit A hereto, effective on the date hereof. Such consent shall not be
---------
deemed to confer or convey to the spouse any rights in the Stock that do not
otherwise exist by operation of law or the agreement of the parties. If the
Purchaser should marry or remarry subsequent to the date of this Agreement, the
Purchaser shall within thirty (30) days thereafter obtain his or her new
spouse's acknowledgment of and consent to the existence and binding effect of
all restrictions contained in this Agreement by signing an additional Consent of
Spouse in the form of Exhibit A.
7.
<PAGE>
8. Legends. All certificates representing any shares of Stock subject to
-------
the provisions of this Agreement shall have endorsed thereon the following
legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
REPURCHASE OPTION AND A RIGHT OF FIRST REFUSAL IN FAVOR OF THE CORPORATION OR
ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE
REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON
FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION."
(b) "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE
COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT
FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
(c) Any legend required to be placed thereon by the California
Commissioner of Corporations.
9. Warranties and Representations. In connection with the proposed
------------------------------
purchase of the Stock, the Purchaser hereby agrees, represents and warrants as
follows:
(a) The Purchaser is purchasing the Stock solely for his or her own
account for investment and not with a view to, or for resale in connection with,
any distribution thereof within the meaning of the Securities Act of 1933 as
amended (the "Act"). The Purchaser further represents that he or she does not
have any present intention of selling, offering to sell or otherwise disposing
of or distributing the Stock or any portion thereof; and that the entire legal
and beneficial interest of the Stock he or she is purchasing is being purchased
for, and will be held for the account of, the Purchaser only and neither in
whole nor in part for any other person.
(b) The Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Stock. The Purchaser
further represents and warrants that he or she has discussed the Company and its
plans, operations and financial condition with its officers, has received all
such information as he or she deems necessary and appropriate to enable him or
her to evaluate the financial risk inherent in
8.
<PAGE>
making an investment in the Stock and has received satisfactory and complete
information concerning the business and financial condition of the Company in
response to all inquiries in respect thereof.
(c) The Purchaser realizes that his or her purchase of the Stock will
be a highly speculative investment, and he or she is able, without impairing his
financial condition, to hold the Stock for an indefinite period of time and to
suffer a complete loss on his or her investment.
(d) The Company has disclosed to the Purchaser that:
(i) the sale of the Stock has not been registered under the
Act, and the Stock must be held indefinitely unless a transfer of it is
subsequently registered under the Act or an exemption from such registration is
available, and that the Company is under no obligation to register the Stock;
(ii) the Company will make a notation in its records of the
aforementioned restrictions on transfer and legends.
(e) The Purchaser is aware of the provisions of Rule 144,
promulgated under the Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or an affiliate of such issuer), in a non-public offering subject to
the satisfaction of certain conditions, including among other things: the resale
occurring not less than two years from the date the Purchaser has purchased and
paid for the Stock; the availability of certain public information concerning
the Company; the sale being through a broker in an unsolicited "broker's
transaction" or in a transaction directly with a market maker (as said term is
defined under the Securities Exchange Act of 1934); and that any sale of the
Stock may be made by him or her only in limited amounts during any three-month
period not exceeding specified limitations. The Purchaser further represents
that he or she understands that at the time he or she wishes to sell the Stock
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 that, in such event, he or she
would be precluded from selling the Stock under Rule 144 even if the two-year
minimum holding period had been satisfied. The Purchaser represents that he or
she understands that in the event all of the requirements of Rule 144 are not
satisfied, registration under the Act or compliance with an
9.
<PAGE>
exemption from registration 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.
(f) Without in any way limiting the Purchaser's representations and
warranties set forth above, the Purchaser further agrees that he or she shall in
no event make any disposition of all or any portion of the Stock which he or she
is purchasing unless and until:
(i) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with said Registration Statement; or
(ii) The Purchaser shall have (1) notified the Company of the
proposed disposition and furnished the Company with a detailed statement of the
circumstances surrounding the proposed disposition, and (2) furnished the
Company with an opinion of his or her own counsel to the effect that such
disposition will not require registration of such shares under the Act, and such
opinion of his or her counsel shall have been concurred in by counsel for the
Company and the Company shall have advised the Purchaser of such concurrence.
10. Escrow. As security for his or her faithful performance of the terms
------
of this Agreement and to insure the availability for delivery of the Stock upon
exercise of the Purchase Option herein provided for, the Purchaser agrees to
deliver to and deposit with Ware & Freidenrich, A Professional Company, counsel
to the Company (the "Escrow Agent"), as Escrow Agent in this transaction, two
Stock Assignments duly endorsed (with date and number of shares blank) in the
form attached hereto as Exhibit B, together with the certificate or
---------
certificates evidencing the Stock; such documents are to be held by the Escrow
Agent pursuant to the Joint Escrow Instructions of the Company and the
Purchaser set forth in Exhibit C attached hereto and incorporated by this
---------
reference, which instruction shall also be delivered to the Escrow Agent at the
closing hereunder.
11. Transfers in Violation of Agreement. The Company shall not be
-----------------------------------
required (i) to transfer on its books any shares of Stock of the Company which
shall have been sold or transferred in violation of any of the provisions set
forth in this Agreement or (ii) to treat as owner of such shares or
10.
<PAGE>
to accord the right to vote as such owner or to pay dividends to any transferee
to whom such shares shall have been so transferred.
12. Rights as Stockholder. Subject to the provisions of this Agreement,
---------------------
the Purchaser shall exercise all rights and privileges of a stockholder of the
Company with respect to the Stock deposited in escrow.
13. Further Instruments. The parties agree to execute such further
-------------------
instruments and to take such further action as may reasonably be necessary to
carry out the intent of this Agreement.
14. Notice. Any notice required or permitted hereunder shall be given
------
in writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail with
postage and fees prepaid, addressed to the other party at the address
hereinafter shown below his or her signature or at such other address as such
party may designate by ten (10) days' advance written notice to the other party.
15. Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
the successors and assigns of the Company and, subject to the restrictions on
transfer herein set forth, be binding upon the Purchaser, his or her heirs,
executors, administrators, successors and assigns.
16. Entire Agreement; Amendments. This Agreement, together with the
----------------------------
Exhibits hereto, shall be construed under the laws of the State of California
(as it applies to agreements between California residents, entered into and to
be performed entirely within California), and constitutes the entire agreement
of the parties with respect to the subject matter hereof superseding all prior
written or oral agreements, and no amendment or addition hereto shall be deemed
effective unless agreed to in writing by the parties.
17. Right to Specific Performance. The Purchaser agrees that the
-----------------------------
Company shall be entitled to a decree of specific performance of the terms
hereof or an injunction restraining violation of this Agreement, said right to
be in addition to any other remedies available to the Company.
18. Separability. If any provision of this Agreement is held by a court
------------
of competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way and shall be construed in accordance with the
purposes and tenor and effect of this Agreement.
11.
<PAGE>
19. Tax Consequences and Tax Election Notification.
----------------------------------------------
(a) The Purchaser understands that the Stock has been valued
by the Board of Directors and that the Company believes this valuation is a fair
attempt to appraise it. The Purchaser understands, however, that the Company can
give no assurances that the purchase price will be accepted as the fair market
value of the Stock by the Internal Revenue Service (the "IRS"), and that the IRS
could assert that the value of the Stock on the date of purchase was
substantially greater than the purchase price.
If the IRS were to successfully argue in a tax determination that the
Stock had value greater than the price paid by the Purchaser, the additional
value would constitute ordinary income as of the date of its receipt. The
additional taxes (and interest) due would be payable by the Purchaser. There is
no provision for the Company to reimburse the Purchaser for any potential tax
liability, and the Purchaser assumes all responsibility for it. If the
additional value attributed to the Stock were more than 25 percent of the
Purchaser's gross income for the year in which that value was taxable, the IRS
would have six years from the due date for filing the return (or the actual
filing date of the return if filed thereafter) within which to assess the
additional tax and interest.
(b) The Purchaser understands that Section 83 of the Internal
Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income the
difference between the amount paid for the Stock and the fair market value of
the Stock as of the date any restrictions on the Stock lapse. In this context,
"restriction" means the right of the Company to buy back the stock pursuant to
the Unvested Share Repurchase Option. The Purchaser understands that he may
elect to be taxed at the time the Stock is purchased rather than when and as the
Unvested Share Repurchase Option expires by filing an election under Section
83(b) of the Code with the IRS within 30 days from the date of purchase. Even if
the fair market value of the Stock equals the amount paid for the Stock, the
election must be made to avoid adverse tax consequences in the future. The
Purchaser understands that failure to make this filing timely will result in the
recognition of ordinary income by the Purchaser, as the Unvested Share
Repurchase Option lapses, on the difference between the purchase price and the
fair market value of the Stock at the time such restriction lapses.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE RESPONSIBILITY
AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF
THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON
THE PURCHASER'S BEHALF.
12.
<PAGE>
(c) The Purchaser shall notify the Company in writing if Purchaser
files an election pursuant to Section 83(b) of the Code. The Company intends, in
the event it does not receive from Purchaser evidence of such filing, to claim a
tax deduction for any amount which would be taxable to Purchaser in the absence
of such an election.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"PURCHASER" "COMPANY"
POWER INTEGRATIONS, INC.
