<PAGE>
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 September 30, 1999
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)
<TABLE>
<S> <C>
DELAWARE 94-3065014
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
</TABLE>
477 N. Mathilda Avenue, Sunnyvale, California 94086
(Address of principal executive offices) (Zip code)
(408) 523-9200
(Registrant's telephone number, including area code)
_____________________________
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.
<TABLE>
<CAPTION>
<S> <C>
Class Outstanding at October 29, 1999
- --------------------------------------------- ------------------------------------
Common Stock, $.001 par value 13,219,342 shares
</TABLE>
<PAGE>
POWER INTEGRATIONS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C> <C>
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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
</TABLE>
TOPSwitch, TinySwitch and EcoSmart are trademarks of Power Integrations, Inc.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $25,971 $24,176
Short-term investments........................................................... 34,846 20,242
Accounts receivable.............................................................. 9,474 4,640
Inventories...................................................................... 7,021 8,845
Prepaid expenses and other current assets........................................ 4,828 812
------- -------
Total current assets..................................................... 82,140 58,715
------- -------
PROPERTY AND EQUIPMENT, net......................................................... 8,801 6,339
------- -------
$90,941 $65,054
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capitalized lease obligations................................. $ 1,456 $ 1,950
Accounts payable................................................................. 6,970 5,866
Accrued payroll and related expenses............................................. 2,860 2,394
Taxes payable and other accrued liabilities...................................... 4,536 2,951
Deferred income on sales to distributors......................................... 2,866 2,566
------- -------
Total current liabilities................................................ 18,688 15,727
------- -------
CAPITALIZED LEASE OBLIGATIONS, net of current portion............................... 1,668 1,963
------- -------
STOCKHOLDERS' EQUITY:
Common stock..................................................................... 13 12
Additional paid-in capital....................................................... 63,495 57,289
Common stock warrants............................................................ -- 12
Stockholder notes receivable..................................................... (264) (274)
Deferred compensation............................................................ (216) (321)
Cumulative translation adjustment................................................ (108) (57)
Retained earnings ( deficit)..................................................... 7,665 (9,297)
------- -------
Total stockholders' equity............................................... 70,585 47,364
------- -------
$90,941 $65,054
======= =======
</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 Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET REVENUES:
Product sales........................................... $29,829 $19,907 $72,930 $48,456
License fees and royalties.............................. 311 410 1,010 1,400
------- ------- ------- -------
Total net revenues................................... 30,140 20,317 73,940 49,856
------- ------- ------- -------
COST OF REVENUES.......................................... 12,667 10,635 32,616 26,865
------- ------- ------- -------
GROSS PROFIT.............................................. 17,473 9,682 41,324 22,991
------- ------- ------- -------
OPERATING EXPENSES:
Research and development................................ 2,813 1,947 7,684 5,226
Sales and marketing..................................... 2,893 2,376 8,097 5,989
General and administrative.............................. 4,324 1,067 7,120 2,345
------- ------- ------- -------
Total operating expenses............................. 10,030 5,390 22,901 13,560
------- ------- ------- -------
INCOME FROM OPERATIONS.................................... 7,443 4,292 18,423 9,431
------- ------- ------- -------
OTHER INCOME, net......................................... 510 399 1,527 775
------- ------- ------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES............................................. 7,953 4,691 19,950 10,206
PROVISION FOR INCOME TAXES................................ 1,185 351 2,988 1,735
------- ------- ------- -------
NET INCOME................................................ $ 6,768 $ 4,340 $16,962 $ 8,471
======= ======= ======= =======
EARNINGS PER SHARE:
Basic................................................... $0.52 $0.35 $1.32 $0.70
======= ======= ======= =======
Diluted................................................. $0.47 $0.33 $1.22 $0.65
======= ======= ======= =======
SHARES USED IN PER SHARE CALCULATION:
Basic................................................... 13,138 12,229 12,898 12,133
======= ======= ======= =======
Diluted................................................. 14,295 13,128 13,954 13,110
======= ======= ======= =======
</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>
Nine Months Ended September 30,
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 16,962 $ 8,471
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................................. 2,368 2,278
Deferred compensation expense................................................. 105 105
Deferred income taxes......................................................... (3,600) --
Tax benefit associated with employee stock plans.............................. 3,825 --
Change in operating assets and liabilities:
Accounts receivable........................................................ (4,834) 665
Inventories................................................................ 1,824 (1,689)
Prepaid expenses and other current assets.................................. (416) (91)
Accounts payable........................................................... 1,104 (1,292)
Accrued liabilities........................................................ 2,000 2,050
Deferred income on sales to distributors................................... 300 1,366
-------- --------
Net cash provided by operating activities............................... 19,638 11,863
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................... (4,058) (1,785)
Purchases of short-term investments........................................... (47,072) (38,071)
Proceeds from sales and maturities of short-term investments.................. 32,468 14,033
-------- --------
Net cash used in operating activities................................... (18,662) (25,823)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.................................... 2,370 658
Proceeds from stockholder note repayment...................................... 10 --
Principal payments under capitalized lease obligations........................ (1,561) (1,543)
-------- --------
Net cash provided by (used in) financing activities..................... 819 (885)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 1,795 (14,845)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................ 24,176 25,553
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 25,971 $ 10,708
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capitalized lease obligations incurred for property and equipment............. $ 772 $ 1,439
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................................ $ 246 $ 388
======== ========
Cash paid for income taxes.................................................... $ 3,212 $ 475
======== ========
</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, 1998 included in its Form 10-K.
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 not longer than fifteen months are classified as
short-term investments. As of September 30, 1999, the Company's short-term
investments consisted of U.S. government backed securities, corporate commercial
paper and other high quality commercial and municipal securities, which were
classified as held to maturity and were valued using the amortized cost method
which approximates market.
Revenue Recognition
Product revenues consist of sales to original equipment manufacturers, or
OEMs, merchant power supply manufacturers and 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 the
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.
Segment Reporting
During 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS 131 requires a new basis of determining reportable
business segments, i.e., the management approach. This approach requires that
business segment information used by management to assess performance and manage
company resources be the source for information disclosure. On this basis, the
Company is organized and operates as one business segment, the design,
development, manufacture and marketing of proprietary, high-voltage, analog
integrated circuits for use primarily in the AC to DC power conversion markets.
6
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
hedging activities, and exposure definition. SFAS No. 133 requires companies to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not expect the adoption of SFAS No. 133 to 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):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------------------
<S> <C> <C>
Raw materials.............................................................. $1,675 $3,132
Work-in-process............................................................ 2,961 2,901
Finished goods............................................................. 2,385 2,812
------ ------
$7,021 $8,845
====== ======
</TABLE>
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 nine months ended September 30, 1999 and 1998,
ten customers accounted for approximately 68% and 67% of total net revenues,
respectively.
