<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
--------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1998
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________
to ______________
Commission File Number 0-23441
--------------
POWER INTEGRATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3065014
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
477 N. MATHILDA AVENUE, SUNNYVALE, CALIFORNIA 94086
(Address of principal executive offices) (Zip code)
(408) 523-9200
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of Exchange on which registered
------------------- ------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
---------------------------- ----------------------------
Common Stock, $.001 par value 12,219,040 shares
================================================================================
1
<PAGE>
POWER INTEGRATIONS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes To Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 6,481 $ 25,553
Short-term investments........................................................... 26,177 3,455
Accounts receivable.............................................................. 5,097 6,243
Inventories...................................................................... 10,953 7,328
Prepaid expenses and other current assets........................................ 252 349
-------- --------
Total current assets......................................................... 48,960 42,928
-------- --------
PROPERTY AND EQUIPMENT, net......................................................... 6,198 5,631
-------- --------
$ 55,158 $ 48,559
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capitalized lease obligations................................. $ 2,063 $ 1,787
Accounts payable................................................................. 6,229 6,903
Accrued payroll and related expenses............................................. 1,812 1,685
Taxes payable and other accrued liabilities...................................... 2,091 1,042
Deferred income on sales to distributors......................................... 2,871 1,380
-------- --------
Total current liabilities........................................................ 15,066 12,797
-------- --------
CAPITALIZED LEASE OBLIGATIONS, net of current portion............................... 2,608 2,435
-------- --------
STOCKHOLDERS' EQUITY:
Common stock..................................................................... 12 12
Additional paid-in capital....................................................... 56,186 56,220
Common stock warrants............................................................ 12 12
Stockholder notes receivable..................................................... (405) (405)
Deferred compensation............................................................ (391) (461)
Cumulative translation adjustment................................................ (86) (76)
Accumulated deficit.............................................................. (17,844) (21,975)
-------- --------
Total stockholders' equity................................................... 37,484 33,327
-------- --------
$ 55,158 $ 48,559
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
<PAGE>
POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET REVENUES:
Product sales......................................... $14,647 $ 9,878 $28,549 $16,709
Royalties............................................. 466 171 990 406
------- ------- ------- -------
Total net revenues................................. 15,113 10,049 29,539 17,115
------- ------- ------- -------
COST OF REVENUES........................................ 8,254 5,789 16,230 10,110
------- ------- ------- -------
GROSS PROFIT............................................ 6,859 4,260 13,309 7,005
------- ------- ------- -------
OPERATING EXPENSES:
Research and development.............................. 1,720 1,215 3,279 2,292
Sales and marketing................................... 1,724 1,464 3,613 2,569
General and administrative............................ 730 430 1,278 840
------- ------- ------- -------
Total operating expenses........................... 4,174 3,109 8,170 5,701
------- ------- ------- -------
INCOME FROM OPERATIONS.................................. 2,685 1,151 5,139 1,304
------- ------- ------- -------
OTHER INCOME (EXPENSE), net............................. 189 (139) 376 (353)
------- ------- ------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES........................................... 2,874 1,012 5,515 951
PROVISION FOR INCOME TAXES.............................. 721 57 1,384 67
------- ------- ------- -------
NET INCOME.............................................. $ 2,153 $ 955 $ 4,131 $ 884
------- ------- ------- -------
EARNINGS PER SHARE:
Basic................................................. $ 0.18 $ 1.08 $ 0.34 $ 1.00
------- ------- ------- -------
Diluted............................................... $ 0.16 $ 0.11 $ 0.31 $ 0.09
------- ------- ------- -------
SHARES USED IN PER SHARE CALCULATION:
Basic................................................. 12,087 886 12,083 881
======= ======= ======= =======
Diluted............................................... 13,119 9,042 13,123 9,358
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 4,131 $ 884
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................................... 1,468 1,032
Provision for accounts receivable and other allowances.......................... (3) 45
Deferred compensation expense................................................... 70 35
Change in operating assets and liabilities:
Accounts receivable.......................................................... 1,149 (2,534)
Inventories.................................................................. (3,625) 75
Prepaid expenses and other current assets.................................... 97 (34)
Accounts payable............................................................. (674) 2,282
Accrued liabilities.......................................................... 1,165 (129)
Deferred income on sales to distributors..................................... 1,491 466
-------- -------
Net cash provided by operating activities................................. 5,269 2,122
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................. (595) (833)
Purchases of short-term investments............................................. (29,114) (5,485)
Proceeds from sales and maturities of short-term investments.................... 6,392 5,410
-------- -------
Net cash used in investing activities..................................... (23,317) (908)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock...................................... (34) 37
Principal payments under capitalized lease obligations.......................... (990) (675)
-------- -------
Net cash used in financing activities..................................... (1,024) (638)
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. (19,072) 576
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................. 25,553 3,282
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ 6,481 $ 3,858
======== =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capitalized lease obligations incurred for property and equipment............... $ 1,439 $ --
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................................................... $ 213 $ 260
======== =======
Cash paid for income taxes...................................................... $ 449 $ 3
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts of Power
Integrations, Inc. (the Company), a Delaware corporation, and its wholly-owned
subsidiaries. Significant inter-company accounts and transactions have been
eliminated.
While the financial information furnished is unaudited, the condensed
consolidated financial statements included in this report reflect all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for the fair presentation of the results of operations for
the interim periods covered and of the financial condition of the Company at the
date of the interim balance sheet. The results for interim periods are not
necessarily indicative of the results for the entire year. The condensed
consolidated financial statements should be read in conjunction with the Power
Integrations, Inc. consolidated financial statements for the year ended December
31, 1997 included in its Form 10-K/A.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 June 30, 1998, the Company's short-term investments consist
of U.S. Government backed securities and commercial paper, which are classified
as held to maturity and are valued using the amortized cost method which
approximates market.
Revenue Recognition
-------------------
Product revenues consist of sales to OEMs and merchant power supply
manufacturers and to distributors. Revenues from product sales to OEMs and
merchant power supply manufacturers are recognized upon shipment. Sales to
distributors are made under terms allowing certain rights of return and
protection against subsequent price declines on the Company's products held by
the distributors. As a result of the Company's distributor agreements, 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" in the accompanying
condensed consolidated balance sheets.
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.
New Accounting Standards
------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and presentation of
comprehensive income. SFAS No. 130 requires companies to report a new measure of
income. The Company adopted SFAS No. 130 in the first quarter of 1998.
"Comprehensive Income" is to include foreign currency translation gains and
losses and other unrealized gains and losses that have historically been
excluded from net income and reflected instead in equity. The adoption of SFAS
No. 130 did not have a material impact on the Company's financial statements.
6
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires companies to report financial and descriptive information about its
reportable operating segments. SFAS No. 131 will be adopted by the Company in
its 1998 annual consolidated financial statements. The Company anticipates that
SFAS No. 131 will not have a material impact on its financial statements.
3. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist of the following (in thousands):
June 30, December 31,
1998 1997
-------- -----------
Raw materials......................... $ 5,471 $3,323
Work-in-process....................... 3,140 2,977
Finished goods........................ 2,342 1,028
------- ------
$10,953 $7,328
======= ======
4. SIGNIFICANT CUSTOMERS AND EXPORT SALES:
Customer Concentration
----------------------
The Company's end user base is highly concentrated and a relatively small
number of OEMs and distributors accounted for a significant portion of the
Company's net revenues. For the six months ended June 30, 1998 and 1997, ten
customers accounted for approximately 65% and 70% of total net revenues,
respectively.
The following customers accounted for more than 10% of total net revenues:
Six Months Ended
June 30,
-------------------------------
Customer 1998 1997
-------- -------------------------------
A................................. 21% 19%
B................................. 13% *
C................................. * 13%
- ---------
* less than 10% or no sales
Export Sales
------------
The Company markets its products in North America and in foreign countries
through its sales personnel and a worldwide network of independent sales
representatives and distributors. As a percentage of total net revenues, export
sales, which consist of domestic sales to customers in foreign countries, are
comprised of the following:
Six Months Ended
JUNE 30,
-------------------------------
1998 1997
-------------------------------
Japan............................. 3% 7%
Taiwan............................ 26% 25%
Hong Kong......................... 23% 24%
Western Europe.................... 16% 13%
Other............................. 13% 10%
---- ----
Total foreign..................... 81% 79%
==== ====
7
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. EARNINGS PER SHARE:
In December 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings per Share." SFAS No. 128 requires companies
to compute earnings per share under two different methods (basic and diluted).