/s/ Steven J. Sharp By: /s/ Arthur E. Fury
- ------------------------------- -----------------------------------
(Signature) Title: Director
--------------------------------
STEVEN J. SHARP
- -------------------------------
(Print Name) Address: 3000 Sand Hill Road,
Building 1, Suite 240
Address: 14 ATHERTON Ave. Menlo Park, CA 94025
ATHERTON CA 94025
13.
<PAGE>
EXHIBIT A
CONSENT OF SPOUSE
-----------------
I, Patricia J. Sharp, spouse of Steven J. Sharp, acknowledge that I have
read the Founder Stock Purchase Agreement dated as of April 13, 1988 to which
this Consent is attached as Exhibit A (the "Agreement") and that I know its
contents. I am aware that by its provisions (a) my spouse and Power
Integrations, Inc. ("Company") have the option to purchase all of the Stock of
the Company of which I may become possessed as a result of a gift from my spouse
or a court decree and/or any property settlement in any domestic litigation, (b)
the Company has the option to purchase certain shares of Stock of the Company
which my spouse owns pursuant to the Agreement including any interest I might
have therein, upon termination of his employment under circumstances set forth
in the Agreement, and (c) certain other restrictions are imposed upon the sale
or other disposition of the Stock during my spouse's lifetime and in the event
of his death.
I agree that my interest, if any, in the Stock subject to the Agreement
shall be bound by the Agreement and further understand and agree that any
community property interest I may have in the Stock shall be similarly bound by
the Agreement.
I agree to the sale and purchase described in Section 6 of the Agreement,
and I hereby consent to the sale of the Stock by my spouse or his legal
representative in accordance with the provisions of the Agreement. Further, as
part of the consideration for the Agreement, I agree that at my death, if I have
not disposed of any interest of mine in the Stock by an outright bequest of said
shares to my spouse, then my spouse and the Company shall have the same rights
against my legal representative to purchase any interest of mine in the Stock as
they would have had pursuant to Section 6 of the Agreement if I had acquired the
Stock pursuant to a court decree in domestic litigation.
I am aware that the legal, financial and related matters contained in the
Agreement are complex and that I am free to seek independent professional
guidance or counsel with respect to this Consent. I have either sought such
guidance or counsel or determined after reviewing the Agreement carefully that I
will waive such right.
Dated as of the l3th day of April, 1988.
/s/ Patricia J. Sharp
--------------------------
<PAGE>
EXHIBIT B
ASSIGNMENT SEPARATE FROM CERTIFICATE
------------------------------------
FOR VALUE RECEIVED,___________________________________ hereby
sells, assigns and transfers unto ______________________________________
_______________ (_______________) shares of the Common Stock of Power
Integrations, Inc., a California corporation, standing in the undersigned's name
on the books of said corporation represented by Certificate No. __________
herewith, and do hereby irrevocably constitute and appoint
______________________________ attorney to transfer the said stock on the books
of the said corporation with full power of substitution in the premises.
Dated: ________________, 198_ By: /s/ Steven J. Sharp
-------------------------
<PAGE>
EXHIBIT C
JOINT ESCROW INSTRUCTIONS
-------------------------
April 13, 1985
Ware & Freidenrich
A Professional Corporation
400 Hamilton Avenue
Palo Alto, California 94301
Gentlemen:
As Escrow Agent for both Power Integrations, Inc., a California corporation
("Company"), and the undersigned purchaser of stock (the "Stock") of the Company
("Purchaser"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Founder Stock Purchase
Agreement ("Agreement"), dated as of the date hereof, to which a copy of these
Joint Escrow Instructions is attached as Exhibit C, in accordance with the
following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") shall elect to exercise
the Unvested Share Repurchase Option set forth in the Agreement the Company
shall give to Purchaser and you a written notice specifying the number of shares
of Stock to be repurchased, the purchase price, and the time for closing the
repurchase. Purchaser and the Company hereby irrevocably authorize and direct
you to close the transaction contemplated by such notice in accordance with the
terms of the notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares of
Stock being transferred, and (c) to deliver same, together with the certificates
evidencing the shares of Stock to be transferred, to the Company against the
simultaneous delivery to you of the purchase price (by check) or cancellation of
indebtedness for the number of shares of Stock being purchased pursuant to the
exercise of the Unvested Share Repurchase Option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of Stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you
1.
<PAGE>
as his or her attorney-in-fact and agent for the term of this escrow to execute
with respect to such securities all stock certificates, stock assignments, or
other documents necessary or appropriate to make such securities negotiable and
complete any transaction herein contemplated, including, but not limited to, the
filing with the Department of Corporations of the State of California of an
Application for Consent to Transfer Securities Subject to Legend or Escrow
Condition Pursuant to Section 25151 of the California Corporate Securities Law
of 1968 as presently in existence or any successor form. Subject to the
provisions of this paragraph 3, Purchaser shall exercise all rights and
privileges of a stockholder of the Company while the Stock is held by you.
4. This escrow shall terminate at such time as there are no longer any
shares of stock subject to the Unvested Share Repurchase Option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith and in the exercise of your own good judgment, and any act done or
omitted by you pursuant to the advice of your own attorneys shall be conclusive
evidence to such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree of any court,
you shall not be liable to any of the parties hereto or to any other person,
firm or corporation by reason of such compliance, notwithstanding any such
order, judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
2.
<PAGE>
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary or proper to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be counsel to the Company or if you shall resign by written
notice to each party. In the event of any such termination, the Company shall
appoint a successor Escrow Agent.
13. If you reasonably require other or further instructions in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or rights of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to any one all or any part of said securities until such
dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree, or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal deliver or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
(10) days' advance written notice to each of the other parties hereto.
CORPORATION: Power Integrations, Inc.
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
3.
<PAGE>
PURCHASER: 14 Atherton Avenue
Atherton, CA 94025
Steven J. Sharp
ESCROW AGENT: Ware & Freidenrich
A Professional Corporation
400 Hamilton Avenue
Palo Alto, California 94301-1809
Attention: Douglas 0. Ebersole
16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
Very truly yours,
Power Integrations, Inc.
a California corporation
By: /s/ Arthur E. Fury
-------------------------------
Title: ___________________________
PURCHASER:
/s/ Steven J. Sharp
-----------------------------------
Agreed to and accepted as of
the date set forth above.
ESCROW AGENT:
WARE & FREIDENRICH
A Professional Company
By /s/ Douglas O. Ebersole
--------------------------------
Douglas O. Ebersole
4.
<PAGE>
EXHIBIT 10.15
FOUNDER STOCK PURCHASE AGREEMENT
--------------------------------
THIS AGREEMENT is made as of the 13th day of April, 1988, by and between
Power Integrations, Inc., a California corporation (the "Company"), and Klas H.
Eklund ("Purchaser").
WITNESSETH:
----------
WHEREAS, the Company desires to issue and the Purchaser desires to acquire
stock of the Company as herein described, on the terms and conditions
hereinafter set forth.
WHEREAS, the parties intend the Purchaser to become an employee of the
Company as soon as an appropriate visa is obtained from the U.S. Immigration and
Naturalization Service (the "INS").
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. Number of Shares and Price Per Share. The Purchaser hereby agrees to
------------------------------------
purchase from the Company and the Company agrees to sell to the Purchaser Six
Hundred Sixty (660,000) shares of the Company's Common Stock (the "Stock") for a
purchase price of $6,600 (or $0.01 per share). The closing of such purchase
shall occur immediately upon execution of this Agreement. Payment of the
purchase price will be made at the closing by the Purchaser's delivery to the
Company of an assignment of certain patent rights in substantially the form
attached as Exhibit D.
2. Unvested Share Repurchase Option. The Purchaser will become an
--------------------------------
employee as soon as he has obtained an appropriate visa from the INS.
Thereafter, in the event the Purchaser's employment with the Company is
terminated for any reason (other than death or disability), with or without
cause, or if the Purchaser or the Purchaser's legal representative attempts to
sell, exchange, transfer, pledge or otherwise dispose of any shares purchased
pursuant to this Agreement which have not vested in the Purchaser pursuant to
Section 2(a) (the "Unvested Shares"), the Company shall have the right to
reacquire the Unvested Shares under the terms set forth in this Section 2 (the
"Unvested Share Repurchase Option"). If the Purchaser is unable to obtain a visa
enabling him to be employed by the Company, the Purchaser will become a
consultant to the Company and the Stock will vest on the same schedule as is set
forth in this Section 2, with the Unvested Share Repurchase Option triggered by
termination of the consulting relationship (for reasons other than death or
disability).
1.
<PAGE>
(a) Vesting of Shares. Upon the closing of the purchase of the Stock,
-----------------
220,000 shares shall be immediately vested. The remaining 440,000 shares will
initially be subject to the Unvested Share Repurchase Option, which will lapse
with respect to 1/48 of such shares (i.e., approximately 9,167 shares) per month
of the Purchaser's continuous employment with the Company measured from April 1,
1988 (even though his actual employment will begin at a later date), with
fractional months not counted. Shares of Stock that are not subject to the
Unvested Share Repurchase Option are "Vested Shares."