The following customers accounted for more than 10% of total net revenues:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
Customer 1999 1998
-------- ---- ----
<S> <C> <C>
A.......................................................................... 16% 22%
B.......................................................................... 11% 13%
</TABLE>
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:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
Japan...................................................................... 2% 3%
Taiwan..................................................................... 19% 28%
Hong Kong/China............................................................ 19% 23%
Korea...................................................................... 14% 6%
Western Europe............................................................. 16% 16%
Other...................................................................... 8% 6%
---- ----
Total foreign..................................................... 78% 82%
==== ====
</TABLE>
7
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. EARNINGS PER SHARE:
Earnings per share are calculated in accordance with 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 are
calculated by dividing net income by the weighted average shares of common stock
outstanding during the period. Diluted earnings per share are 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 Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income................................................... $ 6,768 $ 4,340 $16,962 $ 8,471
------- ------- ------- -------
Weighted average common shares............................... 13,138 12,229 12,898 12,133
------- ------- ------- -------
Basic earnings per share.................................. $ 0.52 $ 0.35 $ 1.32 $ 0.70
------- ------- ------- -------
Diluted earnings per share:
Net income................................................... $ 6,768 $ 4,340 $16,962 $ 8,471
------- ------- ------- -------
Weighted average common shares............................... 13,138 12,229 12,898 12,133
Weighted average common share equivalents:
Options................................................... 1,134 647 1,024 672
Employee stock purchase plan.............................. 23 -- 32 --
Warrants.................................................. -- 252 -- 305
------- ------- ------- -------
Diluted weighted average common shares....................... 14,295 13,128 13,954 13,110
------- ------- ------- -------
Diluted earnings per share............................. $ 0.47 $ 0.33 $ 1.22 $ 0.65
======= ======= ======= =======
</TABLE>
6. PROVISION FOR INCOME TAXES:
Income tax expense for the nine-month periods ended September 30, 1999 and
1998 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. The difference between the statutory rate and the
Company's effective tax rate for the nine months ended September 30, 1999 is
primarily due to the beneficial impact of deferred taxes resulting from a
reduction in the valuation allowance of $3.6 million.
7. LEGAL PROCEEDINGS:
In July 1998, the Company filed a complaint for patent infringement in the
U.S. District Court, Northern District of California, against its largest end
user, Motorola. In August 1998, the Company voluntarily dismissed the complaint,
and filed a new complaint in the U.S. District Court, District of Delaware,
alleging that Motorola has infringed and continues to infringe two of the
Company's circuit patents. In October 1998, Motorola asserted various
counterclaims against the Company, alleging that the Company is infringing
certain of Motorola's patents.
Trial of this action was held in October 1999. On October 15, 1999, a
unanimous jury returned a verdict in favor of the Company. The jury determined
that Motorola had willfully infringed one of the Company's patents and awarded
the Company $32.3 million in compensatory damages. The jury also found that the
Company had not infringed any of the asserted Motorola patents and that two of
the Motorola patents were invalid.
8
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Proceedings in this matter are continuing. The Company anticipates that
Motorola will seek to have the jury verdict overturned. If the verdict were
overturned, the Company might not ultimately prevail in this litigation and this
litigation could have a material adverse effect on the Company's business,
financial condition and operating results.
8. SUBSEQUENT EVENT
On October 20, 1999, the Company's Board of Directors approved a two-for-
one split of the Company's common stock in the form of a 100 percent stock
dividend. This stock split will be effective for shareholders of record at the
close of business on November 8, 1999 and distribution is expected to be made on
November 22, 1999. Share and per-share data have not been adjusted to give
effect to the split.
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
Operating results includes a number of forward-looking statements which reflect
our 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 "Risk Factors" and elsewhere in this report,
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. We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report.
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 our Form 10-K for the year ended December 31, 1998.
Overview
We design, develop, manufacture and market proprietary, high-voltage,
analog integrated circuits, or ICs, for use primarily in AC to DC power
conversion markets. We have targeted high-volume power supply markets, including
the cellular telephone, personal computer, cable and direct broadcast satellite
and various consumer and industrial electronics markets. Our initial focus is on
those markets that are sensitive to size, portability, energy efficiency, time-
to-market and benefits of integrated power supplies. We believe our patented
TOPSwitch ICs, introduced in 1994, are the first highly integrated power
conversion ICs to achieve widespread market acceptance. We introduced an
enhanced family of ICs, TOPSwitch-II, in April 1997. In September 1998, we
announced the TinySwitch family of integrated circuits that incorporates our new
EcoSmart technology. This new family of ICs is designed to enable a new class of
light, compact, energy-efficient power supplies.
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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net revenues:
Product sales........................................ 99.0% 98.0% 98.6% 97.2%
License fees and royalties........................... 1.0 2.0 1.4 2.8
----- ----- ----- -----
Total net revenues................................ 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues....................................... 42.0 52.3 44.1 53.8
----- ----- ----- -----
Gross profit........................................... 58.0 47.7 55.9 46.2
----- ----- ----- -----
Operating expenses:
Research and development............................. 9.4 9.6 10.4 10.5
Sales and marketing.................................. 9.6 11.7 11.0 12.0
General and administrative........................... 14.3 5.3 9.6 4.7
----- ----- ----- -----
Total operating expenses.......................... 33.3 26.6 31.0 27.2
----- ----- ----- -----
Income from operations................................. 24.7 21.1 24.9 19.0
Other income, net...................................... 1.7 1.9 2.0 1.5
----- ----- ----- -----
Income before provision for income taxes............... 26.4 23.0 26.9 20.5
----- ----- ----- -----
Provision for income taxes............................. 3.9 1.7 4.0 3.5
----- ----- ----- -----
Net income ............................................ 22.5% 21.3% 22.9% 17.0%
===== ===== ===== =====
</TABLE>
10
<PAGE>
Comparison of the Three and Nine Months Ended September 30, 1999 and 1998
Net revenues. Net revenues consist of revenues from product sales, which
are calculated net of returns and allowances, plus license fees and royalties
paid by a licensee of our technology. Net revenues for the third quarter ended
September 30, 1999 were $30.1 million compared to $20.3 million for the third
quarter of 1998, an increase of $9.8 million, or 48.3%. Net revenues for the
nine months ended September 30, 1999 were $73.9 million compared to $49.9
million for the comparable period of 1998, an increase of $24.1 million, or
48.3%.
Net revenues from product sales represented $29.8 million and $19.9 million
in the third quarter of 1999 and 1998, respectively. Net revenues from product
sales represented $72.9 million and $48.5 million in the nine months ended
September 30, 1999 and 1998, respectively. The increase in net revenues from
product sales for the three months and nine months ended September 30, 1999 was
due primarily to strong demand for our products across all of our major markets
and geographies. In particular, sales to the cellular phone market increased
approximately 50% for the quarter and 120% for the nine months ended September
30, 1999 compared to the same periods of the prior year. In total, sales of our
TOPSwitch and TinySwitch products accounted for 97.8% and 97.2% of net revenues
from product sales for the three months ended September 30, 1999 and 1998,
respectively, and 96.7% and 94.4% for the nine months ended September 30, 1999
and 1998, respectively. Net revenues from royalties were $311,000 for the third
quarter of 1999, compared to $410,000 for the third quarter of 1998, and $1.0
million for the nine months ended September 30, 1999, compared to $1.4 million
for the same period in 1998. We expect net revenues from royalties to continue
to decline and account for a small percentage of our net revenues.