Basic earnings per share is calculated by dividing net income by the weighted
average shares of common stock outstanding during the period. Diluted earnings
per share is calculated by dividing net income by the weighted average shares of
outstanding common stock and common stock equivalents during the period. Common
stock equivalents included in the diluted calculation consist of dilutive shares
issuable upon the exercise of outstanding common stock options and warrants
computed using the treasury stock method.
The following table sets forth the calculation of basic and diluted earnings
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------ ------- ------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income................................................... $ 2,153 $ 955 $ 4,131 $ 884
------- ------ ------- ------
Weighted average common shares............................... 12,087 886 12,083 881
------- ------ ------- ------
Basic earnings per share.................................. $ 0.18 $ 1.08 $ 0.34 $ 1.00
------- ------ ------- ------
Diluted earnings per share:
Net income................................................... $ 2,153 $ 955 $ 4,131 $ 884
------- ------ ------- ------
Weighted average common shares............................... 12,087 886 12,083 881
Weighted average common share equivalents:
Convertible preferred stock............................... -- 7,447 -- 7,447
Options................................................... 719 674 724 1,016
Warrants.................................................. 313 35 316 14
------- ------ ------- ------
Diluted weighted average common shares....................... 13,119 9,042 13,123 9,358
------- ------ ------- ------
Diluted earnings per share............................. $ 0.16 $ 0.11 $ 0.31 $ 0.09
======= ====== ======= ======
</TABLE>
6. PROVISION FOR INCOME TAXES:
Income tax expense for the six month periods ended June 30, 1998 and 1997
includes a provision for Federal, state and foreign taxes based on the annual
estimated effective tax rate applicable to the Company and its subsidiaries for
the year.
7. LEGAL PROCEEDINGS:
In July 1998, the Company filed a complaint in the U.S. District Court,
Northern District of California against its largest end user, Motorola. The suit
alleges that Motorola, Inc. ("Motorola"), has infringed and continues to
infringe on one of the Company's TOPSwitch circuit patents and one of the
Company's high-voltage semiconductor device patents. The Company seeks, among
other things, an order enjoining Motorola from infringing on the Company's
patents and an award for damages resulting from the alleged infringement.
Litigation may be necessary to resolve the claims asserted by the Company
against Motorola, and any claims which Motorola may assert in the future against
the Company, and to defend, enforce and protect the Company's intellectual
property rights. There can be no assurance that the Company will prevail in any
litigation with Motorola, or any other party. 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 could have a material
adverse effect on the Company's
8
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
business, financial condition and results of operations. Adverse
determinations in litigation could result in the loss of certain 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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and Results
----------------------------------------------------------------------------
of Operations includes a number of forward-looking statements which reflect the
- -------------------------------------------------------------------------------
Company's current views with respect to future events and financial performance.
- -------------------------------------------------------------------------------
These forward-looking statements are subject to certain risks and uncertainties,
- -------------------------------------------------------------------------------
including those discussed in the "Factors That May Affect Future Results of
- ---------------------------------------------------------------------------
Operations" and elsewhere in this Form 10-Q that could cause actual results to
- -------------------------------------------------------------------------------
differ materially from historical results or those anticipated. In this report,
- -------------------------------------------------------------------------------
the words "anticipates," "believes," "expects," "future," "intends," and similar
- -------------------------------------------------------------------------------
expressions identify forward-looking statements. Readers are cautioned not to
- -----------------------------------------------------------------------------
place undue reliance on these forward-looking statements, which speak only as of
- -------------------------------------------------------------------------------
the date hereof.
- ---------------
The following management's discussion and analysis of financial condition and
-----------------------------------------------------------------------------
results of operations should be read in conjunction with management's discussion
- --------------------------------------------------------------------------------
and analysis of financial condition and results of operations included in the
- -----------------------------------------------------------------------------
Company's Form 10-K/A for the year ended December 31, 1997.
- ----------------------------------------------------------
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 and industrial electronics markets. The Company
initially focuses 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.
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 Percentage of
Total Net Revenues for Total Net Revenues for
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues:
Product sales........................................ 96.9% 98.3% 96.6% 97.6%
Royalties............................................ 3.1 1.7 3.4 2.4
------- ------- ------- -------
Total net revenues................................ 100.0 100.0 100.0 100.0
------- ------- ------- -------
Cost of revenues....................................... 54.6 57.6 54.9 59.1
------- ------- ------- -------
Gross profit........................................... 45.4 42.4 45.1 40.9
------- ------- ------- -------
Operating expenses:
Research and development............................. 11.4 12.1 11.1 13.4
Sales and marketing.................................. 11.4 14.6 12.2 15.0
General and administrative........................... 4.8 4.2 4.3 4.9
------- ------- ------- -------
Total operating expenses.......................... 27.6 30.9 27.6 33.3
------- ------- ------- -------
Income from operations................................. 17.8 11.5 17.5 7.6
Other income (expense), net............................ 1.2 (1.4) 1.3 (2.0)
------- ------- ------- -------
Income before provision for income taxes............... 19.0 10.1 18.8 5.6
------- ------- ------- -------
Provision for income taxes............................. 4.8 0.6 4.7 0.4
------- ------- ------- -------
Net income............................................. 14.2% 9.5% 14.1% 5.2%
======= ======= ======= =======
</TABLE>
10
<PAGE>
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net revenues. Net revenues consist of revenues from product sales, which
------------
are calculated net of returns and allowances, plus royalties paid by licensees
of the Company's technology. Net revenues for the second quarter ended June 30,
1998 were $15.1 million compared to $10.0 million for the second quarter of
1997, an increase of $5.1 million, or 50%. Net revenues for the six months ended
June 30, 1998 were $29.5 million compared to $17.1 million for the comparable
period of 1997, an increase of $12.4 million, or 73%.
Net revenues from product sales represented $14.6 million and $9.9 million in
the second quarter of 1998 and 1997, respectively. Net revenues from product
sales represented $28.5 million and $16.7 million in the first half of 1998 and
1997, respectively. The increase in net revenues from product sales for the
three months and six months ended June 30, 1998 was due primarily to higher
sales volume of the Company's TOPSwitch family of products across a larger
customer base. Net revenues also grew because of an increase in royalty
revenues. Royalties were $466,000 for the second quarter of 1998, an increase of
$295,000, or 173%, from the second quarter of 1997. Royalties were $990,000 for
the six months ended June 30, 1998, an increase of $584,000, or 144%, from the
six months ended June 30, 1997.
International sales were $12.4 million in the second quarter of 1998 compared
to $7.9 million for the same period in 1997, an increase of $4.5 million, or
57%, representing 82% of net revenues compared to 78% in the comparable period
of 1997. International sales were $24.0 million for the six months ended June
30, 1998 compared to $12.9 million for the same period in 1997, an increase of
$11.1 million, or 86%, representing 81% of net revenues compared to 79% in the
comparable period of 1997. 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, sales to this region were 71% and 70% of
product sales for the three months ended June 30, 1998 and 1997, respectively,
and 69% and 65% of product sales for the six months ended June 30, 1998 and
1997, respectively. The Company expects international sales to continue to
account for a large portion of the Company's net revenues.
The Company's direct sales are divided approximately 50% to distributors and
50% to OEMs and merchants. For the quarter ended June 30, 1998, net revenues
from three customers accounted for 24%, 12% and 10% of net revenues, and for the
quarter ended June 30, 1997, two of those same customers accounted for 16% and
17% of net revenues. For the six months ended June 30, 1998, net revenues from
two customers accounted for 21% and 13% of net revenues, and for the comparable
period ended June 30, 1997, one of those same customers accounted for 19% of net
revenues and another customer accounted for 13% of net revenues.