(b) Exercise of Unvested Share Repurchase Option. If the Purchaser's
--------------------------------------------
employment with the Company is terminated for any reason (other than death or
disability), with or without cause, or if the Purchaser or the Purchaser's legal
representative attempts to dispose of any Unvested Shares other than as allowed
in this Agreement, the Company may exercise the Unvested Share Repurchase Option
by written notice to the Escrow Agent (as defined in Section 10) and to the
Purchaser or the Purchaser's legal representative within sixty (60) days after
such termination or after the Company has received notice of the attempted
disposition.
(c) Payment for Shares and Return of Shares. Payment by the Company
---------------------------------------
to the Escrow Agent on behalf of the Purchaser or the Purchaser's legal
representative shall be made in cash within sixty (60) days after the date of
the mailing of the written notice of exercise of the Unvested Share Repurchase
Option. For purposes of the foregoing, cancellation of any promissory note of
the Purchaser to the Company shall be treated as payment to the Purchaser in
cash to the extent of the unpaid principal and any accrued interest cancelled.
The purchase price per share being purchased by the Company pursuant to the
Unvested Share Repurchase Option shall be $0.01 per share, adjusted
appropriately to reflect any stock split, stock dividend, recapitalization, etc.
Within thirty (30) days after payment by the Company, the Escrow Agent shall
give the shares which the Company has purchased to the Company and shall give
the payment received from the Company to the Purchaser.
(d) Early Termination of Unvested Share Repurchase Option. The other
-----------------------------------------------------
provisions of Section 2 notwithstanding, the Company's Board of Directors may
terminate the Unvested Share Repurchase Option in the event of (1) a merger in
which the Company is not the surviving corporation; (2) a merger or the sale or
exchange by the shareholders of the Company of all or substantially all of the
stock of the Company where the shareholders before such merger or sale or
exchange do not retain, directly or indirectly, at least a majority of the
beneficial interest in the voting stock of the surviving
2.
<PAGE>
Company; (3) the sale or exchange of all or substantially all of the Company's
assets (other than a sale or transfer to a subsidiary of the Company as defined
in section 425(f) of the Code); or (4) in such other event as the Company's
Board of Directors may determine to be appropriate. The Unvested Share
Repurchase Option will terminate in the event of Purchaser's death or
termination of employment due to permanent and total disability as defined in
Section 72(m) of the Internal Revenue Code of 1986, as amended.
(e) Transfers Not Subject to the Unvested Share Repurchase Option.
-------------------------------------------------------------
The Unvested Share Repurchase Option shall not apply to a transfer to the
Purchaser's ancestors, descendants or spouse or to a trustee for their benefit
or the benefit of the Purchaser, provided that such transferee shall agree in
writing (in a form satisfactory to the Company) to take the stock subject to all
the terms and conditions of this Section 2.
(f) Legends. The Company may at any time place a legend or legends
-------
referencing the Unvested Share Repurchase Option on any shares subject to the
Unvested Share Repurchase Option.
(g) Assignment of Unvested Share Repurchase Option. The Company may
----------------------------------------------
assign the Unvested Share Repurchase Option to one or more persons, who shall
have the right to exercise the Unvested Share Repurchase Option in his or her
own name for his or her own account.
3. Stock Dividends, etc. If, from time to time, there is any stock
--------------------
dividend, stock split or other change in the character or amount of any of the
outstanding stock of the Company, then in such event any and all new substituted
or additional securities to which Purchaser is entitled by reason of Purchaser's
ownership of Unvested Shares shall be immediately subject to the Unvested Share
Repurchase Option with the same force and effect as the Unvested Shares.
4. Right of First Refusal. The Purchaser cannot transfer, assign or
----------------------
otherwise dispose of, voluntarily or involuntarily, any Unvested Shares or any
interest in those shares. Before any Vested Shares registered in the name of
Purchaser may be sold or transferred (including transfer by operation of law)
other than to Purchaser's spouse, descendants, ancestors, or trusts for their
benefit or the benefit of the Purchaser, such shares shall first be offered to
the Company, which will have the right to purchase all or any part of the Vested
Shares proposed to be transferred ("Right of First Refusal"), in the following
manner:
3.
<PAGE>
(a) Transfer Notice. The Purchaser or his or her legal representative
---------------
shall first give written notice (the "Transfer Notice") of any proposed transfer
to the Company. The Transfer Notice shall name the proposed transferee, state
the number of shares of Stock to be transferred, the price per share and all
other terms of the offer. The Transfer Notice shall be signed by the Purchaser
or his or her representative and the prospective transferee and must constitute
a binding agreement for the transfer of the Stock subject only to the Right of
First Refusal.
(b) Bona Fide Determination. Within thirty (30) days of delivery of
-----------------------
the Purchaser's notice of a proposed transfer, the Company's Board of Directors
shall determine the bona fide nature of the proposed transfer and give the
Purchaser written notice of its determination. If the proposed transfer is
deemed to be bona fide, the remaining subsections of this section shall apply to
the sale. If the proposed transfer is deemed not to be bona fide, the Purchaser
will be responsible for providing additional information to the Board to show
the bona fide nature of the proposed transfer and no Stock will be transferred
on the books of the Company until the Board has approved the proposed transfer
as bona fide.
(c) Failure to Exercise. If the Company elects not to or fails to
-------------------
exercise in full the Right of First Refusal within thirty (30) days from the
later of the date the Transfer Notice is delivered to the Company or thirty (30)
days after the date the transfer is determined to be bona fide (if the Purchaser
is required to provide additional information as provided in Section 4(b)), the
Purchaser may, by the later of sixty (60) days after the delivery of the
Transfer Notice to the Company or thirty (30) days after the date the transfer
is determined to be bona fide (if the Purchaser is required to provide
additional information as provided in Section 4(b)), conclude a transfer of the
shares of Stock subject to the Transfer Notice which have not been purchased by
the Company pursuant to exercise of the Right of First Refusal on the terms and
conditions described in the Transfer Notice. Any proposed transfer on terms and
conditions different from those described in the Transfer Notice, as well as any
subsequent proposed transfer by the Purchaser, shall again be subject to the
Right of First Refusal and shall require compliance by the Purchaser with the
procedure described in this Section 4. If the Company exercises the Right of
First Refusal, the parties shall consummate the sale of shares of Stock on the
terms set forth in the Transfer Notice by the later of sixty (60) days after the
delivery of the Transfer Notice to the Company or thirty (30) days after the
date the transfer is determined to be bona fide (if the Purchaser is required to
provide additional
4.
<PAGE>
information as provided in Section 4(b)); provided, however, in the event the
Transfer Notice provides for the payment for the shares of Stock other than in
cash, the Company shall have the option of paying for the shares of Stock by the
discounted cash equivalent of the consideration described in the Transfer Notice
as reasonably determined by the Company.
(d) Condition to Transfer. All transferees of shares of Stock or any
---------------------
interest therein other than the Company shall be required as a condition of such
transfer to agree in writing (in a form satisfactory to the Company) that they
will receive and hold such shares of Stock or interests subject to the
provisions of this Agreement, including the Right of First Refusal.
(e) Termination. The Right of First Refusal will terminate at such
-----------
time as a public market exists for the Company's Common Stock (or any other
stock issued by the Company, or any successor, in exchange for the Stock). For
the purpose of this Agreement, a "public market" shall be deemed to exist if (i)
such stock is listed on a national securities exchange (as that term is used in
the Securities Exchange Act of 1934) or (ii) such stock is traded on the over-
the-counter market and prices therefore are published daily on business days in
a recognized financial journal.
(f) Permitted Transfers. The Right of First Refusal shall not apply
-------------------
to a transfer (inter vivos or upon death) to the Purchaser's ancestors or
descendants or spouse or to a trustee for their benefit provided that such
transferee shall agree in writing (in a form satisfactory to the Company) to
take the Stock subject to all the terms of the Plan, including the Right of
First Refusal.
5. Piggyback Registration Rights.
-----------------------------
(a) The terms "register", "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933, as amended, and the declaration or
ordering of the effectiveness of such registration statement.
(b) If the Company shall determine to register any of its securities
either for its own account or the account of a stockholder(s) exercising demand
registration rights, other than a registration relating solely to employee
benefit plans, or a registration relating solely to a transaction within the
scope of Rule 145 promulgated under the Securities Act of 1933, or a
registration 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 the
5.
<PAGE>
Stock, the Company will promptly give to the Purchaser written notice thereof
and include in such registration (and any related qualification under blue sky
laws), and in any underwriting involved therein, the number of Vested Shares
specified in a written request made by the Purchaser within fifteen (15) days
after receipt of such written notice from the Company, except as set forth in
Section 5(b) below.