International sales were $23.2 million in the third quarter of 1999 compared
to $16.7 million for the same period in 1998, an increase of $6.5 million, or
39.1%, which represented 77.0% of net revenues compared to 82.1% in the
comparable period of 1998. International sales were $56.8 million for the nine
months ended September 30, 1999 compared to $40.7 million for the same period in
1998, an increase of $16.1 million, or 39.6%, which represented 76.9% of net
revenues compared to 81.7% in the comparable period of 1998. Although the power
supplies using our products are designed and distributed worldwide, most of
these power supplies are manufactured in Asia. As a result, sales to this region
were 61.9% and 65.6% of our product sales for the three months ended September
30, 1999 and 1998, respectively, and 61.7% and 64.7% of our product sales for
the nine months ended September 30, 1999 and 1998, respectively. We expect
international sales to continue to account for a large portion of our net
revenues.
Direct sales for the third quarter of 1999 were divided 39.0% to distributors
and 61.0% to original equipment manufacturers, or OEMs, and power supply
merchants, compared to 50% to distributors and 50% to OEMs and power supply
merchants for the same quarter in 1998. For the nine months ended September 30,
1999, direct sales were divided 41.5% to distributors and 58.5% to OEMs and
power supply merchants, compared to 52.9% to distributors and 47.1% to OEMs and
power supply merchants for the same period in 1998. For the quarter ended
September 30, 1999, sales to two customers accounted for 14.1% and 11.3% of net
revenues, and for the quarter ended September 30, 1998, those same two customers
accounted for 23.8% and 13.3% of net revenues. For the nine months ended
September 30, 1999, sales to two customers accounted for 15.9% and 11.1% of net
revenues, and for the nine months ended September 30, 1998, those same two
customers accounted for 22.1% and 13.0% of net revenues.
The exact dollar amounts and percentages of sales to end customers are
difficult to ascertain because most of those sales occur through distributors or
indirectly through sales to merchant power supply manufacturers, which in turn
sell power supplies to OEMs. However, we estimate that direct and indirect sales
to Motorola, who is our largest end user, accounted for approximately 23% and
15% of net revenues for the quarters ended September 30, 1999 and 1998,
respectively, and approximately 22% and 12% of net revenues for the nine months
ended September 30, 1999 and 1998, respectively. Direct sales to Motorola were
6.7% and 5.9% of net revenues for the quarters ended September 30, 1999 and
1998, respectively, and 9.7% and 4.7% of net revenues for the nine months ended
September 30, 1999 and 1998, respectively.
Cost of revenues; Gross profit. Gross profit is equal to net revenues less
cost of revenues. Our cost of revenues consists primarily of costs associated
with the purchase of wafers, the assembly and packaging of our
11
<PAGE>
products, and internal labor and overhead associated with the testing of both
wafers and packaged components. Gross profit for the third quarter of 1999 was
$17.5 million, or 58.0%, of net revenues, compared to $9.7 million, or 47.7%, of
net revenues for the same period in 1998. Gross profit for the nine months ended
September 30, 1999 was $41.3 million, or 55.9%, of net revenues, compared to
$23.0 million, or 46.2%, of net revenues for the same period in 1998. The
increase in gross profit for the three months and nine months ended September
30, 1999 was primarily due to efficiencies achieved from increased sales volume,
lower prices for wafers and better manufacturing yields due to improved test
equipment. Gross profit also benefited from a one-time credit from one of our
suppliers in the amount of $1.2 million recorded in the third quarter of 1999.
The credit resulted in gross profit improvement of 4.0% for the quarter and 1.6%
for the nine months ended September 30, 1999. We cannot assure you that these or
other factors will have a favorable impact on our 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. We also
expense prototype wafers and mask sets related to new products as research and
development costs until new products are released to production. Research and
development expenses for the third quarter of 1999 were $2.8 million compared to
$1.9 million for the same period in 1998, an increase of $866,000, or 44.5%,
which represented 9.3% and 9.6% of our net revenues in each period,
respectively. Research and development expenses for the first nine months of
1999 were $7.7 million compared to $5.2 million for the same period in 1998, an
increase of $2.5 million, or 47.0%, which represented 10.4% and 10.5% of net
revenues in each period, respectively. The increase for the three months and
nine months ended September 30, 1999 was primarily due to increased salaries and
other costs related to the hiring of additional engineering personnel, outside
consulting fees and expensed prototype materials caused by the transition of
foundry manufacturing processes, and bringing newly developed products into
manufacturing. We expect research and development expenses to continue to
increase in absolute dollars but to fluctuate as a percentage of our 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 our regional sales and
support offices. Sales and marketing expenses for the third quarter of 1999 were
$2.9 million compared to $2.4 million for the same period in 1998, an increase
of $517,000, or 21.8%, which represented 9.6% and 11.7% of our net revenues in
each period, respectively. Sales and marketing expenses for the first nine
months of 1999 were $8.1 million compared to $6.0 million for the same period in
1998, an increase of $2.1 million, or 35.2%, which represented 11.0% and 12.0%
of our net revenues in each period, respectively. The increase for the three
months and nine months ended September 30, 1999 was primarily a result of the
addition of personnel to support increased sales, and to increase the
availability of field application engineers. We expect sales and marketing
expenses to continue to increase in absolute dollars but to fluctuate as a
percentage of our net revenues.
General and administrative expenses. General and administrative expenses
consist primarily of employee-related expenses for administration, finance,
human resources and general management, as well as consulting, outside services,
legal and auditing expenses. For the quarters ended September 30, 1999 and 1998,
general and administrative expenses were $4.3 million and $1.1 million,
respectively, which represented 14.3% and 5.3% of our net revenues in each
period. For the nine months ended September 30, 1999 and 1998, general and
administrative expenses were $7.1 million and $2.3 million, respectively, which
represented 9.6% and 4.7% of our net revenues in each period. This increase in
spending was primarily attributable to increased professional and legal expenses
related to our patent infringement lawsuit filed against Motorola.
Other income, net. Other income, net, for the third quarter of 1999
increased by $111,000 over the same period in 1998, and for the nine months
ended September 30, 1999, it increased by $752,000 over the same period in 1998.
The increase for the three month and nine month periods ended September 30, 1999
was due primarily to additional interest income from an increase in short-term
investments in 1999.
Provision for income taxes. Provision for income taxes represents Federal,
state and foreign taxes. The provision for income taxes was $1.2 million for the
third quarter of 1999 compared to $351,000 for the same period in 1998. The
provision for income taxes was $3.0 million for the first nine months of 1999
compared to $1.7 million for the same period in 1998. Our estimated effective
tax rate for 1999 is 15% compared to 17% used in the same period for 1998. The
difference between the statutory rate and our effective tax rate for 1999 is
primarily due to the beneficial impact of deferred taxes resulting from a
reduction in the valuation allowance.
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Liquidity and Capital Resources
At September 30, 1999, we had approximately $60.8 million in cash, cash
equivalents and short-term investments. In addition, under a revolving line of
credit agreement with Union Bank of California, we can borrow up to $10.0
million. A portion of the credit line is used to cover advances for commercial
letters of credit and standby letters of credit, which we provide to Matsushita
and OKI prior to the shipment of wafers by those foundries to us. The balance of
this credit line is unused and available. The line of credit agreement contains
financial covenants and requires that we maintain profitability on a quarterly
basis and not pay or declare dividends without the bank's prior consent. We have
financed a significant portion of our machinery and equipment through capital
equipment leases. We financed additional equipment during the nine months ended
September 30, 1999 in the amount of $772,000. We do not expect to obtain any
additional financing for equipment purchases during the balance of 1999.