The exact dollar amounts and percentages of sales to end customers 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 OEMs. However, the Company estimates that direct and
indirect sales to Motorola, who is the Company's largest end user, accounted for
approximately 13% and 19% of the Company's net revenues for the quarters ended
June 30, 1998 and 1997, respectively, and approximately 9% and 16% of the
Company's net revenues for the six months ended June 30, 1998 and 1997,
respectively. Direct sales to Motorola were approximately 5% and 6% of the
Company's net revenues for the quarters ended June 30, 1998 and 1997,
respectively, and approximately 4% and 5% of the Company's net revenues for
the six months ended June 30,1998 and 1997, respectively.
Cost of revenues; 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, the assembly and packaging of its
products, and internal labor and overhead associated with the testing of both
wafers and packaged components. Gross profit for the second quarter of 1998 was
$6.9 million, or 45.4%, of net revenues, compared to $4.3 million, or 42.4%, of
net revenues for the same period in 1997. Gross profit for the six months ended
June 30, 1998 was $13.3 million, or 45.1%, of net revenues, compared to $7.0
million, or 40.9%, of net revenues for the same period in 1997. The increase in
gross profit for the three months and six months ended June 30, 1998 was
primarily due to the combined effects of the absorption of certain fixed costs
over the increased sales volume, lower prices for wafers, which were partially a
result of favorable Japanese Yen exchange rates, and better manufacturing yields
due to improved test equipment. There can be no assurance that these or other
factors will have a favorable impact on gross profit in future periods.
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
11
<PAGE>
development costs until new products are released to production. Research and
development expenses for the second quarter of 1998 were $1.7 million compared
to $1.2 million for the same period in 1997, an increase of $505,000, or 42%,
representing 11.4% and 12.1% of net revenues, respectively. Research and
development expenses for the first half of 1998 were $3.3 million compared to
$2.3 million for the same period in 1997, an increase of $987,000, or 43%,
representing 11.1% and 13.4% of net revenues, respectively. The increase for the
three months and six months ended June 30, 1998 was primarily due to 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. 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 for the second quarter
of 1998 were $1.7 million compared to $1.5 million for the same period in 1997,
an increase of $260,000, or 18%, representing 11.4% and 14.6% of net revenues,
respectively. Sales and marketing expenses for the first half of 1998 were $3.6
million compared to $2.6 million for the same period in 1997, an increase of
$1.0 million, or 41%, representing 12.2% and 15.0% of net revenues,
respectively. The increase for the three months and six months ended June 30,
1998 was primarily a result of the addition of personnel to support
international sales and field application engineers and to staff two new sales
offices in Asia which opened in June 1997. 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, general management and facilities, and consulting, outside
services, legal and auditing expenses. For the quarters ended June 30, 1998 and
1997, general and administrative expenses were $730,000 and $430,000,
respectively, which represented 4.8% and 4.2% of net revenues, respectively. For
the six month periods ended June 30, 1998 and 1997, general and administrative
expenses were $1.3 million and $840,000, respectively, which represented 4.3%
and 4.9% of net revenues, respectively. This increase in absolute dollars was
attributable to additional headcount to support the Company's growth and
additional professional and outside services required by the Company as a result
of its public reporting obligations. The Company expects that general and
administrative expenses will continue to increase in absolute dollars and may
increase as a percentage of net revenues, particularly in light of the Company's
recently filed patent infringement claim against Motorola.
Other income (expense), net. Other income (expense), net, for the second
---------------------------
quarter of 1998 increased by $328,000 over the same period in 1997, and for the
six months ended June 30, 1998 increased by $729,000 over the same period in
1997. The increase for the three months and six months ended June 30, 1998 was
due primarily to additional interest income from an increase in short-term
investments in 1998 and a reduction in interest expense as a result of the
repayment of $3.0 million of subordinated debt in the fourth quarter of 1997.
The Company expects to continue to utilize term debt to finance its capital
equipment needs.
Provision for income taxes. Provision for income taxes represents Federal,
--------------------------
state and foreign taxes. The provision for income taxes was $721,000 for the
second quarter of 1998 compared to $57,000 for the same period in 1997. The
provision for income taxes was $1.4 million for the first half of 1998 compared
to $67,000 for the same period in 1997. The Company used an effective tax rate
of 25% reflecting the profitable results for the 1998 period, while the
provision for 1997 represented minimum tax. The difference between the statutory
rate and the Company's effective tax rate for 1998 is primarily due to the
beneficial impact of net operating loss carryforwards. Utilization of the net
operating loss carryforwards will be subject to an annual limitation due to the
ownership change limitations provided by the Internal Revenue Code of 1986, as
amended, and similar state provisions.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had approximately $32.7 million in cash, cash
equivalents and short-term investments. In addition, under a working capital
line of credit agreement with a bank, the Company can borrow up to $8.0 million
conditional upon meeting certain financial covenants, including maintaining
quarterly profitability and specific financial covenants. As of June 30, 1998,
there were no borrowings outstanding under the line of credit agreement. The
Company has financed a significant portion of its machinery and equipment
through capital
12
<PAGE>
equipment leases including an additional equipment financing in the amount of
$1.4 million during the six months ended June 30, 1998. At June 30, 1998,
approximately $4.7 million was outstanding under various capital equipment
leasing agreements.
As of June 30, 1998, the Company had working capital, defined as current
assets less current liabilities, of approximately $33.9 million, which was an
increase of approximately $3.8 million over December 31, 1997. The Company
generated $5.3 million from operating activities during the six months ended
June 30, 1998, reflecting net income of $4.1 million, depreciation of $1.5
million and $330,000 provided by the net change in working capital items. The
net change in working capital items primarily reflects an increase in inventory
of $3.6 million as part of the Company's program to provide shorter lead times
to its customers, a decrease in accounts receivable of $1.1 million, and an
increase of $1.5 million in deferred revenue.
The nature of the semiconductor industry, combined with the current economic
environment, make it very difficult for the Company to predict future liquidity
requirements with certainty. However, the Company believes that its existing
cash, cash equivalents and short-term investments, cash generated from
operations and other existing sources of working capital will be adequate to
finance its operations through the next twelve months.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and presentation of
comprehensive income. SFAS No. 130 requires companies to report a new measure of
income. The Company adopted SFAS No. 130 in the first quarter of 1998.
"Comprehensive Income" is to include foreign currency translation gains and
losses and other unrealized gains and losses that have historically been
excluded from net income and reflected instead in equity. The adoption of SFAS
No. 130 did not have a material impact on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires companies to report financial and descriptive information about its
reportable operating segments. SFAS No. 131 will be adopted by the Company in
its 1998 annual consolidated financial statements. The Company anticipates that
SFAS No. 131 will not have a material impact on its financial statements.
Factors That May Affect Future Results of Operations
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company's future results of operations are dependent upon a number of
-------------------------------------------------------------------------
factors, including those described below. For a complete description of such
- ----------------------------------------------------------------------------
factors, see the Company's Form 10-K/A for the year ended December 31, 1997.
- ---------------------------------------------------------------------------
Unpredictable and Fluctuating Operating Results. The Company's quarterly
-----------------------------------------------
net 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 was profitable in the second quarter of 1998, 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.
Factors which may affect the Company's net revenues and operating results
include the timing and volume of orders received by the Company; 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 including the impact of new product
introduction on existing products; the Company's ability to develop and bring to
market 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; the Company's patent infringement claim
against Motorola; 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.
13
<PAGE>
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."
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 approximately one-half of the
Company's net revenues. The Company expects that its net 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 over capacity. The Company may experience
substantial period-to-period fluctuations in future operating results due to
general conditions of these markets. The Company's net 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. 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.
Customer Concentration and Competing Products from Customers. The Company's
------------------------------------------------------------
end user base is highly concentrated and a relatively small number of OEMs,
directly or indirectly through merchant power supply manufacturers, account for
a significant portion of the Company's net revenues. The Company estimates that
its top ten customers, including distributors which resell to large OEMs and
merchant power supply manufacturers, accounted for 65% and 70% of the Company's
net revenues for the six months ended June 30, 1998 and 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 no customer is presently obligated either to purchase a
specified amount of products or to provide the Company with binding forecasts of
product purchases for any period. The reduction, delay or cancellation of orders
from one or more of the Company's 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.