(c) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the right of any Purchaser
to registration shall be conditioned upon the Purchaser's participation in such
underwriting and the inclusion of such Purchaser's Stock in the underwriting
pursuant to an underwriting agreement in customary form with the underwriter or
underwriters selected by the Company. Notwithstanding any other provision of
this Section 5, if the underwriter reasonably determines that marketing factors
require a limitation on the number of shares to be underwritten the underwriter
may exclude some or all of the Stock, as follows: with respect to stockholders
exercising demand registration rights or exercising piggyback rights superior,
as to inclusion of shares in a registration, to those of the Purchaser (for
example, the rights under the Registration Rights Agreement to be entered into
in or around April 1988 by the Company and purchasers of the Company's Series A
Preferred Stock, amendments to those rights that may occur from time to time,
and similar rights that may be granted in the future), the number of shares that
may be included by the Purchaser shall be cut back entirely before any
limitation on the number of shares that may be included by such stockholders.
With respect to stockholders exercising other registration rights (i.e., rights
on a parity with the Purchaser's rights), the number of shares that may be
included in the registration and underwriting will be allocated in proportion,
as nearly as practicable, to the respective amounts of securities of the Company
owned by each.
(d) All expenses of the registration shall be borne by the Company,
except underwriting discounts and selling commissions applicable to the sale of
any Stock and any other securities of the Company being sold in the same
registration by other stockholders, which shall be borne by the Purchaser and
such other stockholders pro rata on the basis of the number of their shares
registered.
6. Dissolution of Marriage.
-----------------------
(a) In the event of the dissolution of Purchaser's marriage,
Purchaser shall have the right and option to purchase from his or her spouse all
or any portion of shares of Stock (i) awarded to the spouse pursuant to a decree
of
6.
<PAGE>
dissolution of marriage or any other order by any court of competent
jurisdiction and/or by any property settlement agreement (whether or not
incorporated by reference in any such decree), or (ii) gifted to the spouse by
Purchaser prior to the dissolution, at the fair market value of said Stock at
the time of such decree, other order or property settlement as determined by the
Company's Board of Directors, upon the terms set forth below. If either
Purchaser or Purchaser's spouse disputes the fair market valuation of the Stock
by the Board of Directors, such fair market value shall be determined by
arbitration in accordance with the rules of the American Arbitration
Association. Purchaser shall exercise his or her right, if at all, within thirty
(30) days of the entry of any such decree or property settlement agreement by
delivery to Purchaser's former spouse of written notice of exercise, specifying
the number of shares of Stock Purchaser elects to purchase. The purchase price
for the Stock shall be paid by delivery of a promissory note for the purchase
price bearing interest at the rate of ten percent (10%) per annum payable in
four (4) equal annual installments of principal and interest, commencing on the
anniversary date of the exercise of the option; provided, however that if,
--------
subsequent to the date any or all of the Stock is awarded to Purchaser's former
spouse as provided above, the Company exercises its Unvested Share Repurchase
Option with respect to any or all of the Stock so awarded, the amount remaining
due under such promissory note shall be reduced by the difference between the
fair market value of such Stock determined as set forth above and the amount
received by Purchaser for such Stock upon exercise by the Company of the
Unvested Share Repurchase Option.
(b) In the event Purchaser does not exercise his right to purchase
all of the Stock awarded to Purchaser's former spouse, Purchaser shall provide
written notice to the Company of the number of shares of Stock available for
purchase within thirty (30) days of the entry of the decree. The Company shall
then have the right for the next thirty (30) days to purchase any of the Stock
not acquired by Purchaser directly from Purchaser's former spouse in the manner
provided in Section 6(a) at the same price and on the same terms that were
available to Purchaser.
(c) Nothing contained in this Section 6 shall affect or impair the
Unvested Share Repurchase Option in favor of the Company as set forth in Section
2 above.
7. Consent of Spouse. If the Purchaser is married on the date of this
-----------------
Agreement, the Purchaser's spouse shall execute a Consent of Spouse in the form
of Exhibit A hereto, effective on the date hereof. Such consent shall not be
---------
deemed to confer or convey to the spouse any rights in the
7.
<PAGE>
Stock that do not otherwise exist by operation of law or the agreement of the
parties. If the Purchaser should marry or remarry subsequent to the date of this
Agreement, the Purchaser shall within thirty (30) days thereafter obtain his or
her new spouse's acknowledgment of and consent to the existence and binding
effect of all restrictions contained in this Agreement by signing an additional
Consent of Spouse in the form of Exhibit A.
8. Legends. All certificates representing any shares of Stock subject to
-------
the provisions of this Agreement shall have endorsed thereon the following
legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
REPURCHASE OPTION AND A RIGHT OF FIRST REFUSAL IN FAVOR OF THE CORPORATION OR
ITS ASSIGNEE SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE
REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON
FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION."
(b) "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE
COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT
FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
(c) Any legend required to be placed thereon by the California
Commissioner of Corporations.
9. Warranties and Representations. In connection with the proposed
------------------------------
purchase of the Stock, the Purchaser hereby agrees, represents and warrants as
follows:
(a) The Purchaser is purchasing the Stock solely for his or her own
account for investment and not with a view to, or for resale in connection with,
any distribution thereof within the meaning of the Securities Act of 1933 as
amended (the "Act"). The Purchaser further represents that he or she does not
have any present intention of selling, offering to sell or otherwise disposing
of or distributing the Stock or any portion thereof; and that the entire legal
and beneficial interest of the Stock he or she is purchasing is being purchased
for, and will be held for the account of, the Purchaser only and neither in
whole nor in part for any other person.
8.
<PAGE>
(b) The Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Stock. The Purchaser
further represents and warrants that he or she has discussed the Company and its
plans, operations and financial condition with its officers, has received all
such information as he or she deems necessary and appropriate to enable him or
her to evaluate the financial risk inherent in making an investment in the Stock
and has received satisfactory and complete information concerning the business
and financial condition of the Company in response to all inquiries in respect
thereof.
(c) The Purchaser realizes that his or her purchase of the Stock will
be a highly speculative investment, and he or she is able, without impairing his
financial condition, to hold the Stock for an indefinite period of time and to
suffer a complete loss on his or her investment.
(d) The Company has disclosed to the Purchaser that:
(i) the sale of the Stock has not been registered under the
Act, and the Stock must be held indefinitely unless a transfer of it is
subsequently registered under the Act or an exemption from such registration is
available, and that the Company is under no obligation to register the Stock;
(ii) the Company will make a notation in its records of the
aforementioned restrictions on transfer and legends.
(e) The Purchaser is aware of the provisions of Rule 144, promulgated
under the Act, which, in substance, permits limited public resale of "restricted
securities" acquired, directly or indirectly, from the issuer thereof (or an
affiliate of such issuer), in a non-public offering subject to the satisfaction
of certain conditions, including among other things: the resale occurring not
less than two years from the date the Purchaser has purchased and paid for the
Stock; the availability of certain public information concerning the Company;
the sale being through a broker in an unsolicited "broker's transaction" or in a
transaction directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934); and that any sale of the Stock may be made by
him or her only in limited amounts during any three-month period not exceeding
specified limitations. The Purchaser further represents that he or she
understands that at the time he or she wishes to sell the
9.
<PAGE>
Stock 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 that, in such event, he
or she would be precluded from selling the Stock under Rule 144 even if the two-
year minimum holding period had been satisfied. The Purchaser represents that he
or she understands that in the event all of the requirements of Rule 144 are not
satisfied, registration under the Act or compliance with an exemption from
registration 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.
(f) Without in any way limiting the Purchaser's representations and
warranties set forth above, the Purchaser further agrees that he or she shall in
no event make any disposition of all or any portion of the Stock which he or she
is purchasing unless and until:
(i) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with said Registration Statement; or
(ii) The Purchaser shall have (1) notified the Company of the
proposed disposition and furnished the Company with a detailed statement of the
circumstances surrounding the proposed disposition, and (2) furnished the
Company with an opinion of his or her own counsel to the effect that such
disposition will not require registration of such shares under the Act, and such
opinion of his or her counsel shall have been concurred in by counsel for the
Company and the Company shall have advised the Purchaser of such concurrence.
10. Escrow. As security for his or her faithful performance of the terms
------
of this Agreement and to insure the availability for delivery of the Stock upon
exercise of the Purchase Option herein provided for, the Purchaser agrees to
deliver to and deposit with Ware & Freidenrich, A Professional Company, counsel
to the Company (the "Escrow Agent"), as Escrow Agent in this transaction, two
Stock Assignments duly endorsed (with date and number of shares blank) in the
form attached hereto as Exhibit B, together with the certificate or certificates
---------
evidencing the Stock; such documents are to be held by the Escrow Agent pursuant
to the Joint Escrow Instructions of the Company and the
10.
<PAGE>
Purchaser set forth in Exhibit C attached hereto and incorporated by this
---------
reference, which instructions shall also be delivered to the Escrow Agent at the
closing hereunder.
11. Transfers in Violation of Agreement. The Company shall not be required
-----------------------------------
(i) to transfer on its books any shares of Stock of the Company which shall have
been sold or transferred in violation of any of the provisions set forth in this
Agreement or (ii) to treat as owner of such shares or to accord the right to
vote as such owner or to pay dividends to any transferee to whom such shares
shall have been so transferred.
12. Rights as Stockholder. Subject to the provisions of this Agreement,
---------------------
the Purchaser shall exercise all rights and privileges of a stockholder of the
Company with respect to the Stock deposited in escrow.
13. Further Instruments. The parties agree to execute such further
-------------------
instruments and to take such further action as may reasonably be necessary to
carry out the intent of this Agreement.