As of September 30, 1999, we had working capital, defined as current assets
less current liabilities, of approximately $63.2 million, which was an increase
of approximately $20.4 million over December 31, 1998. Our operating activities
generated cash of $19.6 million and $11.9 million in the nine months ended
September 30, 1999 and 1998, respectively. Cash generated in the first nine
months of 1999 was principally the result of net income in the amount of $17.0
million, depreciation and amortization, tax benefits from employee stock plans
and increases in accounts payable and accrued liabilities with a reduction in
inventory. This was partially offset by increases in accounts receivable and
deferred income taxes. Cash generated in the first nine months of 1998 was
principally the result of net income of $8.5 million, depreciation and
amortization, increases in deferred revenue and accrued liabilities, offset by
an increase in inventories and a decrease in accounts payable.
Our investing activities were a net transfer from cash and cash equivalents
to short-term investments of $14.6 million and $24.0 million in the nine months
ended September 30, 1999 and 1998, respectively.
We believe that cash generated from operations, together with existing
sources of liquidity, will satisfy our projected working capital and other cash
requirements for at least the next 12 months.
Year 2000 Issues
Some computers, software, and other equipment include computer code in which
calendar year data is abbreviated to only two digits. As a result of this design
decision, some of these systems could fail to operate or fail to produce correct
results if "00" is interpreted to mean 1900, rather than 2000. These problems
are widely expected to increase in frequency and severity as the year 2000
approaches, and are commonly referred to as the year 2000 problem.
Assessment. The year 2000 problem affects the computers, software and other
equipment that we use, operate or maintain for our operations. Early during 1999
we organized a program team to monitor the assessment and remediation status of
our year 2000 projects and to report such status to our board of directors. In
addition, the project team assessed the potential effect and costs of
remediating the year 2000 problem for our internal systems. During the second
quarter of 1999, our year 2000 project plan was reviewed by an independent
consulting firm as to completeness and progress. There were no major omissions
identified. The primary recommendations of the independent consulting firm
focused on the importance of our testing and contingency planning activities.
The review recommendations were incorporated into the plan.
Products. We have evaluated the functionality of our past and present
products with respect to any year 2000 problems and have determined that none of
our past or present products utilize date-related functions and, therefore, have
no year 2000 problems.
Internal Infrastructure. During the second quarter of 1999 we completed an
inventory of our computers, software applications and production equipment used
in connection with our internal operations and we categorized those systems as
critical or non-critical. During subsequent quarters we completed the
remediation and testing of all critical computers and software applications as
well as most of the production equipment used in the manufacture of our
products. Production testers that handle over 98% of our product volume have
now been successfully upgraded
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for year 2000 compliance and tested. We have developed acceptable work-arounds
for the remainder of our test equipment and we do not anticipate any material
disruption to our production as a result of employing these work-arounds.
Testing of non-critical computers, software applications and production
equipment will be continued throughout the remainder of the calendar year.
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, including
fax machines, telephone switches, security systems, and other common devices,
may be affected by the year 2000 problem. As of June 30, 1999, we had completed
remediation of critical office and facilities equipment with the exception of
our telephone equipment. We are now targeting replacement of our telephone
equipment and software with a new, fully compliant system during the month of
November 1999.
We estimate the total cost to us of completing any required modifications,
upgrades or replacements of our internal systems, beyond expenditures planned to
meet the needs for managing our growth, to be approximately $350,000, almost all
of which we believe will be incurred during 1999. This estimate is being
monitored and we will revise it as additional information becomes available.
Based on the activities described above, we do not believe that the year 2000
problem will have a material adverse effect on our business or operating
results. In addition, we have not deferred any material information technology
projects as a result of our year 2000 problem activities.
Suppliers. During the second and third quarters of 1999 we contacted all
third-party suppliers of components used in the manufacture of our products,
with special emphasis on those suppliers categorized as critical. During this
process we identified one or more suppliers who are our single source of
products and reviewed information they provided to us regarding their year 2000
programs. As of the third quarter of 1999, these suppliers have represented to
us in writing that they have achieved year 2000 compliance. However, we have
limited or no control over the actions of these third-party suppliers. Thus,
while we expect that we will be able to resolve any significant year 2000
problems with these third parties, we cannot assure you that these suppliers
will resolve any or all year 2000 problems before the occurrence of a material
disruption to the operation of our business. Any failure of these third parties
to resolve year 2000 problems with their systems, on a timely basis, could have
a material adverse effect on our business, operating results and financial
condition.
Customers. During the second and third quarters of 1999 we contacted our
significant customers to understand their situations regarding year 2000
readiness and to ensure that any inability on their part to take delivery of
planned product shipments will not substantially impact our revenue flow.
However, we have limited or no control over the actions of these customers.
Thus, while we expect that we will be able to resolve any significant year 2000
problems with them, we cannot ensure you that these customers will not
materially reduce their purchases from us in order to resolve their year 2000
problems. Any failure of these customers to resolve year 2000 problems with
their systems on a timely basis, could have a material adverse effect on our
business, operating results and financial condition.
Most Likely Consequences of Year 2000 Problems. We believe we have
identified and resolved all year 2000 problems that could materially adversely
affect our business operations prior to the times when these problems could
cause disruptions to our business. However, we believe that it is not possible
to determine with complete certainty that we have identified or corrected all
year 2000 problems affecting us. The number of devices that could be affected
and the interactions among these devices are simply too numerous. In addition,
no one can accurately predict how many year 2000 problem-related failures will
occur or the severity, duration or financial consequences of these perhaps
inevitable failures. As a result, we believe that the following consequences are
possible:
. a significant number of operational inconveniences and inefficiencies for
us, our contract manufacturers and our customers that will divert
management's time and attention and financial and human resources from
ordinary business activities;
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. several business disputes and claims for pricing adjustments or penalties
due to year 2000 problems by our customers, which we believe will be
resolved in the ordinary course of business; and
. a few serious business disputes alleging that we failed to comply with
the terms of contracts or industry standards of performance, some of
which could result in litigation or contract termination.
Worst case year 2000 scenario. While it is impossible to evaluate every
aspect of year 2000 compliance, we believe the worst case scenario related to
year 2000 compliance issues would be the failure of a sole or limited source
supplier to be year 2000 compliant. The failure of one of these suppliers to be
year 2000 compliant could seriously interrupt the flow of materials into the
manufacturing process and therefore delay the manufacture and sale of our
products. However, due to the general uncertainty inherent in the year 2000
computer problem resulting from the uncertainty of the year 2000 readiness of
third-party suppliers, we are unable to determine at this time whether the
consequences of year 2000 failures will have a material impact on our business.
Contingency Plans. During the third and fourth quarters of 1999 we are
developing contingency plans to be implemented if our efforts to identify and
correct year 2000 problems affecting our internal systems are not effective.