Dependence on Wafer Suppliers. 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 contract with OKI terminates on October 1, 1998.
The Company is negotiating a renewal of this contract, however, there can be no
assurance that the Company will execute a renewal contract with OKI for the
supply of wafers. The Company's wafer supply contract with MEC terminates in
June 2000. There can be no assurance that the Company will be able to reach an
agreement with MEC to extend the term of its wafer supply agreement. The
Company's failure to reach, in a 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 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
14
<PAGE>
wafers with acceptable manufacturing yields, the Company's business, financial
condition and operating results would be materially and adversely affected.
From time to time in the past, the Company has been unable to fully satisfy
customer requests for its products. Any significant disruptions in deliveries of
the Company's products to its customers would materially and adversely affect
the Company's business and operating results.
Risks of Outside Manufacturing and Assembly; Sole Source Risks. 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. 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 affect 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.
Risks of International Sales. Sales to customers outside of the United
----------------------------
States represented 81% and 79% for the six months ended June 30, 1998 and 1997,
respectively. 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,
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. There can be no 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.
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 a 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. Failure by the Company to timely
develop and introduce products that are
15
<PAGE>
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 relating to the Company's product
quality, performance and reliability will not occur in the future or that such
defects or failures will not have a material adverse effect on the Company's
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. 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. The Company is continuing its efforts 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.
In addition, the Company faces competition from MEC, which currently
manufactures and sells its versions of the Company's TOPSwitch families of
products under the right (exclusive during the term of the contract as to 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.
Beginning in April 1997, the Company agreed not to sell its products to new
customers in Japan. The Company's TOPSwitch product families have also 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.
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.
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. In addition, the laws of certain foreign countries in which the
Company's technology is or
16
<PAGE>
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.
Motorola Litigation. In July 1998, the Company filed a complaint in the
-------------------
U.S. District Court, Northern District of California against its largest end
user, Motorola. The suit alleges that Motorola has infringed and continues to
infringe on one of the Company's TOPSwitch circuit patents and one of the
Company's high-voltage semiconductor device patents. The Company seeks, among
other things, an order enjoining Motorola from infringing on the Company's
patents and an award for damages resulting from the alleged infringement.
Litigation may be necessary to resolve the claims asserted by the Company
against Motorola, and any claims which Motorola may assert in the future
against the Company, and to defend, enforce and protect the Company's
intellectual property rights. There can be no assurance that the Company will
prevail in any litigation with Motorola, or any other party. 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 could have a material adverse effect on the Company's business,
financial condition and results of operations. Adverse determinations in
litigation could result in the loss of certain 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.
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 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 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.
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.
Year 2000 Compliance. The Company is aware of the issues associated with
--------------------
the programming code in existing computer systems and software products as the
year 2000 approaches. Computer programs that are written using two digits rather
than four digits to define the applicable year, may have date-sensitive software
and, for instance, may recognize a date using 00 as the year 1900 rather than
the year 2000 ("Date Code Dependency"). Systems that do not properly recognize
such information could generate erroneous data or cause a system to fail. The
Company is in the process of defining costs, issues and uncertainties associated
with making the Company's internal-use software applications compliant with the
Year 2000. In general, the Company expects to resolve the Year 2000 issues
through planned replacement upgrades of its software applications. Management
does not expect the Year 2000 issues to have a material impact on the Company's
business or future results of operations. However, if the planned replacement
upgrades to its software applications are not made, or are not completed on a
timely basis, the Year 2000 issues could have a material impact on the
operations of the Company. The Company currently expects that its internal-use
software applications will be Year 2000 compliant by no later than June 1999,
before any Date Code Dependencies within the Company's internal systems would
have a material adverse impact on the Company's operations. The cost of the
project and the date on which the Company believes it will complete the Year
2000 upgrades are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the availability of
certain resources and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
Possible Volatility of Stock. The stock market has from time to time
----------------------------
experienced significant price and volume fluctuations which have particularly
affected the market prices of the stock of high technology companies, and
17
<PAGE>
which may be unrelated to the operating performance of particular companies.
Factors such as technology and product announcements by the Company or by
competitors, disputes relating to patents and proprietary rights, and failures
or delays in the Company's development program may have a significant effect on
the market price of the Company's common stock.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1998, the Company filed a complaint in the U.S. District Court,
Northern District of California against its largest end user, Motorola. The
suit alleges that Motorola has infringed and continues to infringe on one of the
Company's TOPSwitch circuit patents and one of the Company's high-voltage
semiconductor device patents. The Company seeks, among other things, an order
enjoining Motorola from infringing on the Company's patents and an award for
damages resulting from the alleged infringement.
Litigation may be necessary to resolve the claims asserted by the Company
against Motorola, and any claims which Motorola may assert in the future
against the Company, and to defend, enforce and protect the Company's
intellectual property rights. There can be no assurance that the Company will
prevail in any litigation with Motorola, or any other party. 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 could have a material adverse effect on the Company's business,
financial condition and results of operations. Adverse determinations in
litigation could result in the loss of certain 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of Power Integrations, Inc. held on June
1, 1998, the following proposals were adopted by the margins indicated.
Proposal I - To elect two (2) Class I directors to hold office for a three-year
term and until their successors are elected and qualified:
Voted For Withheld
-------------- --------------
Dr. William Davidow................ 9,427,825 222,635
Steven J. Sharp.................... 9,405,018 245,442
Proposal II - To approve amendments to the Company's 1997 Stock Option Plan
which (i) provides that effective January 1, 1999, 600,000 shares which would
otherwise only be available for grant under such plan pursuant to nonstatutory
stock options may instead be granted pursuant to incentive stock options, and
(ii) limit the number of shares for which options may be granted under such plan
to any employee within any fiscal year to 200,000:
Voted Voted
For Against Abstain
------------ ------------ ------------
8,692,860 939,907 17,693
19
<PAGE>
Proposal III - To ratify the appointment of Arthur Andersen LLP as independent
auditors of the Company for the fiscal year ending December 31, 1998:
Voted Voted
For Against Abstain
------------ ------------ ------------
9,624,197 22,558 3,705
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
The following exhibits are attached hereto and filed herewith:
10.18 Industrial Building Lease between the Company and Mathilda
Development, a California Limited Partnership, dated as
of June 3, 1998.
10.19 Amendment Number Two to Licensing and Wafer Supply
Agreement between the Company and OKI, dated as of
June 16, 1998.
10.20* Amendment Number Three to Licensing and Wafer Supply
Agreement between the Company and OKI, dated as of
August 1,1998.
27.1 Financial Data Schedule.
b. Reports on Form 8-K.
None.
* 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.
20
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
POWER INTEGRATIONS, INC.
Dated: August 12, 1998 By: /s/ Robert G. Staples
--------------------------------------
Robert G. Staples
Chief Financial Officer
21
<PAGE>
EXHIBIT 10.18
INDUSTRIAL BUILDING LEASE
THIS INDUSTRIAL BUILDING LEASE ("Lease") is made and entered into this
3rd day of June, 1998, by and between MATHILDA DEVELOPMENT, a California
Limited Partnership, hereinafter called "Lessor", and POWER INTEGRATIONS,
INC., a Delaware corporation, hereinafter called "Lessee".
W I T N E S S E T H
WHEREAS, Lessor is the owner of the property commonly described as 477
North Mathilda Avenue, Sunnyvale, Santa Clara County, California ("the
Premises") which has been improved with a building, parking lot, driveway, and
sidewalks, among other things;
WHEREAS, Lessee currently occupies the Premises pursuant to a sublease
dated June 15, 1995 between Lessee, as Sublessee and Intermedics, Inc. as
Sublessor (the "Sublease") which Sublease is subject and subordinate to a
lease dated October 28, 1982, as amended, between Intermedics, Inc., now known
as Sulzer Medica, Inc., ("Intermedics") as lessee and Lessor (the "Master
Lease");
WHEREAS, the Master Lease mentioned above expires on October 31, 1998 and
Lessee desires to lease the Premises directly from Lessor on expiration of the
Master Lease provided that the Sublease has not been terminated for any reason
prior to the commencement of the term of this Lease;
NOW, THEREFORE, it is mutually agreed by and between the parties hereto
as follows:
1. Premises. Lessor hereby leases to Lessee, and Lessee hereby hires
--------
from Lessor, on the terms and conditions hereinafter set forth, the Premises,
more particularly described in Exhibit "A", attached hereto, and incorporated
herein by this reference.