14. Notice. Any notice required or permitted hereunder shall be given in
------
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail with
postage and fees prepaid, addressed to the other party at the address
hereinafter shown below his or her signature or at such other address as such
party may designate by ten (10) days' advance written notice to the other party.
15. Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
the successors and assigns of the Company and, subject to the restrictions on
transfer herein set forth, be binding upon the Purchaser, his or her heirs,
executors, administrators, successors and assigns.
16. Entire Agreement; Amendments. This Agreement, together with the
----------------------------
Exhibits hereto, shall be construed under the laws of the State of California
(as it applies to agreements between California residents, entered into and to
be performed entirely within California), and constitutes the entire agreement
of the parties with respect to the subject matter hereof superseding all prior
written or oral agreements, and no amendment or addition hereto shall be deemed
effective unless agreed to in writing by the parties.
17. Right to Specific Performance. The Purchaser agrees that the Company
-----------------------------
shall be entitled to a decree of specific performance of the terms hereof or an
injunction restraining violation of this Agreement, said right to be in addition
to any other remedies available to the Company.
11.
<PAGE>
18. Separability. If any provision of this Agreement is held by a court of
------------
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way and shall be construed in accordance with the
purposes and tenor and effect of this Agreement.
19. Tax Consequences and Tax Election Notification.
----------------------------------------------
(a) The Purchaser understands that the Stock has been valued by the
Board of Directors and that the Company believes this valuation is a fair
attempt to appraise it. The Purchaser understands, however, that the Company can
give no assurances that the purchase price will be accepted as the fair market
value of the Stock by the Internal Revenue Service (the "IRS"), and that the IRS
could assert that the value of the Stock on the date of purchase was
substantially greater than the purchase price.
If the IRS were to successfully argue in a tax determination that the Stock
had value greater than the price paid by the Purchaser, the additional value
would constitute ordinary income as of the date of its receipt. The additional
taxes (and interest) due would be payable by the Purchaser. There is no
provision for the Company to reimburse the Purchaser for any potential tax
liability, and the Purchaser assumes all responsibility for it. If the
additional value attributed to the Stock were more than 25 percent of the
Purchaser's gross income for the year in which that value was taxable, the IRS
would have six years from the due date for filing the return (or the actual
filing date of the return if filed thereafter) within which to assess the
additional tax and interest.
(b) The Purchaser understands that Section 83 of the Internal Revenue
Code of 1986, as amended (the "Code"), taxes as ordinary income the difference
between the amount paid for the Stock and the fair market value of the Stock as
of the date any restrictions on the Stock lapse. In this context, "restriction"
means the right of the Company to buy back the stock pursuant to the Unvested
Share Repurchase Option. The Purchaser understands that he may elect to be taxed
at the time the Stock is purchased rather than when and as the Unvested Share
Repurchase Option expires by filing an election under Section 83(b) of the Code
with the IRS within 30 days from the date of purchase. Even if the fair market
value of the Stock equals the amount paid for the Stock, the election must be
made to avoid adverse tax consequences in the future. The Purchaser understands
that failure to make this filing timely will result in the recognition of
ordinary income by the Purchaser, as the Unvested Share Repurchase
12.
<PAGE>
Option lapses, on the difference between the purchase price and the fair market
value of the Stock at the time such restriction lapses.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE RESPONSIBILITY
AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF
THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON
THE PURCHASER' S BEHALF.
(c) The Purchaser shall notify the Company in writing if Purchaser
files an election pursuant to Section 83(b) of the Code. The Company intends, in
the event it does not receive from Purchaser evidence of such filing, to claim a
tax deduction for any amount which would be taxable to Purchaser in the absence
of such an election.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"PURCHASER" "COMPANY"
POWER INTEGRATIONS, INC.
/s/ Klas H. Eklund By: /s/ Steven J. Sharp
- ----------------------------- -------------------------------
(Signature)
Title: President
---------------------------
KLAS H. EKLUND
- -----------------------------
(Print Name) Address: 3000 Sand Hill Road,
Building 1, Suite 240
Menlo Park, CA 94025
Address: 243 Mistletoe Rd.
Los Gatos CA 95030
13.
<PAGE>
EXHIBIT 10.16
FOUNDER STOCK PURCHASE AGREEMENT
--------------------------------
THIS AGREEMENT is made as of the 13th day of April, 1988, by and between
Power Integrations, Inc., a California corporation (the "Company"), and Arthur
E. Fury ("Purchaser").
WITNESSETH:
----------
WHEREAS, the Company desires to issue and the Purchaser desires to acquire
stock of the Company as herein described, on the terms and conditions
hereinafter set forth.
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. Number of Shares and Price Per Share. The Purchaser hereby agrees to
------------------------------------
purchase from the Company and the Company agrees to sell to the Purchaser Six
Hundred Sixty Thousand (660,000) shares of the Company's Common Stock (the
"Stock") for a purchase price of $6,600 (or $0.01 per share). The closing of
such purchase shall occur immediately upon execution of this Agreement. Payment
of the purchase price will be made at the closing by the Purchaser's delivery to
the Company of a check representing the aggregate purchase price.
2. Unvested Share Repurchase Option. In the event the Purchaser's
--------------------------------
employment with the Company is terminated for any reason (other than death or
disability), with or without cause, or if the Purchaser or the Purchaser's legal
representative attempts to sell, exchange, transfer, pledge or otherwise dispose
of any shares purchased pursuant to this Agreement which have not vested in the
Purchaser pursuant to Section 2(a) (the "Unvested Shares"), the Company shall
have the right to reacquire the Unvested Shares under the terms set forth in
this Section 2 (the "Unvested Share Repurchase Option").
(a) Vesting of Shares. Upon the closing of the purchase of the
-----------------
Stock, 110,000 shares will be immediately vested. The remaining 550,000 shares
will initially be subject to the Unvested Share Repurchase Option, which will
lapse with respect to 1/48 of such shares (i.e., approximately 11,458 shares)
per month of the Purchaser's continuous employment with the Company from April
1, 1988, with fractional months not counted. Shares of Stock that are not
subject to the Unvested Share Repurchase Option are "Vested Shares."
1.
<PAGE>
(b) Exercise of Unvested Share Repurchase Option. If the Purchaser's
--------------------------------------------
employment with the Company is terminated for any reason (other than death or
disability), with or without cause, or if the Purchaser or the Purchaser's legal
representative attempts to dispose of any Unvested Shares other than as allowed
in this Agreement, the Company may exercise the Unvested Share Repurchase Option
by written notice to the Escrow Agent (as defined in Section 10) and to the
Purchaser or the Purchaser's legal representative within sixty (60) days after
such termination or after the Company has received notice of the attempted
disposition.
(c) Payment for Shares and Return of Shares. Payment by the Company to
---------------------------------------
the Escrow Agent on behalf of the Purchaser or the Purchaser's legal
representative shall be made in cash within sixty (60) days after the date of
the mailing of the written notice of exercise of the Unvested Share Repurchase
Option. For purposes of the foregoing, cancellation of any promissory note of
the Purchaser to the Company shall be treated as payment to the Purchaser in
cash to the extent of the unpaid principal and any accrued interest cancelled.
The purchase price per share being purchased by the Company pursuant to the
Unvested Share Repurchase Option shall be $0.01 per share, adjusted
appropriately to reflect any stock split, stock dividend, recapitalization, etc.
Within thirty (30) days after payment by the Company, the Escrow Agent shall
give the shares which the Company has purchased to the Company and shall give
the payment received from the Company to the Purchaser.
(d) Early Termination of Unvested Share Repurchase Option. The other
-----------------------------------------------------
provisions of Section 2 notwithstanding, the Company's Board of Directors may
terminate the Unvested Share Repurchase Option in the event of (1) a merger in
which the Company is not the surviving corporation; (2) a merger or the sale or
exchange by the shareholders of the Company of all or substantially all of the
stock of the Company where the shareholders before such merger or sale or
exchange do not retain, directly or indirectly, at least a majority of the
beneficial interest in the voting stock of the surviving Company; (3) the sale
or exchange of all or substantially all of the Company's assets (other than a
sale or transfer to a subsidiary of the Company as defined in section 425(f) of
the Code); or (4) in such other event as the Company's Board of Directors may
determine to be appropriate. The Unvested Share Repurchase Option will
terminate in the event of Purchaser's death or termination of employment due to
permanent and total disability as defined in Section 72(m) of the Internal
Revenue Code of 1986, as amended.
(e) Transfers Not Subject to the Unvested Share Repurchase Option.
--------------------------------------------------------------
The Unvested Share Repurchase Option shall not apply to a transfer to the
Purchaser's ancestors,
2.
<PAGE>
descendants or spouse or to a trustee for their benefit or the benefit of the
Purchaser, provided that such transferee shall agree in writing (in a form
satisfactory to the Company) to take the stock subject to all the terms and
conditions of this Section 2.
(f) Legends. The Company may at any time place a legend or legends
-------
referencing the Unvested Share Repurchase Option on any shares subject to the
Unvested Share Repurchase Option.