Depending on the systems affected, these plans could include:
. accelerated replacement of affected equipment or software;
. use of more costly express carriers to supplement freight forwarding
services;
. reliance on power generation devices to sustain critical voice and data
functions;
. short-to medium-term use of backup equipment and software;
. increased work hours for our personnel; and
. use of contract personnel on an accelerated schedule to correct any
year 2000 problems that arise or to provide manual workarounds for
information systems.
Our implementation of any of these contingency plans could have a material
adverse effect on our business, operating results and financial condition.
Disclaimer. The discussion of our efforts and expectations relating to year
2000 compliance are forward-looking statements. Our ability to achieve year
2000 compliance and the level of incremental costs associated therewith could be
adversely affected by, among other things, the availability and cost of
programming and testing resources, third party suppliers' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, hedging activities, and exposure
definition. SFAS No. 133 requires companies to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. We do not expect that
the adoption of SFAS No. 133 will have a material impact on our financial
statements.
Factors That May Affect Future Results of Operations
Our future results of operations are dependent upon a number of factors,
including those described below. For a complete description of these factors,
see our Form 10-K for the year ended December 31, 1998.
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Our Operating Results Fluctuate and Are Unpredictable. Our 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 our control, and may fluctuate significantly in the future. As a result, our
operating results in a future quarter or quarters could fall below the
expectations of public market analysts or investors. If that occurs, the price
of our stock may decline.
Some of the reasons our operating results may fluctuate in the future include
the following:
. Our Operating Results Depend on the Volume and Timing of Orders Received.
Our net revenues and operating results are substantially dependent upon
the volume and timing of orders received from our customers. We have
historically experienced lengthy sales cycles, which limit our visibility
regarding future financial performance. We are also subject to the risks
to which the markets for our customers' or end users' products are
subject, and to technological or other changes in those markets which may
affect customer-buying patterns. In addition, the ordering patterns of
some of our existing large customers have been unpredictable in the past,
and we expect that customer-ordering patterns will continue to be
unpredictable in the future. Not only does the volume of units ordered by
particular customers vary substantially from period to period, but also
purchase orders received from particular customers often vary
substantially from early oral estimates provided by those customers for
planning purposes. Our business is characterized by short-term customer
orders and shipment schedules, and customer orders typically can be
canceled or rescheduled without significant penalty to the customer. We
have in the past experienced customer cancellations of substantial orders
for reasons beyond our control, and significant cancellations could occur
again at any time in the future.
. Our Operating Results Are Subject to Competitive Pressures on Selling
Prices. Our net revenues and operating results are also subject to
competitive pressures on selling prices. Historically, average selling
prices of products in the semiconductor and the high-voltage AC to DC
power supply industries have decreased over the lives of the products. If
we are unable to successfully introduce new products with higher average
selling prices or are unable to reduce manufacturing costs to offset
expected decreases in the prices of our existing products, our operating
margins will be adversely affected.
. Our Operating Results Are Dependent Upon the Volume and Timing of Our
Orders With Our Foundries. Our operating results are also substantially
dependent upon the volume and timing of orders that we place with our
foundries. Due to the absence of substantial noncancellable backlog, we
must plan our production and inventory levels based on internal forecasts
of customer demand, which is unpredictable and may fluctuate
substantially. If we underestimate the number of units required to meet
customer demand and fail to maintain adequate inventory levels, we may
lose significant revenue opportunities and market share to our
competitors. On the other hand, if we overestimate the number of units
required to meet customer demand, our operating results may be materially
adversely affected as a result of costs associated with carrying excess
inventory and with obsolescence. Excess inventory and obsolescence costs
could be further increased by any unestimated returns from our
distributors or customers.
. Our net revenues and operating results may also fluctuate because of the
following factors:
. unavailability 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;
. our ability to develop and bring to market new products and
technologies on a timely basis;
. the introduction of products and technologies by our competitors;
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. market acceptance of our and our customers' products;
. the timing of investments in research and development and sales and
marketing; and
. fluctuations in exchange rates, particularly exchange rates between
the U.S. dollar and the Japanese yen.
We Depend on the Cellular Phone Battery Charger and Desktop PC Stand-By
Markets for a Majority of Our Net Revenues. A limited number of applications of
our products, primarily in the cellular phone battery chargers and desktop PC
stand-by markets, currently account for the majority of our net revenues. We
expect that our 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. Any significant
downturn in these markets could cause a decline in our net revenues and a
reduction in the price of our stock.
Our net revenues and operating results are subject to many of the risks to
which the cellular phone battery charger and desktop PC stand-by markets for
these applications are subject, and may also be impacted by technological or
other developments in these markets. In particular, recent advances in battery
technology which offer competitive advantages to the OEMs of cellular telephones
permit these OEMs, including our largest end user, Motorola, to lower, or
consider lowering, the wattage level of the power supplies used to recharge
batteries. As the output power has dropped below 5 watts for some slow or
trickle chargers, some OEMs have substituted older alternative technologies for
switchers. Although this has not had any significant impact on our business to
date, it could in the future if these older technological alternatives are more
cost effective than our current and future product offerings. Similarly, if a
competitor successfully and cost-effectively combines desktop PC stand-by power
supplies with the main PC desktop power supplies before we do, demand for our
products could be materially adversely affected.
We believe that our future success will depend in part upon our ability to
penetrate additional markets for our products, and we cannot assure you that we
will be able to overcome the marketing or technological challenges necessary to
do so. To the extent that a competitor penetrates additional markets before we
do, or takes market share from us in our existing markets, our net revenues and
financial condition could be materially adversely affected.
We Are Highly Dependent on a Limited Number of Customers. Our 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 our net revenues. Accordingly, if one of these OEMs
significantly reduces its purchases from us, our net revenues may decline. We
have experienced these effects in the past and we cannot assure you that our
customers will not reduce, cancel or delay orders in the future.
We expect to continue to be dependent upon a relatively limited number of
customers for a significant portion of our net revenues in future periods. Also,
no customer is presently obligated either to purchase a specified amount of
products or to provide us with binding forecasts of product purchases for any
period. Our products are typically one of many components used in a larger
product produced by our customers. Demand for our products is therefore subject
to many risks beyond our control, including, among others:
. competition faced by our customers in their particular end markets;
. market acceptance of the products of our customers;
. technical challenges which may or may not be related to the components
supplied by us; and
. the technical, sales and marketing and management capabilities of our
customers and the financial and other resources of our customers.
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Motorola's Energy Systems Group, or ESG, has informed us of its intent to
move a high volume charger program to another solution. We expect that this
transition will occur in the first quarter of 2000. As a result of this
decision, our direct sales to ESG may be significantly reduced, which may
significantly reduce our net revenues.
We Are Dependent on Our Wafer Suppliers. We outsource all of our
semiconductor manufacturing and product assembly, except for testing and
finishing. We have supply arrangements for the production of wafers with
Matsushita and OKI. Although certain aspects of our relationships with
Matsushita 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. We cannot assure you that our strategic partners
and we will continue to work together successfully in the future or that either
Matsushita or OKI will not seek an early termination of its wafer supply
agreement with us. If we were unable to obtain wafers from Matsushita and OKI
and could not timely qualify another supplier, we would not be able to supply
our customers with the products they require, which would cause our net revenues
to decline.