2. Term.
----
(a) Provided that the Sublease has not been terminated for any reason
prior to the commencement of the term of this Lease, the term of this Lease
shall be for a period of five (5) years commencing on the first day of
November, 1998 and ending at midnight on the 31st day of October, 2003. A
termination of the Master Lease due to the default of Intermedics thereunder,
followed by the mutual attornment of Lessor (as Master Lessor under the Master
Lease) and Lessee (as Sublessee under the Sublease), shall
1
<PAGE>
not be deemed a termination of the Sublease under the provisions of the
preceding sentence.
(b) Holding over after the expiration of the term or extended term, of
this Lease, if any, or any oral extension thereof, with the consent of Lessor,
shall be a tenancy from month to month, and the rentals and additional rentals
upon the covenants, conditions, limitations, and agreements are subject to the
exceptions and reservations contained in this Lease. The rental rate is to be
the same rate last charged hereunder.
If Lessee remains in possession without Lessor's consent after termination
of the Lease, by lapse of time or otherwise, Lessee shall pay Lessor for each
day of such retention one-twentieth (1/20th) of the amount of the monthly
rental for the last month prior to such termination and Lessee shall also pay
all costs, expenses and damages sustained by Lessor by reason of such
retention, including, without limitation, claims made by a succeeding tenant
resulting from Lessee's failure to surrender the Premises.
3. Rental.
------
(a) Lessee agrees to pay to Lessor as monthly base rent for the Premises
the following amounts:
Period Monthly Base Rent
------ -----------------
Nov. 1, 1998-Oct. 31, 1999 $60,000.00
Nov. 1, 1999-Oct. 31, 2000 $61,500.00
Nov. 1, 2000-Oct. 31, 2001 $63,000.00
Nov. 1, 2000-Oct. 31, 2002 $64,500.00
Nov. 1, 2002-Oct. 31, 2003 $66,000.00
(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 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.
(c) Lessee agrees that all Monthly Base Rent and additional rentals not
received by Lessor within five (5) calendar days of the due date shall be
considered delinquent and agrees to pay a late charge equal to ten percent
(10%) of the delinquent payment within five (5) business days after receipt of
written notice of non
2
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receipt of payment. Rent mailed and bearing a U. S. Postal Service postmark of
the date that is two (2) calendar days prior to the due date shall not be
considered delinquent no matter when received. Additionally, any delinquent
payments not paid within thirty (30) days of the original due date shall bear
interest at the lower of the maximum rate then allowed by law or two points
over the reference rate (prime rate) charged by the San Francisco Main Branch
of the Bank of America.
4. Security Deposit. Lessee shall deposit with Lessor Sixty
----------------
Thousand Dollars ($60,000.00) as security for the full and faithful
performance of each and every term, provision, covenant and condition of this
Lease on execution of this Lease and Lessor's execution of this Lease shall
constitute an acknowledgment of receipt of same. 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. Lessee is currently in possession of the Premises,
----------
pursuant to the Sublease.
6. Improvements. Lessee, being in possession of the Premises, accepts
------------
the Premises and the improvements in their present condition, subject to
Lessor's obligation to repair any latent defects in the Premises at its sole
cost and expense, as provided in paragraph 12, below.
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
3
<PAGE>
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 Premises outside of the areas
designated for such purposes. No materials, supplies, equipment, finished
product or semi-finished project, nor materials or articles of any nature
shall be put upon or permitted to remain upon any portion of the Premises
outside of the areas designated for such purpose or the building proper.
9. Acceptance of Premises and Covenant to Surrender. Lessee, being in
------------------------------------------------
possession of the Premises, accepts the Premises as being in good and sanitary
order, condition and repair, and accepts the building and other improvements
in their present condition, subject to Lessor's obligation to repair any
latent defects in the Premises at its whole cost and expense, as provided in
paragraph 12, below.
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 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
4
<PAGE>
such delay.
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. Except for latent structural defects,
-----------------------
which Lessor shall repair at its sole expense, 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, landscape areas, plumbing, electrical systems, heating and air
conditioning installations, and the exterior and interior of the Premises in
5
<PAGE>
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.
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 non responsibility.
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
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
6
<PAGE>
receiving Lessor's consent, which consent shall not be unreasonably withheld.
16. 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 Premises, 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.
17. Assignment and Subletting.
-------------------------
(a) Lessee shall not assign this Lease, or any interest therein, and
shall 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. Without in any way limiting
Lessor's right to refuse to give consent to a proposed assignment or
subletting under this Paragraph 17, Lessor's refusal to give consent shall not
be deemed unreasonably withheld if:
(i) The character, reputation and financial responsibility of the
proposed new tenant or sub-tenant is not reasonably satisfactory in Lessor's
judgment, or in any event, not at least equal to those possessed by Lessee or
represented to be possessed by Lessee as of the date of the execution of this
Lease. In connection with any such assignment or subletting Lessee shall
deliver to Lessor certified financial statements of Lessee and the new
proposed tenant or sub-tenant showing their then financial condition as
required hereunder.
(ii) The proposed new tenant or sub-tenant fails to
7
<PAGE>
agree in writing to assume and be bound by all the terms and provisions
of this Lease.
(iii) The proposed new tenant's or sub-tenant's proposed use is
different from that set forth in Paragraph 7.
Additionally, as a condition to Lessor's consent to an assignment or
subletting it is hereby agreed that there shall be paid to Lessor the
following: To the extent any rental or other payments under such sublease or
assignment exceed the Monthly Base Rent payments and additional rental
payments payable under the terms of this Lease plus the assignment or
subleasing commissions, and other costs of assigning or subleasing, all
amortized over the initial term of the sublease or remainder of the lease
term, all of such excess (the total of such excess is referred to herein as
"Excess Payments") shall be paid to Lessor as such Excess Payments become due
and payable under the terms of the assignment or subletting.
If Lessee hereunder is a corporation or at any time becomes a corporation
which, under the then current laws of the State of California, is not deemed a
public corporation, or is an unincorporated association or partnership, the
transfer, or assignment directly or indirectly (except to a member of the
transferor's immediate family by gift, bequest or intestate succession) of
any stock or interest in such corporation, association or partnership in the
aggregate in excess of forty-nine percent (49%) during the term hereof shall
be deemed an assignment within the meaning and provisions of this Paragraph
17. Lessee shall immediately report in writing any such transfer or
assignment of any stock or interest to Lessor.
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.
Notwithstanding the above, Lessor's consent shall not be required for an
assignment to: (1) a joint venture if Lessee has at least a fifty percent
(50%) interest in the capital, profits and losses of the joint venture; (2) a
corporation with which Lessee may merge or consolidate; (3) any parent or
subsidiary of Lessee or
8
<PAGE>
subsidiary of Lessee's parent; (4) a purchaser of substantially all of
Lessee's assets if the assignee executes an agreement reasonably required by
Lessor assuming Lessee's obligations; or (5) the surviving entity resulting
from a corporate reorganization.
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. Lessee shall not encumber this Lease without
Lessor's consent, which consent may be withheld by Lessor in its sole and
absolute discretion.
(b) In the event Lessee desires to assign this Lease or 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,
the use which the proposed sublessee intends to make of the Premises and
provide the financial statements described in subparagraph 17 (a) (ii) above,
if Lessor's consent is required. Lessor shall, within fifteen (15) days after
such notice and information 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 any other provisions contained in this Lease, in the
event Lessee desires to assign this Lease or sublet the entire Premises at a
rate higher than the then current rent, Lessor shall have the right,
exercisable in Lessor's sole discretion, by written notice to Lessee within
fifteen (15) after receipt of Lessee's written notice and the information
described in subparagraph 17 (b) above, to terminate this Lease as of the date
Lessee proposed to have its assignment or subletting be effective and enter
into a new lease with a third party, including, but not limited to, Lessee's
proposed assignee or subtenant, without any liability to Lessee. On such
termination, this Lease shall be null and void as of the termination date set
forth in Lessor's notice or as of the date Lessee actually surrenders
possession of the
9
<PAGE>
Premises to Landlord, whichever is later; provided however, each party shall
be liable to the other for any liabilities accrued up to the later of the
above dates.