(g) Assignment of Unvested Share Repurchase Option. The Company may
----------------------------------------------
assign the Unvested Share Repurchase Option to one or more persons, who shall
have the right to exercise the Unvested Share Repurchase Option in his or her
own name for his or her own account.
3. Stock Dividends, etc. If, from time to time, there is any stock
--------------------
dividend, stock split or other change in the character or amount of any of the
outstanding stock of the Company, then in such event any and all new substituted
or additional securities to which Purchaser is entitled by reason of Purchaser's
ownership of Unvested Shares shall be immediately subject to the Unvested Share
Repurchase Option with the same force and effect as the Unvested Shares.
4. Right of First Refusal. The Purchaser cannot transfer, assign or
----------------------
otherwise dispose of, voluntarily or involuntarily, any Unvested Shares or any
interest in those shares. Before any Vested Shares registered in the name of
Purchaser may be sold or transferred (including transfer by operation of law)
other than to Purchaser's spouse, descendants, ancestors, or trusts for their
benefit or the benefit of the Purchaser, such shares shall first be offered to
the Company, which will have the right to purchase all or any part of the Vested
Shares proposed to be transferred ("Right of First Refusal"), in the following
manner:
(a) Transfer Notice. The Purchaser or his or her legal representative
---------------
shall first give written notice (the "Transfer Notice") of any proposed transfer
to the Company. The Transfer Notice shall name the proposed transferee, state
the number of shares of Stock to be transferred, the price per share and all
other terms of the offer. The Transfer Notice shall be signed by the Purchaser
or his or her representative and the prospective transferee and must constitute
a binding agreement for the transfer of the Stock subject only to the Right of
First Refusal.
(b) Bona Fide Determination. Within thirty (30) days of delivery of
-----------------------
the Purchaser's notice of a proposed transfer, the Company's Board of Directors
shall determine
3.
<PAGE>
the bona fide nature of the proposed transfer and give the Purchaser written
notice of its determination. If the proposed transfer is deemed to be bona fide,
the remaining subsections of this section shall apply to the sale. If the
proposed transfer is deemed not to be bona fide, the Purchaser will be
responsible for providing additional information to the Board to show the bona
fide nature of the proposed transfer and no Stock will be transferred on the
books of the Company until the Board has approved the proposed transfer as bona
fide.
(c) Failure to Exercise. If the Company elects not to or fails to
-------------------
exercise in full the Right of First Refusal within thirty (30) days from the
later of the date the Transfer Notice is delivered to the Company or thirty (30)
days after the date the transfer is determined to be bona fide (if the Purchaser
is required to provide additional information as provided in Section 4(b)), the
Purchaser may, by the later of sixty (60) days after the delivery of the
Transfer Notice to the Company or thirty (30) days after the date the transfer
is determined to be bona fide (if the Purchaser is required to provide
additional information as provided in Section 4(b)), conclude a transfer of the
shares of Stock subject to the Transfer Notice which have not been purchased by
the Company pursuant to exercise of the Right of First Refusal on the terms and
conditions described in the Transfer Notice. Any proposed transfer on terms
and conditions different from those described in the Transfer Notice, as well as
any subsequent proposed transfer by the Purchaser, shall again be subject to the
Right of First Refusal and shall require compliance by the Purchaser with the
procedure described in this Section 4. If the Company exercises the Right of
First Refusal, the parties shall consummate the sale of shares of Stock on the
terms set forth in the Transfer Notice by the later of sixty (60) days after the
delivery of the Transfer Notice to the Company or thirty (30) days after the
date the transfer is determined to be bona fide (if the Purchaser is required to
provide additional information as provided in Section 4(b)); provided, however,
in the event the Transfer Notice provides for the payment for the shares of
Stock other than in cash, the Company shall have the option of paying for the
shares of Stock by the discounted cash equivalent of the consideration described
in the Transfer Notice as reasonably determined by the Company.
(d) Condition to Transfer. All transferees of shares of Stock or any
---------------------
interest therein other than the Company shall be required as a condition of such
transfer to agree in writing (in a form satisfactory to the Company) that they
will receive and hold such shares of Stock or interests subject to the
provisions of this Agreement, including the Right of First Refusal.
4.
<PAGE>
(e) Termination. The Right of First Refusal will terminate at such
-----------
time as a public market exists for the Company's Common Stock (or any other
stock issued by the Company, or any successor, in exchange for the Stock). For
the purpose of this Agreement, a "public market" shall be deemed to exist if (i)
such stock is listed on a national securities exchange (as that term is used in
the Securities Exchange Act of 1934) or (ii) such stock is traded on the over-
the-counter market and prices therefore are published daily on business days in
a recognized financial journal.
(f) Permitted Transfers. The Right of First Refusal shall not apply
-------------------
to a transfer (inter vivos or upon death) to the Purchaser's ancestors or
descendants or spouse or to a trustee for their benefit provided that such
transferee shall agree in writing (in a form satisfactory to the Company) to
take the Stock subject to all the terms of the Plan, including the Right of
First Refusal.
5. Piggyback Registration Rights.
-----------------------------
(a) The terms "register", "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933, as amended, and the declaration or
ordering of the effectiveness of such registration statement.
(b) If the Company shall determine to register any of its securities
either for its own account or the account of a stockholder(s) exercising demand
registration rights, other than a registration relating solely to employee
benefit plans, or a registration relating solely to a transaction within the
scope of Rule 145 promulgated under the Securities Act of 1933, or a
registration 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 the Stock, the Company
will promptly give to the Purchaser written notice thereof and include in such
registration (and any related qualification under blue sky laws), and in any
underwriting involved therein, the number of Vested Shares specified in a
written request made by the Purchaser within fifteen (15) days after receipt of
such written notice from the Company, except as set forth in Section 5(b) below.
(c) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the right of any Purchaser
to registration shall be conditioned upon the Purchaser's participation in such
underwriting and the inclusion of such Purchaser's Stock in the underwriting
pursuant to an underwriting agreement in customary form with the underwriter or
underwriters selected
5.
<PAGE>
by the Company. Notwithstanding any other provision of this Section 5, if the
underwriter reasonably determines that marketing factors require a limitation on
the number of shares to be underwritten the underwriter may exclude some or all
of the Stock, as follows: with respect to stockholders exercising demand
registration rights or exercising piggyback rights superior, as to inclusion of
shares in a registration, to those of the Purchaser (for example, the rights
under the Registration Rights Agreement to be entered into in or around April
1988 by the Company and purchasers of the Company's Series A Preferred Stock,
amendments to those rights that may occur from time to time, and similar rights
that may be granted in the future), the number of shares that may be included by
the Purchaser shall be cut back entirely before any limitation on the number of
shares that may be included by such stockholders. With respect to stockholders
exercising other registration rights (i.e., rights on a parity with the
Purchaser's rights), the number of shares that may be included in the
registration and underwriting will be allocated in proportion, as nearly as
practicable, to the respective amounts of securities of the Company owned by
each.
(d) All expenses of the registration shall be borne by the Company,
except underwriting discounts and selling commissions applicable to the sale of
any Stock and any other securities of the Company being sold in the same
registration by other stockholders, which shall be borne by the Purchaser and
such other stockholders pro rata on the basis of the number of their shares
registered.
6. Dissolution of Marriage.
-----------------------
(a) In the event of the dissolution of Purchaser's marriage, Purchaser
shall have the right and option to purchase from his or her spouse all or any
portion of shares of Stock (i) awarded to the spouse pursuant to a decree of
dissolution of marriage or any other order by any court of competent
jurisdiction and/or by any property settlement agreement (whether or not
incorporated by reference in any such decree), or (ii) gifted to the spouse by
Purchaser prior to the dissolution, at the fair market value of said Stock at
the time of such decree, other order or property settlement as determined by the
Company's Board of Directors, upon the terms set forth below. If either
Purchaser or Purchaser's spouse disputes the fair market valuation of the Stock
by the Board of Directors, such fair market value shall be determined by
arbitration in accordance with the rules of the American Arbitration
Association. Purchaser shall exercise his or her right, if at all, within thirty
(30) days of the entry of any such decree or property settlement agreement by
delivery to Purchaser's former spouse of written notice of exercise, specifying
the number of shares of Stock Purchaser
6.
<PAGE>
elects to purchase. The purchase price for the Stock shall be paid by delivery
of a promissory note for the purchase price bearing interest at the rate of ten
percent (10%) per annum payable in four (4) equal annual installments of
principal and interest, commencing on the anniversary date of the exercise of
the option; provided, however that if, subsequent to the date any or all of the
--------
Stock is awarded to Purchaser's former spouse as provided above, the Company
exercises its Unvested Share Repurchase Option with respect to any or all of the
Stock so awarded, the amount remaining due under such promissory note shall be
reduced by the difference between the fair market value of such Stock determined
as set forth above and the amount received by Purchaser for such Stock upon
exercise by the Company of the Unvested Share Repurchase Option.
(b) In the event Purchaser does not exercise his right to purchase all
of the Stock awarded to Purchaser's former spouse, Purchaser shall provide
written notice to the Company of the number of shares of Stock available for
purchase within thirty (30) days of the entry of the decree. The Company shall
then have the right for the next thirty (30) days to purchase any of the Stock
not acquired by Purchaser directly from Purchaser's former spouse in the manner
provided in Section 6(a) at the same price and on the same terms that were
available to Purchaser.