Our wafer supply contracts with Matsushita and OKI terminate in June 2000 and
September 2003, respectively. We cannot assure you that we will be able to reach
an agreement with Matsushita to extend the term of its wafer supply agreement.
Failure to reach, in a timely fashion, an extension of our agreement with
Matsushita or to enter into an arrangement with another manufacturer could
result in material disruptions in supply. In addition, the terms of our
agreement with Matsushita limit the conditions under which we can enter into
similar arrangements with other Japanese manufacturers or their subsidiaries
during the term of this agreement. Any disruption in our supply of wafers would
adversely impact our ability to sell our product and would cause a decline in
our net revenues.
In addition, our products do not require leading edge device process
geometries. As device process geometries become increasingly smaller and as
demand for such smaller geometries increases, Matsushita and OKI may decide at
some point to convert all of their manufacturing processes to smaller geometries
in response to these industry trends. We estimate that it would take between 9
to 12 months from the time we identified an alternate manufacturing source
before that source could produce wafers with acceptable manufacturing yields in
sufficient quantities to meet our needs.
We typically receive shipments from Matsushita or OKI approximately 8 to 10
weeks after placing orders, and lead times for new products can be substantially
longer. To provide sufficient time for assembly, testing and finishing, we
typically need to receive wafers from Matsushita or OKI 4 to 6 weeks before the
desired ship date to our customers. As a result of these factors and the fact
that customers' orders can be made with little advance notice, we have only a
limited ability to react to fluctuations in demand for our products. This could
cause us to have an excess or a shortage of inventory of a particular product.
From time to time we have been unable to fully satisfy customer requests as a
result of these factors. Any significant disruptions in deliveries would
materially adversely affect our business and operating results. Although we
provide OKI and Matsushita with rolling forecasts of our production
requirements, the ability of Matsushita or OKI to provide wafers to us is
limited by the available capacity of the foundry in which it manufactures wafers
for us. An increased need for capacity to meet internal demands or demands of
other customers could cause Matsushita and OKI to reduce capacity available to
us. Matsushita and OKI may also require us to pay amounts in excess of
contracted or anticipated amounts for wafer deliveries or require us to make
other concessions in order to acquire the wafer supply necessary to meet our
customers' requirements. Any of these concessions could materially adversely
affect our business.
We Rely on Our Contracted Foundries and Independent Subcontractors to Produce
Wafers and Assemble Finished Products at Acceptable Yields. We depend on
Matsushita and OKI to produce wafers, and independent subcontractors to assemble
finished products, at acceptable yields and to deliver them to us in a timely
manner. The failure of Matsushita or OKI to supply us wafers at acceptable
yields could prevent us from selling our products to our customers and would
likely cause a decline in our net revenues. The manufacture of our TOPSwitch
products utilizes a CMOS process with a proprietary, highly sensitive implant
process step. To the extent this process prevents our wafer foundries from
achieving acceptable manufacturing yields or causes them to delay product
shipments, our financial condition and operating results would be materially
adversely affected. Our IC assembly process also requires our manufacturers to
use a high-voltage molding compound available from only one vendor,
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which is difficult to process. This compound and its required processes,
together with the other non-standard materials and processes needed to assemble
our 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 adversely affect yields and
cost to manufacture. Good production yields are particularly important to our
business and financial results, including our ability to meet our customers'
demand for products and to maintain profitability. As we continue to increase
our product output, our foundries and assemblers may experience a decrease in
yields. We cannot assure you that acceptable yields will be maintainable in the
future.
Matsushita Has Licenses to Our Technology Which It May Use to Our Detriment.
Our ability to take advantage of the potentially large Japanese market for our
products is largely dependent on Matsushita and its ability to promote and
deliver our products. Pursuant to our agreement with Matsushita, Matsushita has
the right to manufacture and sell products using our technology to Japanese
companies worldwide and to subsidiaries of Japanese companies located in Asia.
Some of these products are redistributed by the Japanese customers to their
manufacturing operations in other regions. In addition, we have agreed not to
sell our products in Japan to new customers. Although we receive royalties on
Matsushita's sales, these royalties are substantially lower than the gross
profit we would receive on direct sales. In addition, the royalties Matsushita
pays us are denominated in Japanese yen and are subject to risks inherent in
exchange rate fluctuations. Should we fail to negotiate acceptable royalty-
bearing extensions to our contract with Matsushita, we would need to expend
substantial effort and expense to establish ourselves in this market directly or
through a different partner. We cannot assure you that we would not lose
customers for Matsushita's products during any transition. We cannot assure you
that Matsushita will not use the technology rights we have granted it to develop
or market competing products following any termination of its relationship with
us or after termination of Matsushita's royalty obligation to us.
Our International Sales Subject Us to Substantial Risks. Sales to customers
outside of the United States account for a large portion of our net revenues.
These sales involve a number of risks to us, including:
. imposition of government controls;
. 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;
. 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 our foreign sales are denominated
in U.S. dollars, increases in the value of the dollar would increase the price
in local currencies of our products in foreign markets and make our products
relatively more expensive and less price competitive than competitors' products
that are priced in local currencies. Our failure to adequately address these
risks could reduce our international sales, which would materially adversely
affect our operating results.
We Are Dependent on Foreign Manufacturers and Assemblers for the Manufacture
of Our Wafers. Because we depend on Matsushita and OKI, both located in Japan,
for the manufacture of all of our finished silicon wafers and on foreign
assembly subcontractors of our products, we are directly affected by the
political and economic conditions of the countries in which our wafers are or
are expected to be manufactured. To the extent that these countries experience
prolonged work stoppages or other inability to manufacture and assemble our
products, our business, financial condition or operating results could be
materially adversely affected. Our contracts with Matsushita and OKI are
denominated in Japanese yen, which exposes us to the risk of increased costs for
finished wafers. We do not believe we could readily pass this increase through
to our customers.
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New Products and Technological Change May Render Our and Our Customers'
Products Out of Date. Our future success depends in significant part upon our
ability to develop new ICs for high-voltage power conversion for existing and
new markets, to introduce these products in a timely manner and to have these
products selected for design into products of leading manufacturers. If we fail
to develop and sell new products in a timely manner, our net revenues could
decline.
The development of new devices is highly complex, and from time to time we
have experienced delays in completing the development of new products.
Successful product development and introduction depends on a number of factors,
including:
. accurate new product definition;
. timely completion and introduction of new product designs;
. availability of foundry capacity;
. achievement of acceptable manufacturing yields; and
. market acceptance of our and our customers' products.
We cannot be sure that we will be able to adjust to changing market demands
as quickly and cost-effectively as necessary to compete successfully.
Furthermore, we cannot assure you that we 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. Our or our
customers' failure to develop and introduce new products successfully and in a
timely manner would materially adversely affect our business, financial
condition and operating results. In addition, customers may defer or return
orders for existing products in response to the introduction of new products.
Although we maintain reserves against returns, we cannot assure you that these
reserves will be adequate.