18. 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.
19. 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 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.
20. 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 Premises in the event that the Premises be sold, and thereupon Lessor
shall be discharged from any further liability in reference thereto.
21. 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 fraction of the
basic rental as the area of the part of the improvements remaining after such
taking bears to the original area
10
<PAGE>
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, personal property,
fixtures, or expenses incurred in, or as a result of, any eminent domain
action.
22. Recordation. Neither party shall record this Lease or a short form
-----------
memorandum of this Lease.
23. Subordination. At Lessor's option, this Lease shall be subordinated
-------------
to any mortgage or deed of trust which is now or shall hereafter be placed
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.
24. Effect of Conveyance. The term "Lessor" as used in this Lease,
--------------------
means only the owner for the time being of the Premises, so that, in the event
of any sale of the Premises, the Lessor shall be and hereby is entirely freed
and relieved of all covenants and obligations of the Lessor hereunder
thereafter accruing. If any
11
<PAGE>
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.
25. Estoppel Certificate. 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, 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.
26. Waiver. The waiver by Lessor or Lessee of any breach of any term,
------
covenant or condition, herein contained shall not be deemed to be a waiver of
such term, covenant or condition or any subsequent breach of 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's knowledge of such preceding breach at the
time of acceptance of such rent.
27. Attorney's Fees. 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.
28. Default. Occurrence of any of the following events shall constitute
-------
a default and breach of this Lease by Lessee.
(a) The vacating and abandonment of the Premises by Lessee.
12
<PAGE>
(b) The failure by Lessee to make any payment of rent or any other
payment required of Lessee hereunder, as and when due, if such failure
continues for three (3) days after written notice thereof by Lessor to Lessee.
(c) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease other than described in subparagraph
28(b) above, where such failure continues for thirty (30) days after written
notice thereof by Lessor to Lessee; provided however, that if Lessee's default
is such that more than thirty (30) days are reasonably required for its cure,
then Lessee shall not be deemed to be in default if Lessee commences such cure
within said thirty (30) day period and thereafter diligently prosecutes such
cure to completion.
(d) The making by Lessee of any general assignment or general
arrangement for the benefit of creditors or the filing by or against Lessee of
a petition to have Lessee adjudged bankrupt, or a petition, or reorganization
or arrangement under any law relating to bankruptcy (unless in the case of a
petition filed against Lessee, the same is dismissed within sixty (60) days);
or the appointment of a trustee or a receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within
thirty (30) days; or the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged in thirty (30)
days.
(e) Any two (2) failures by Lessee to observe or perform any provision or
provisions of this Lease (whether such provision be the same or different)
after written notice by Lessor of such failure during any twelve (12) month
period of the term, as such may be extended, at the option of Lessor shall
constitute a separate and non-curable default.
29. Remedies. Lessor shall have the following remedies if Lessee
--------
commits a default. These remedies are not exclusive; they are cumulative and
in addition to any remedies now or later allowed by law.
(a) Lessor may continue this Lease in full force and effect, as long as
Lessor does not terminate Lessee's right to possession, and Lessor shall have
the right to collect rent when due. During
13
<PAGE>
the period Lessee is in default, Lessor may enter the Premises and relet them,
or any part of them, to third parties for Lessee's account. Lessee shall be
liable to Lessor for all costs Lessor incurs in reletting the Premises,
including, without limitation, broker's commissions and expenses of remodeling
the Premises required by the reletting. Reletting may be for a period shorter
or longer than the remaining term of the Lease. Lessee shall pay to Lessor the
rent due under this Lease as and when due, less the rent Lessor receives from
any reletting. No act by Lessor allowed by this Paragraph shall terminate this
Lease unless Lessor notifies Lessee in writing that Lessor elects to terminate
Lessee's right to possession of the Premises. If Lessee obtains Lessor's
consent, Lessee shall have the right to assign or sublet its interest in this
Lease, but Lessee shall not be released from liability. Lessor's consent to a
proposed assignment or subletting shall not be unreasonably withheld.
(b) Lessor may terminate Lessee's right to possession of the Premises at
any time. No act by Lessor other than giving written notice to Lessee shall
terminate this Lease. Acts of maintenance, efforts to relet the Premises, or
the appointment of a receiver on Lessor's initiative to protect Landlord's
interest under this Lease shall not constitute a termination of Lessee's right
to possession. On termination, Lessor has the right to recover from Lessee:
(i) The worth at the time of the award of the unpaid rent that had
been earned at the time of termination of this Lease;
(ii) The worth at the time of the award of the amount by which the
unpaid rent that would have been earned after the date of termination of this
Lease until the time of award exceeds the amount of the loss of rent that
Lessee proves could have been reasonably avoided;
(iii) The worth at the time of the award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of the loss of rent that Lessee proves could have been reasonably
avoided; and
(iv) Any other amount, and court costs, necessary to compensate
Lessor for all detriment proximately caused by Lessee's default.
"The worth, at the time of the award", as used in (i) and (ii)
14
<PAGE>
of this subparagraph, is to be computed by allowing interest at the
maximum rate allowed by law. "The worth, at the time of the award", as
referred to in (iii) of this subparagraph, is to be computed by
discounting the amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of the award, plus one percent (1%).
30. 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
charge 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 fifteen (15) days prior
to the date such shall be delinquent. 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.
31. Destruction of Premises.
-----------------------
(a) If ten percent (10%) or less of the improvements to the Premises are
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 to the same by Lessee, its agents, servants, employees or
15
<PAGE>
invitees, Lessee and not Lessor shall be so obligated to repair and restore.
If the improvements to the Premises are damaged by an uninsured peril
rendering more than ten percent (10%) of the improvements to 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 abate in
proportion to the area of the improvements to the Premises rendered not
reasonably suitable for the conduct of Lessee's business.
(b) If the improvements to 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 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 34, 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
16
<PAGE>
expended by Lessor in paying the cost of restoration.
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 (10)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
17
<PAGE>
and/or restoration, Lessor shall reimburse Lessee to the extent of Lessee's
payments.
32. 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 Premises, 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 generality of the foregoing, elevators, stairways,
passage-ways, 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 Lessor, its agents, employees or contractors.
33. 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.
34. Insurance. Lessor 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 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 reasonable
discretion of the Lessor.
(d) As a basis for continuance of the "stipulated amount clause", Lessor
shall adjust such amount annually in accordance
18
<PAGE>
with reasonably acceptable industrial building cost indices for the State of
California. 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 the Premises shall name the Lessor
as named insured and any bank or other mortgage lender with an interest in the
Premises shall be included as a loss payee.
(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
(so long as said coverage is available at commercially reasonable rates),
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 34 shall expressly
provide that it (they) shall not be cancelled or altered without thirty (30)
days prior written notice to the Lessee.
(h) Lessee shall reimburse Lessor, as additional rent, all costs and
premiums for all insurance coverage required by this Paragraph 34 within
thirty (30) days after receipt of a copy of the premium notice.
35. Indemnification of Lessor and Lessee's Liability and Personal
-------------------------------------------------------------
Property Insurance.
------------------
(a) Lessee, as a material part of the consideration to be rendered to
Lessor, waives all claims against Lessor for 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
19
<PAGE>
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
are 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
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 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. Lessee shall also maintain in force during the term hereof insurance
covering its tenant improvements, fixtures, equipment, merchandise and
personal property in the Premises with a policy or policies of fire insurance
with a standard extended coverage endorsement attached together with coverage
for sprinkler damage, vandalism, and malicious mischief to the extent of their
insurable value, the proceeds of which will, so long as this Lease is in
effect, be used for the repair or replacement of the assets so insured. It is
understood Lessor shall have no interest in the insurance upon Lessee's assets
and will sign all documents necessary or proper in connection with the
settlement of any claim or loss by Lessee.