(c) Nothing contained in this Section 6 shall affect or impair the
Unvested Share Repurchase Option in favor of the Company as set forth in Section
2 above.
7. Consent of Spouse. If the Purchaser is married on the date of this
-----------------
Agreement, the Purchaser's spouse shall execute a Consent of Spouse in the form
of Exhibit A hereto, effective on the date hereof. Such consent shall not be
---------
deemed to confer or convey to the spouse any rights in the Stock that do not
otherwise exist by operation of law or the agreement of the parties. If the
Purchaser should marry or remarry subsequent to the date of this Agreement, the
Purchaser shall within thirty (30) days thereafter obtain his or her new
spouse's acknowledgment of and consent to the existence and binding effect of
all restrictions contained in this Agreement by signing an additional Consent of
Spouse in the form of Exhibit A.
8. Legends. All certificates representing any shares of Stock subject to
-------
the provisions of this Agreement shall have endorsed thereon the following
legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
REPURCHASE OPTION AND A RIGHT OF FIRST REFUSAL IN FAVOR OF THE CORPORATION OR
ITS ASSIGNEE SET FORTH
7.
<PAGE>
IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR HIS OR HER
PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF
THIS CORPORATION."
(b) "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE
COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT
FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
(c) Any legend required to be placed thereon by the California
Commissioner of Corporations.
9. Warranties and Representations. In connection with the proposed
------------------------------
purchase of the Stock, the Purchaser hereby agrees, represents and warrants as
follows:
(a) The Purchaser is purchasing the Stock solely for his or her own
account for investment and not with a view to, or for resale in connection with,
any distribution thereof within the meaning of the Securities Act of 1933 as
amended (the "Act"). The Purchaser further represents that he or she does not
have any present intention of selling, offering to sell or otherwise disposing
of or distributing the Stock or any portion thereof; and that the entire legal
and beneficial interest of the Stock he or she is purchasing is being purchased
for, and will be held for the account of, the Purchaser only and neither in
whole nor in part for any other person.
(b) The Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Stock. The Purchaser
further represents and warrants that he or she has discussed the Company and its
plans, operations and financial condition with its officers, has received all
such information as he or she deems necessary and appropriate to enable him or
her to evaluate the financial risk inherent in making an investment in the Stock
and has received satisfactory and complete information concerning the business
and financial condition of the Company in response to all inquiries in respect
thereof.
(c) The Purchaser realizes that his or her purchase of the Stock will
be a highly speculative
8.
<PAGE>
investment, and he or she is able, without impairing his financial condition, to
hold the Stock for an indefinite period of time and to suffer a complete loss on
his or her investment.
(d) The Company has disclosed to the Purchaser that:
(i) the sale of the Stock has not been registered under the Act,
and the Stock must be held indefinitely unless a transfer of it is subsequently
registered under the Act or an exemption from such registration is available,
and that the Company is under no obligation to register the Stock;
(ii) the Company will make a notation in its records of the
aforementioned restrictions on transfer and legends.
(e) The Purchaser is aware of the provisions of Rule 144, promulgated
under the Act, which, in substance, permits limited public resale of "restricted
securities" acquired, directly or indirectly, from the issuer thereof (or an
affiliate of such issuer), in a non-public offering subject to the satisfaction
of certain conditions, including among other things: the resale occurring not
less than two years from the date the Purchaser has purchased and paid for the
Stock; the availability of certain public information concerning the Company;
the sale being through a broker in an unsolicited "broker's transaction" or in a
transaction directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934); and that any sale of the Stock may be made by
him or her only in limited amounts during any three-month period not exceeding
specified limitations. The Purchaser further represents that he or she
understands that at the time he or she wishes to sell the Stock 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 that, in such event, he or she would
be precluded from selling the Stock under Rule 144 even if the two-year minimum
holding period had been satisfied. The Purchaser represents that he or she
understands that in the event all of the requirements of Rule 144 are not
satisfied, registration under the Act or compliance with an exemption from
registration 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
9.
<PAGE>
or sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
(f) Without in any way limiting the Purchaser's representations and
warranties set forth above, the Purchaser further agrees that he or she shall in
no event make any disposition of all or any portion of the Stock which he or she
is purchasing unless and until:
(i) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with said Registration Statement; or
(ii) The Purchaser shall have (1) notified the Company of the
proposed disposition and furnished the Company with a detailed statement of the
circumstances surrounding the proposed disposition, and (2) furnished the
Company with an opinion of his or her own counsel to the effect that such
disposition will not require registration of such shares under the Act, and such
opinion of his or her counsel shall have been concurred in by counsel for the
Company and the Company shall have advised the Purchaser of such concurrence.
10. Escrow. As security for his or her faithful performance of the terms
------
of this Agreement and to insure the availability for delivery of the Stock upon
exercise of the Purchase Option herein provided for, the Purchaser agrees to
deliver to and deposit with Ware & Freidenrich, A Professional Company, counsel
to the Company (the "Escrow Agent"), as Escrow Agent in this transaction, two
Stock Assignments duly endorsed (with date and number of shares blank) in the
form attached hereto as Exhibit B, together with the certificate or certificates
---------
evidencing the Stock; such documents are to be held by the Escrow Agent pursuant
to the Joint Escrow Instructions of the Company and the Purchaser set forth in
Exhibit C attached hereto and incorporated by this reference, which instructions
- ---------
shall also be delivered to the Escrow Agent at the closing hereunder.
11. Transfers in Violation of Agreement. The Company shall not be
-----------------------------------
required (i) to transfer on its books any shares of Stock of the Company which
shall have been sold or transferred in violation of any of the provisions set
forth in this Agreement or (ii) to treat as owner of such shares or to accord
the right to vote as such owner or to pay dividends to any transferee to whom
such shares shall have been so transferred.
12. Rights as Stockholder. Subject to the provisions of this Agreement,
---------------------
the Purchaser shall exercise all rights and privileges of a stockholder of the
Company with respect to the Stock deposited in escrow.
10.
<PAGE>
13. Further Instruments. The parties agree to execute such further
-------------------
instruments and to take such further action as may reasonably be necessary to
carry out the intent of this Agreement.
14. Notice. Any notice required or permitted hereunder shall be given in
------
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail with
postage and fees prepaid, addressed to the other party at the address
hereinafter shown below his or her signature or at such other address as such
party may designate by ten (10) days' advance written notice to the other party.
15. Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
the successors and assigns of the Company and, subject to the restrictions on
transfer herein set forth, be binding upon the Purchaser, his or her heirs,
executors, administrators, successors and assigns.
16. Entire Agreement; Amendments. This Agreement, together with the
----------------------------
Exhibits hereto, shall be construed under the laws of the State of California
(as it applies to agreements between California residents, entered into and to
be performed entirely within California), and constitutes the entire agreement
of the parties with respect to the subject matter hereof superseding all prior
written or oral agreements, and no amendment or addition hereto shall be deemed
effective unless agreed to in writing by the parties.
17. Right to Specific Performance. The Purchaser agrees that the Company
-----------------------------
shall be entitled to a decree of specific performance of the terms hereof or an
injunction restraining violation of this Agreement, said right to be in addition
to any other remedies available to the Company.
18. Separability. If any provision of this Agreement is held by a court
------------
of competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way and shall be construed in accordance with the
purposes and tenor and effect of this Agreement.
19. Tax Consequences and Tax Election Notification.
----------------------------------------------
(a) The Purchaser understands that the Stock has been valued by the
Board of Directors and that the Company believes this valuation is a fair
attempt to appraise it. The Purchaser understands, however, that the Company can
give no assurances that the purchase price will be accepted as the fair market
value of the Stock by the Internal Revenue
11.
<PAGE>
Service (the "IRS"), and that the IRS could assert that the value of the Stock
on the date of purchase was substantially greater than the purchase price.
If the IRS were to successfully argue in a tax determination that the Stock
had value greater than the price paid by the Purchaser, the additional value
would constitute ordinary income as of the date of its receipt. The additional
taxes (and interest) due would be payable by the Purchaser. There is no
provision for the Company to reimburse the Purchaser for any potential tax
liability, and the Purchaser assumes all responsibility for it. If the
additional value attributed to the Stock were more than 25 percent of the
Purchaser's gross income for the year in which that value was taxable, the IRS
would have six years from the due date for filing the return (or the actual
filing date of the return if filed thereafter) within which to assess the
additional tax and interest.
(b) The Purchaser understands that Section 83 of the Internal Revenue
Code of 1986, as amended (the "Code"), taxes as ordinary income the difference
between the amount paid for the Stock and the fair market value of the Stock as
of the date any restrictions on the Stock lapse. In this context, "restriction"
means the right of the Company to buy back the stock pursuant to the Unvested
Share Repurchase Option. The Purchaser understands that he may elect to be
taxed at the time the Stock is purchased rather than when and as the Unvested
Share Repurchase Option expires by filing an election under Section 83(b) of the
Code with the IRS within 30 days from the date of purchase. Even if the fair
market value of the Stock equals the amount paid for the Stock, the election
must be made to avoid adverse tax consequences in the future. The Purchaser
understands that failure to make this filing timely will result in the
recognition of ordinary income by the Purchaser, as the Unvested Share
Repurchase Option lapses, on the difference between the purchase price and the
fair market value of the Stock at the time such restriction lapses.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE RESPONSIBILITY
AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF
THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON
THE PURCHASER'S BEHALF.