We Have Historically Experienced a Lengthy Sales Cycle. Our products are
generally incorporated into a customer's products at the design stage. However,
customer decisions to use our products, commonly referred to as design wins,
which can often require us to expend significant resources 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 our products into its product, we
may not have another opportunity for a design win with respect to that product
for many months or years. Because of this lengthy sales cycle, we may experience
a delay between increasing expenses for research and development and our sales
and marketing efforts and the generation of volume production revenues, if any,
from these expenditures. Moreover, the value of any design win will largely
depend upon the commercial success of the customer's product. We cannot assure
you that we will continue to achieve design wins or that any design win will
result in future revenues. Our failure to timely develop and introduce products
that are incorporated into our customers' products could significantly reduce
our net revenues and adversely affect our operating results.
Our Products Must Meet Exacting Specifications, and Undetected Defects and
Failures May Occur. The fabrication and assembly of ICs are highly complex and
precise processes. We expect that our customers will continue to establish
demanding specifications for quality, performance and reliability that our
products must meet. ICs as complex as those we sell often encounter development
delays and may contain undetected defects or failures when first introduced or
after commencement of commercial shipments. We have from time to time in the
past experienced product quality, performance or reliability problems. We cannot
guarantee that defects or failures will not occur in the future relating to our
product quality, performance and reliability that may have a material adverse
effect on our operating results. If these defects and failures occur, we could
experience lost revenue, increased costs, including warranty expense and costs
associated with customer support, delays in or cancellations or rescheduling of
orders or shipments and product returns or discounts, any of which would harm
our operating results.
20
<PAGE>
The High-Voltage Power Supply Industry is Extremely Competitive and Highly
Price-Sensitive. 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 our products is
cost effectiveness. Our products face competition from alternative technologies,
including traditional linear transformers and discrete switcher power supplies.
We believe that at current pricing, our high-voltage power conversion IC
families of products offer favorable cost-performance benefits compared to the
competition. However, there has recently been over capacity of discrete
components, which has resulted in significant price erosion for these products.
Continued significant erosion in the price of competing products, including
high-voltage Bipolar and MOSFET transistors and PWM controller ICs, could
adversely affect the cost effectiveness of our products. Also, older alternative
technologies to switchers are more cost-effective than discrete switchers and
integrated switchers that use our products in certain power ranges for some
applications. If power requirements for applications in which our products are
currently utilized, including battery chargers for cellular telephones, drop
below certain power levels, these older alternative technologies can be used
more cost effectively than our TOPSwitch-based switchers.
Recently, our TOPSwitch product families have begun to meet additional
competition from hybrid and single high-voltage ICs similar to TOPSwitch.
Fairchild Semiconductor, OnSemiconductor, STMicroelectronics and Sanken are
developing or producing these competing products. We expect competition to
increase as companies like these see the success we have had in converting older
technologies to the integrated solutions used in our product offerings. To the
extent these competitors' products are more cost effective than our products,
our operating results could be materially adversely affected. Many of our
emerging competitors, including Fairchild Semiconductor, OnSemiconductor,
STMicroelectronics and Sanken, have significantly greater financial, technical,
manufacturing and marketing resources than we do. In a market where a high-
voltage IC is designed into a customer's product and the provider of the IC is
therefore the sole source of the IC for that product, greater manufacturing
resources may be a significant factor in the customer's choice of the IC because
of the customer's perception of greater certainty in its source of supply.
Our ability to compete in our target markets also depends on these factors:
. the timing and success of new product introductions by us and our
competitors;
. the pace at which our customers incorporate our products into their end
user products;
. the availability of wafer fabrication and finished good manufacturing
capability;
. availability of adequate sources of raw materials; and
. the protection of our products by effective utilization of intellectual
property laws.
We cannot assure you that our products will continue to compete favorably or
that we will be successful in the face of increasing competition from new
products and enhancements introduced by existing competitors or new companies
entering this market. We believe our failure to compete successfully in the
high-voltage power supply business would materially reduce our operating
results.
We Must Protect Our Intellectual Property. Our future success depends upon
our ability to protect our intellectual property, including patents, trade
secrets, and know-how, and to continue our technological innovation. We cannot
assure you that the steps we have taken to protect our intellectual property
will be adequate to prevent misappropriation or that others will not develop
competitive technologies or products.
Moreover, the laws of some foreign countries in which our technology is or
may in the future be licensed may not protect our intellectual property rights
to the same extent as the laws of the United States, thus increasing the
possibility of infringement of our intellectual property.
We Depend on a Few Key Personnel. Our success depends to a significant
extent upon the continued service of our executive officers and other key
management and technical personnel, and on our ability to continue to attract,
retain and motivate qualified personnel, such as experienced systems
applications engineers. The
21
<PAGE>
competition for these employees is intense, particularly in Silicon Valley. The
loss of the services of one or more of our engineers, executive officers or
other key personnel or our inability to recruit replacements for these
individuals or to otherwise attract, retain and motivate qualified personnel
could have a material adverse effect on our business, financial condition or
operating results. We do not have long-term employment contracts with, and we do
not have in place "key person" life insurance policies on, any of our employees.
Our Future Success Depends On Our Successful Management of Growth. We have
experienced a period of rapid growth and expansion, which has placed, and
continues to place, a significant strain on our resources. To accommodate this
growth, we have implemented and will continue to implement new and upgraded
operational and financial systems, procedures and controls, including the
improvement of our internal management systems, which may require substantial
management efforts. These efforts if not accomplished successfully, could
adversely affect our business and cause our net revenues to decline. In
addition, any future periods of rapid growth or expansion could be expected to
place a significant strain on our limited managerial, financial, engineering and
other resources.
Relationships with new customers generally require significant engineering
support. As a result, any increase in the number of customers using our
technology will increase the strain on our resources, particularly our
engineers. These strains may result in delays or difficulties in our research
and development process, which could make it difficult for us to develop future
generations of our products and to remain competitive. In addition, the rapid
rate of hiring new employees could be disruptive and adversely affect the
efficiency of our research and development process.
Arrival of the Year 2000 May Create Unforeseen Difficulties. Many computer
systems were not designed to handle any dates beyond the year 1999, and
therefore, computer hardware and software for virtually all businesses will need
to be modified prior to the year 2000 in order to remain functional. We are
concerned that many enterprises will be devoting a substantial portion of their
information systems spending to resolving this upcoming year 2000 problem. This
expense may result in spending being diverted from ICs for use in AC to DC power
conversion in the near future. We have assessed the impact of the year 2000
issue on our internal information systems and have completed the remediation and
testing of all critical computers and software applications, as well as most of
the production equipment used in the manufacture of our products. Production
testers that handle over 98% of our product volume have now been successfully
upgraded for year 2000 compliance and tested. We have developed acceptable
work-arounds for the remainder of our test equipment and we do not anticipate
any material disruption to our production as a result of employing these work-
arounds. Testing of non-critical computers, software applications and
production equipment will be continued throughout the remainder of the calendar
year. We have evaluated the functionality of our current products with respect
to any year 2000 problems and have determined that our current products have no
year 2000 problems. We do not anticipate that addressing the year 2000 problem
for our internal information systems and future products will have a material
impact on our operations or financial results. However, we cannot assure you
that these costs will not be greater than anticipated, or that we will complete
the corrective actions we have undertaken before any year 2000 problems could
occur. The year 2000 issue could lower demand for our products while increasing
our costs. These factors, while not quantified, could have a material adverse
impact on our operations and financial results.