(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
20
<PAGE>
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.
36. 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.
37. Notices. All notices, consents, waiver or other communications
-------
which 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
800 El Camino Real, Suite 175
Menlo Park, CA 94025
To Lessee:At Premises
Attention:
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.
38. 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.
39. Miscellaneous.
-------------
(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.
(b) This Lease shall be construed and enforced in accordance with the
laws of the State of California.
21
<PAGE>
(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 Lease. 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.
40. Warranty. Lessee warrants to Lessor that Lessee conducts business
--------
as a corporation organized in the State of California, 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.
41. 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.
42. Further Instruments. Lessee, at no cost or expense to
-------------------
22
<PAGE>
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 Premises from the adjacent property owned by Lessor.
43. Non-Recourse Obligation. All obligations of Lessor hereunder shall
-----------------------
not constitute personal obligations of Lessor, its partners or any other
persons or entities constituting Lessor and Lessee shall not seek recourse
against any such entities, persons, or any of their assets for satisfaction of
any liabilities with respect to this Lease. In the event Lessee obtains a
judgment against Lessor resulting from any default or claim or raising under
this Lease, such judgment may only be satisfied from Lessor's interest in the
real property commonly described as 477 North Mathilda Avenue, Sunnyvale,
Santa Clara, Santa Clara County, California or proceeds from the sale thereof
and no other real, personal, or mixed property of Lessor, its partners, or any
other persons or entities comprising Lessor, wherever situated, shall be
subject to levy to satisfy such judgment.
44. Hazardous Materials Usage and Indemnities. Lessee hereby makes the
-----------------------------------------
following covenants regarding hazardous materials:
(a) Lessee shall at all times and in all material respects comply with
all federal, state and local laws, ordinances and regulations, including, but
not limited to, the Federal Water Pollution Control Act (33 U.S.C. sec.1251,
et seq.), Resource Conservation & Recovery Act (42 U.S.C. sec.6901, et seq.),
------ ------
Safe Drinking Water Act (42 U.S.C. sec.3000f, et seq.), Toxic Substance
------
Control Act (15 U.S.C. sec.2601, et seq.), the Clean Air Act (42 U.S.C.
------
sec.7401, et seq.), Comprehensive Environmental Response, Compensation and
------
Liability Act (42 U.S.C. sec.9601, et seq.), California Health & Safety Code
------
(sec.25100, et seq.; sec.39000, et seq.), California Safe Drinking Water &
Toxic Enforcement Act of 1986 (California Health & Safety Code sec.25249.5, et
--
seq.), California Water Code (sec.13000, et seq.), and other comparable state
--- -- ---
and federal laws ("Hazardous Materials Laws"), relating to the use, analysis,
generation, manufacture, storage, disposal or transportation of any "hazardous
substances," "hazardous wastes," "hazardous materials" or "toxic substances"
as such terms are defined under any Hazardous Materials Laws (collectively,
"Hazardous Materials").
23
<PAGE>
(b) Lessee shall, at its own expense, procure, maintain in effect and
comply in all material respects with all conditions of any and all permits,
licenses, and other governmental and regulatory approvals required for
Lessee's use of Hazardous Materials on the Premises, including, without
limitation, discharge of (appropriately treated) materials or wastes into or
through any sanitary sewer serving the Premises. Lessee shall cause any and
all of its Hazardous Materials to be removed from the Premises solely in
compliance with all applicable Hazardous Materials Laws. Lessee shall in all
material respects handle, treat, deal with and manage any and all Hazardous
Materials in, on, under or about the Premises in conformity with all
applicable Hazardous Materials Laws and prudent industry practices regarding
management of such Hazardous Materials. Upon expiration or earlier
termination of the term, Lessee shall cause all of its Hazardous Materials to
be removed from the Premises in accordance with and in compliance with all
applicable Hazardous Materials Laws.
(c) Lessee shall indemnify, defend (by counsel reasonably acceptable to
Lessor), protect, and hold Lessor and each of Lessor's partners, employees,
agents, attorneys, successors and assigns, free and harmless from and against
any and all claims, liabilities, penalties, forfeitures, losses or expenses
(including reasonable attorneys' fees) arising from or caused in whole or in
part, directly or indirectly, by (i) an Environmental Activity (defined below)
by Lessee, or (ii) Lessee's failure to comply with any Hazardous Materials
Law. Lessee's obligations under this paragraph shall include all costs of any
repair, cleanup or detoxification or decontamination of the Premises, or the
preparation and implementation of any closure, remedial action or other plans
in connection therewith that are required as a result of any Environmental
Activity by Lessee.
Lessor shall indemnify, defend (by counsel reasonably acceptable to
Lessee), protect, and hold Lessor and each of Lessee's partners, employees,
agents, attorneys, successors and assigns, free and harmless form and against
any and all claims, liabilities, penalties, forfeitures, losses or expenses
(including reasonable attorneys' fees) arising from or caused in whole or in
part, directly or indirectly, the occurrence of any Environmental Activity
where such Environmental Activity was not caused by
24
<PAGE>
Lessee. Lessor's obligations under this paragraph shall include all costs of
any repair, cleanup or detoxification or decontamination of the Premises, or
the preparation and implementation of any closure, remedial action or other
plans in connection therewith that are required as a result of any
Environmental Activity other than an Environmental Activity caused by Lessee.
The provisions of this Paragraph 44 shall survive the termination of the
Lease. "Environmental Activity" means any actual, proposed or threatened
storage, holding, existence, release, emission, discharge, generation,
processing, abatement, removal, disposition, handling or transportation of any
Hazardous Materials from, into or on the Premises, or any other activity or
occurrence that causes or would cause any such event to exist.
45. Option to Extend. (a) In the event Lessee shall not then be in
----------------
default hereunder and shall have made all previous rental payments in a timely
manner (no more than one payment in each calendar year being delinquent, as
defined in Paragraph 3 hereof), Lessee shall have the right, not earlier than
nine (9) months prior to the date of the expiration of the term of this Lease
and not later than six (6) months prior to the date of the expiration of the
term of this Lease, to renew the term of this Lease for a further term of five
(5) years from the date of expiration of the term of this Lease.
(b) Such election shall be made by Lessee by serving upon Lessor a
notice in writing to the effect that Lessee elects to renew and extend the
term of this Lease for such extended term.
(c) In the event Lessee shall elect to renew this Lease and shall
serve notice of such election, upon the expiration of the term of this Lease,
it shall be automatically extended for an additional term of five (5) years
from the date of expiration of the original term of this Lease.
(d) Except for the redetermination of the base rental in accordance
with this Paragraph 45, all other terms and conditions of the original lease
agreement shall apply to the extended term.
(e) (i) During the first year of extended term of this Lease, if
any, Lessee shall pay to Lessor as Monthly Base Rent for the Premises monthly
rent in an amount equal to the then current
25
<PAGE>
fair market value of the Premises. Such Monthly Base Rent shall be increased
annually during the extended term in proportion to the increase in the
Consumer Price Index, All Items, San Francisco-Oakland-San Jose, All Urban
Consumers, 1982-84=100. The base index shall be the index for August, 2003.
The adjustment index shall be the index for August, 2004. The percentage
increase between those two indexes shall be applied to the Monthly Base Rent
for the first year of the extended term to determine the Monthly Base Rent for
the next year of the extended term. The same procedure shall be used for each
subsequent year of the extended term. In no event, however, shall the Monthly
Base Rent for the first year of the extended term or for any subsequent year
be less than that of the immediately preceding year.
(ii) Lessor and Lessee shall have thirty (30) days after service of
Lessee's notice of election to renew on Lessor to agree on such monthly fair
market rental value of the Premises. If Lessor and Lessee agree on such
amount during such thirty (30) day period, then they shall immediately execute
an amendment to this Lease setting forth the Monthly Base Rent for the first
year of the extended term of this Lease. If Lessor and Lessee are unable to
agree on such amount within such thirty (30) day period, then they shall each,
within thirty (30) days of the expiration of such period, appoint a real
estate broker knowledgeable of the monthly rentals charged for similar
commercial space in the Sunnyvale area and such brokers shall then endeavor to
agree on the monthly fair market rental value of the Premises. If the two
brokers agree on the monthly fair market rental value of the Premises, their
decision shall be binding on the parties. If either party hereto does not
appoint a broker within such second thirty (30) day period, then the single
broker appointed shall be the sole broker and shall establish such amounts
alone.