(c) The Purchaser shall notify the Company in writing if Purchaser
files an election pursuant to Section 83(b) of the Code. The Company intends,
in the event it does not receive from Purchaser evidence of such filing,
12.
<PAGE>
to claim a tax deduction for any amount which would be taxable to Purchaser in
the absence of such an election.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"PURCHASER" "COMPANY"
POWER INTEGRATIONS, INC.
/s/ Arthur E Fury By: /s/ Steven J. Sharp
- ----------------------------- ---------------------------
(Signature)
Title: President
ARTHUR E FURY ------------------------
- -----------------------------
(Print Name)
Address: 5939 AMADOLA DR Address: 3000 Sand Hill Road,
SAN JOSE CA 95129 Building 1, Suite 240
Menlo Park, CA 94025
13.
<PAGE>
EXHIBIT A
CONSENT OF SPOUSE
-----------------
I, Joan A. Fury, spouse of Arthur E. Fury, acknowledge that I have read the
Founder Stock Purchase Agreement dated as of April 13, 1988 to which this
Consent is attached as Exhibit A (the "Agreement") and that I know its contents.
I am aware that by its provisions (a) my spouse and Power Integrations, Inc.
("Company") have the option to purchase all of the Stock of the Company of which
I may become possessed as a result of a gift from my spouse or a court decree
and/or any property settlement in any domestic litigation, (b) the Company has
the option to purchase certain shares of Stock of the Company which my spouse
owns pursuant to the Agreement including any interest I might have therein, upon
termination of his employment under circumstances set forth in the Agreement,
and (c) certain other restrictions are imposed upon the sale or other
disposition of the Stock during my spouse's lifetime and in the event of his
death.
I agree that my interest, if any, in the Stock subject to the Agreement
shall be bound by the Agreement and further understand and agree that any
community property interest I may have in the Stock shall be similarly bound by
the Agreement.
I agree to the sale and purchase described in Section 6 of the Agreement,
and I hereby consent to the sale of the Stock by my spouse or his legal
representative in accordance with the provisions of the Agreement. Further, as
part of the consideration for the Agreement, I agree that at my death, if I have
not disposed of any interest of mine in the Stock by an outright bequest of said
shares to my spouse, then my spouse and the Company shall have the same rights
against my legal representative to purchase any interest of mine in the Stock as
they would have had pursuant to Section 6 of the Agreement if I had acquired the
Stock pursuant to a court decree in domestic litigation.
I am aware that the legal, financial and related matters contained in the
Agreement are complex and that I am free to seek independent professional
guidance or counsel with respect to this Consent. I have either sought such
guidance or counsel or determined after reviewing the Agreement carefully that I
will waive such right.
Dated as of the 13th day of April, 1988.
/s/ Joan A. Fury
-------------------------------------
<PAGE>
EXHIBIT B
---------
ASSIGNMENT SEPARATE FROM CERTIFICATE
------------------------------------
FOR VALUE RECEIVED,________________________________________________ hereby
sells, assigns and transfers unto_______________________________________________
_______________ (_______________) shares of the Common Stock of Power
Integrations, Inc., a California corporation, standing in the undersigned's name
on the books of said corporation represented by Certificate No. __________
herewith, and do hereby irrevocably constitute and appoint
______________________________ attorney to transfer the said stock on the books
of the said corporation with full power of substitution in the premises.
Dated: ________________, 198__ By: /s/ Arthur E. Fury
---------------------------
<PAGE>
EXHIBIT C
---------
JOINT ESCROW INSTRUCTIONS
-------------------------
April 13 , 1988
Ware & Freidenrich
A Professional Corporation
400 Hamilton Avenue
Palo Alto, California 94301
Gentlemen:
As Escrow Agent for both Power Integrations, Inc., a California corporation
("Company"), and the undersigned purchaser of stock (the "Stock") of the Company
("Purchaser"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Founder Stock Purchase
Agreement ("Agreement"), dated as of the date hereof, to which a copy of these
Joint Escrow Instructions is attached as Exhibit C, in accordance with the
following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") shall elect to exercise
the Unvested Share Repurchase Option set forth in the Agreement the Company
shall give to Purchaser and you a written notice specifying the number of shares
of Stock to be repurchased, the purchase price, and the time for closing the
repurchase. Purchaser and the Company hereby irrevocably authorize and direct
you to close the transaction contemplated by such notice in accordance with the
terms of the notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares of
Stock being transferred, and (c) to deliver same, together with the certificates
evidencing the shares of Stock to be transferred, to the Company against the
simultaneous delivery to you of the purchase price (by check) or cancellation of
indebtedness for the number of shares of Stock being purchased pursuant to the
exercise of the Unvested Share Repurchase Option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of Stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you
1.
<PAGE>
as his or her attorney-in-fact and agent for the term of this escrow to execute
with respect to such securities all stock certificates, stock assignments, or
other documents necessary or appropriate to make such securities negotiable and
complete any transaction herein contemplated, including, but not limited to, the
filing with the Department of Corporations of the State of California of an
Application for Consent to Transfer Securities Subject to Legend or Escrow
Condition Pursuant to Section 25151 of the California Corporate Securities Law
of 1968 as presently in existence or any successor form. Subject to the
provisions of this paragraph 3, Purchaser shall exercise all rights and
privileges of a stockholder of the Company while the Stock is held by you.
4. This escrow shall terminate at such time as there are no longer any
shares of stock subject to the Unvested Share Repurchase Option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and
in the exercise of your own good judgment, and any act done or omitted by you
pursuant to the advice of your own attorneys shall be conclusive evidence to
such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree of any court,
you shall not be liable to any of the parties hereto or to any other person,
firm or corporation by reason of such compliance, notwithstanding any such
order, judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
2.
<PAGE>
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary or proper to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be counsel to the Company or if you shall resign by written
notice to each party. In the event of any such termination, the Company shall
appoint a successor Escrow Agent.
13. If you reasonably require other or further instructions in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or rights of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to any one all or any part of said securities until such
dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree, or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal deliver or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
(10) days' advance written notice to each of the other parties hereto.
CORPORATION: Power Integrations, Inc.
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
3.
<PAGE>
PURCHASER: 5939 Amapola Drive
San Jose, CA 95129
Arthur E. Fury
ESCROW AGENT: Ware & Freidenrich
A Professional Corporation
400 Hamilton Avenue
Palo Alto, California 94301-1809
Attention: Douglas 0. Ebersole
16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
Very truly yours,
Power Integrations, Inc.
a California corporation
By: /s/ Steven J. Sharp
-------------------------
Title: President
----------------------
PURCHASER:
/s/ Arthur E. Fury
-----------------------------
Agreed to and accepted as of
the date set forth above.
ESCROW AGENT:
WARE & FREIDENRICH
A Professional Company
By /s/ Douglas O. Ebersole
-------------------------
Douglas O. Ebersole
4.
<PAGE>
EXHIBIT 11.1
POWER INTEGRATIONS, INC.
STATEMENTS OF COMPUTATION OF PRO FORMA COMMON
SHARES AND EQUIVALENTS
(in thousands, except for share amounts)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
Year Ended -----------------------
December 31, 1996 1996 1997
----------------- ---------- ---------
<S> <C> <C> <C>
PRIMARY
Net income (loss) $ (1,341) $ (499) $ 884
============== ========= ========
Weighted average common shares outstanding 853 839 874
Weighted average common equivalent shares:
Weighted average preferred stock outstanding 7,395 7,342 7,447
Weighted average warrants outstanding -- -- 474
Common stock option grants -- -- 273
Adjustments to reflect requirements of the
Securities and Exchange Commission's Staff
Accounting Bulletin No. 83:
Common stock issuances 1,016 1,016 1,016
Common stock option grants 316 316 316
Pro forma total weighted average common shares
and equivalents 9,580 9,513 10,400
============== ========= ========
Pro forma net income (loss) per share $ (0.14) $ (0.05) $ 0.09
============== ========= ========
FULLY DILUTED
Net income (loss) $ (1,341) $ (499) 884
============== ========= ========
Weighted average common shares outstanding 853 839 874
Weighted average common equivalent shares:
Weighted average preferred stock outstanding 7,395 7,342 7,447
Weighted average warrants outstanding -- -- 474
Common stock option grants -- -- 273
Adjustments to reflect requirements of the
Securities and Exchange Commission's Staff
Accounting Bulletin No. 83:
Common stock issuances 1,016 1,016 1,016
Common stock option grants 316 316 316
Pro forma total weighted average common shares
and equivalents 9,580 9,513 10,400
Pro forma net income (loss) per share $ (0.14) $ (0.05) $ 0.09
============== ========= ========
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Power Integrations International Holdings, Inc.
Power Integrations KK
Power Integrations U.K. Limited
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
San Jose, California
September 11, 1997