(iii) If the brokers so appointed are unable to agree on the
monthly fair market rental value of the Premises within thirty (30) days after
the second broker has been appointed, then the two brokers shall attempt to
select a third broker meeting the qualifications set forth above within ten
(10) days after the last day the two brokers are given to establish such
amount. If the two brokers are unable to agree on a third broker, either
party hereto, after giving ten (10) days' notice to the other party, can
26
<PAGE>
apply to the then President of the Real Estate Board of Santa Clara County, or
to the presiding judge of the Superior Court of Santa Clara County, for the
selection of a third broker. The three brokers shall then establish the
monthly fair market rental value of the Premises by majority vote. Lessor and
Lessee shall each bear the cost of their own broker and 1/2 of the cost of
appointing the third broker and of the third broker's fee.
46. 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"
POWER INTEGRATIONS, INC.,
a California Corporation
By /s/Clifford D. Walker
-----------------------
Clifford D. Walker, Vice President
"LESSOR"
MATHILDA DEVELOPMENT, a
California Limited Partnership
THE CORTANA CORPORATION,
Managing General Partner
By /s/ David A. Wollenberg
-------------------------
David A. Wollenberg, President
27
<PAGE>
EXHIBIT 10.19
AMENDMENT NUMBER TWO
TO
LICENSING AND WAFER SUPPLY AGREEMENT
This Amendment Number Two (the "Amendment"), dated as of June 16, 1998,
amends the Licensing and Wafer Supply Agreement dated as of June 17, 1993, as
amended by Amendment Number One to Licensing and Wafer Supply Agreement dated
September 21, 1995 (the "OKI Agreement"), by and between OKI Electric Industry
Co., Ltd. ("OKI"), a Japanese corporation, and Power Integrations, Inc., a
Delaware corporation (the "Company"). Unless specifically designated otherwise,
capitalized terms used herein shall have the same meanings given them in the OKI
Agreement.
RECITALS
--------
WHEREAS, pursuant to the terms of the OKI Agreement, the Company grants to
OKI licenses of certain of the Company's intellectual property and the Company
acquires from OKI fabrication and supply of wafers of certain Power IC products;
WHEREAS, the OKI Agreement expires five (5) years from its Effective Date;
WHEREAS, the Company and OKI desire to extend the term of the OKI
Agreement;
WHEREAS, in accordance with Section 23.8 of the OKI Agreement, the OKI
Agreement may be extended by an instrument in writing duly executed by
authorized officers of OKI and the Company;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements of the parties contained herein, the parties hereby agree to amend
the OKI Agreement as follows:
AGREEMENT
---------
1. Article 20 shall be amended and restated to read in full as follows:
"The term of this Agreement shall commence on the Effective Date and
shall continue in full force and effect until August 1, 1998, unless
sooner terminated as provided herein."
2. This Amendment shall be governed in accordance with the laws of the
State of California, without regard to conflict of law principles.
3. This Amendment may be executed in counterparts, each of which shall be
an original and all of which together shall constitute one and the same
instrument.
4. Except as amended hereby, the OKI Agreement remains in full force and
effect.
1
<PAGE>
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.
/s/ TAIJI USUI /s/ CLIFFORD D. WALKER
By:__________________________________ By:_____________________________
GENERAL MANAGER VICE PRESIDENT
Title:_______________________________ Title:__________________________
2
<PAGE>
EXHIBIT 10.20
-------------
AMENDMENT NUMBER THREE
TO
LICENSING AND WAFER SUPPLY AGREEMENT
This Amendment Number Three (the "Amendment"), dated as of August 1, 1998,
amends the Licensing and Wafer Supply Agreement dated as of June 17, 1993, as
amended by Amendment Number One to Licensing and Wafer Supply Agreement dated
September 21, 1995, and Amendment Number Two to Licensing and Wafer Supply
Agreement dated June 16, 1998 (the "OKI Agreement"), by and between OKI Electric
Industry Co., Ltd. ("OKI"), a Japanese corporation, and Power Integrations,
Inc., a Delaware corporation (the "Company"). Unless specifically designated
otherwise, capitalized terms used herein shall have the same meanings given them
in the OKI Agreement.
RECITALS
--------
WHEREAS, pursuant to the terms of the OKI Agreement, the Company grants to
OKI licenses of certain of the Company's intellectual property and the Company
acquires from OKI fabrication and supply of wafers of certain Power IC products;
WHEREAS, the Company and OKI desire to amend the terms of the OKI
Agreement;
WHEREAS, in accordance with Section 23.8 of the OKI Agreement, the OKI
Agreement may be amended by an instrument in writing duly executed by authorized
officers of OKI and the Company;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements of the parties contained herein, the parties hereby agree to amend
the OKI Agreement as follows:
AGREEMENT
---------
1. Article 20 shall be amended and restated to read in full as follows:
"The term of this Agreement shall commence on the Effective Date and
shall continue in full force and effect until October 1, 1998, unless
sooner terminated as provided herein."
2. Exhibit C to the OKI Agreement shall be amended and restated to read
in full as set forth on Exhibit A hereto and any amendments to Exhibit C of
the OKI Agreement prior to the date hereof shall be replaced with and
superseded by the terms set forth on Exhibit A hereto.
3. This Amendment shall be governed in accordance with the laws of the
State of California, without regard to conflict of law principles.
[+] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
1
<PAGE>
4. This Amendment may be executed in counterparts, each of which shall
be an original and all of which together shall constitute one and the same
instrument.
5. Except as amended hereby, the OKI Agreement remains 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: /s/ Taiji Usui By: /s/ Clifford D. Walker
------------------------------ --------------------------------
Title: General Manager Title: Vice President
2
<PAGE>
EXHIBIT A
"Exhibit C
---------
WAFERS PRICE
------------
Production WAFERS (4") BASE_PRICE = +
F/X_BASE = +
Initial F/X_RATE = +
A new F/X_RATE is only established at the time of placing a purchase order for
WAFERS if the Previous Month's Average exchange rate is equal to or greater than
+ from the current F/X_RATE. The new F/X_RATE will be set to the Previous
Month's Average exchange rate and will remain in effect for at least the month
it was established.
The actual WAFERS PURCHASE_PRICE used at the time of order will be calculated by
the following formula:
PURCHASE_PRICE = +
Examples:
1) Nominal F/X Rate Example: F/X_RATE = +:
PURCHASE_PRICE = +
2) Higher F/X Rate Example: New F/X_RATE = +:
PURCHASE_PRICE = +
3) Lower F/X Rate Example: New F/X_RATE = +:
PURCHASE_PRICE = +
Additionally, a F/X_REBATE of will be paid to OKI for each of the WAFERS
accepted by PI during the first year of the Agreement.
OKI and PI may jointly review and revise the WAFERS price within thirty (30)
days of the close of each half of OKI's fiscal year which runs from April 1st
through March 31st. Any such revised price must be agreed upon in writing."
[+] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,481
<SECURITIES> 26,177
<RECEIVABLES> 6,362
<ALLOWANCES> 1,265
<INVENTORY> 10,953
<CURRENT-ASSETS> 48,960
<PP&E> 14,659
<DEPRECIATION> 8,461
<TOTAL-ASSETS> 55,158
<CURRENT-LIABILITIES> 15,066
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 37,472
<TOTAL-LIABILITY-AND-EQUITY> 55,158
<SALES> 28,549
<TOTAL-REVENUES> 29,539
<CGS> 16,230
<TOTAL-COSTS> 16,230
<OTHER-EXPENSES> 8,170
<LOSS-PROVISION> 8
<INTEREST-EXPENSE> 213
<INCOME-PRETAX> 5,515
<INCOME-TAX> 1,384
<INCOME-CONTINUING> 4,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,131
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.31
</TABLE>