We have relationships with key suppliers, who are our single source or one of
a limited number of providers of certain materials used in our products. During
the second and third quarters of 1999 we completed the process of contacting all
third-party suppliers of components used in the manufacture of our products,
with special emphasis on those suppliers categorized as critical. During this
process we identified one or more sole source suppliers and reviewed information
they provided to us regarding their year 2000 programs. As of the third quarter
of 1999, these suppliers have represented to us in writing that they have
achieved year 2000 compliance. However, we have limited or no control over the
actions of these third-party suppliers. Thus, while we expect that we will be
able to resolve any significant year 2000 problems with these third parties, we
cannot assure you that these suppliers will resolve any or all year 2000
problems before the occurrence of a material disruption to the operation of our
business. Any failure of these third parties to resolve year 2000 problems with
their systems, on a timely basis, could have a material adverse effect on our
business, operating results and financial condition.
22
<PAGE>
We Have Adopted Anti-Takeover Measures Which May Make it More Difficult for a
Third Party to Acquire Us. Our board of directors has the authority to issue up
to 3,000,000 shares of preferred stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the stockholders. The rights of the holders of common stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of shares of preferred
stock, while potentially providing flexibility in connection with possible
acquisitions and for other corporate purposes, could have the effect of making
it more difficult for a third party to acquire a majority of our outstanding
voting stock. We have no present intention to issue shares of preferred stock.
In February 1999, our board of directors adopted a preferred stock purchase
rights plan intended to guard against hostile takeover tactics. The adoption of
this plan was not in response to any proposal to acquire us, and the board is
not aware of any such effort. The existence of this plan could have the effect
of making it more difficult for a third party to acquire a majority of our
outstanding voting stock.
In addition, provisions of our certificate of incorporation may have the
effect of delaying or preventing a change of control, which could adversely
affect the market price of our common stock. These provisions provide, among
other things, that:
. stockholders may not take action by written consent;
. the ability of stockholders to call special meetings and to raise matters
at stockholders' meetings is restricted; and
. certain amendments of our certificate of incorporation, and all
amendments of our bylaws, require the approval of holders of at least
two-thirds of the voting power of all outstanding shares.
We are also subject to the anti-takeover provisions of section 203 of the
Delaware General Corporation Law, which prohibits us from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of section 203 could have the effect of delaying or preventing a
change of control.
Our Stock Price Has Been Volatile. Our common stock has been, and is likely
to be, volatile. We cannot assure you that the trading price of our common stock
will remain at or near the price at which you may have purchased it. Factors
including future announcements concerning us or our competitors, quarterly
variations in operating results, announcements of technological innovations, the
introduction of new products or changes in our product pricing policies or those
of our competitors, proprietary rights or other litigation, changes in earnings
estimates by analysts and other factors could cause the market price of our
common stock to fluctuate substantially. In addition, stock prices for many
technology companies fluctuate widely for reasons which may be unrelated to
operating results. These fluctuations, as well as general economic, market and
political conditions such as recessions or military conflicts may materially
adversely affect the market price of our common stock. Moreover, the trading
prices of many high technology stocks are at or near their historical highs and
reflect price/earning ratios substantially above historical norms.
23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.
There has not been a material change in our exposure to interest rate and
foreign currency risks since the date of the 1998 Form 10-K.
Interest Rate Risk. Our exposure to market risk for changes in interest rates
relate primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. We invest in high-credit quality
issuers and, by policy, limit the amount of credit exposure to any one issuer.
As stated in our policy, we ensure the safety and preservation of our invested
principal funds by limiting default risk, market risk and reinvestment risk. We
mitigate default risk by investing in safe and high-credit quality securities
and by constantly positioning our portfolio to respond appropriately to a
significant reduction in a credit rating of any investment issuer, guarantor or
depository. The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity.
The table below presents principal amounts and related weighted average
interest rates for our investment portfolio at September 30, 1999. All
investments mature, by policy, in 15 months or less.
(in thousands, except average interest rates)
<TABLE>
<CAPTION>
Average
Carrying Interest
Amount Rate
---------- ----------
Cash Equivalents:
<S> <C> <C>
Tax-exempt securities............................................................. $15,000 3.75%
------- ----
Total cash equivalents....................................................... 15,000 3.75%
------- ----
Short-term Investments:
U.S. corporate securities......................................................... 24,100 5.23%
Foreign securities................................................................ 3,079 4.97%
Tax-exempt securities............................................................. 7,000 3.75%
------- ----
Total short-term investments................................................. 34,179 4.90%
------- ----
Total investment securities.................................................. $49,179 4.55%
======= ====
</TABLE>
Foreign Currency Exchange Risk. We transact business in various foreign
countries. Our primary foreign currency cash flows are in Japan and Western
Europe. Currently, we do not employ a foreign currency hedge program utilizing
foreign currency forward exchange contracts as the foreign currency transactions
and risks to date have not been significant.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1998, we filed a complaint for patent infringement in the U.S.
District Court, Northern District of California, against our largest end user,
Motorola. In August 1998, we voluntarily dismissed the complaint, and filed a
new complaint in the U.S. District Court, District of Delaware, alleging that
Motorola has infringed and continues to infringe two of our circuit patents. In
October 1998, Motorola asserted various counterclaims against us, alleging that
we are infringing certain of Motorola's patents.
Trial of this action was held in October 1999. On October 15, 1999, a
unanimous jury returned a verdict in our favor. The jury determined that
Motorola had willfully infringed one of our patents and awarded us $32.3 million
in compensatory damages. The jury also found that we had not infringed any of
the asserted Motorola patents and that two of the Motorola patents were invalid.
Proceedings in this matter are continuing. We anticipate that Motorola will
seek to have the jury verdict overturned. If the verdict were overturned, we
might not ultimately prevail in this litigation and this litigation could have a
material adverse effect on our business, financial condition and operating
results.
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
None.
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:
10.25 Sublease between the Company and Atweb, Inc., dated as
of July 1, 1999.
27.1 Financial Data Schedule.
b. Reports on Form 8-K.
None
25
<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: November 9, 1999 By: /s/ Robert G. Staples
-----------------------------
Robert G. Staples
Chief Financial Officer
26
<PAGE>
EXHIBIT 10.25
SUBLEASE
<TABLE>
<CAPTION>
<S> <C>
Sublessor: At Web, Inc. Subleased Premises: 686 West Maude, Sunnyvale, CA
Sublessee: Power Integrations, Inc. Date: July 1, 1999
</TABLE>
1. Parties:
This Sublease is made and entered into as of July 1, 1999, by and between AtWeb,
Inc. (Sublessor), and Power Integrations, Inc. (Sublessee), under the Master
Lease dated December 18, 1997, between A&P Family Investments as (Lessor) and
Sublessor under this Sublease as (Lessee.) A copy of the Master Lease is
attached hereto as Exhibit "A" and incorporated herein by this reference.
2. Provisions Constituting Sublease:
2.1 This Sublease is subject to all of the terms and conditions of the
Master Lease. Sublessee hereby assumes and agrees to perform all of the
obligations of Lessee under the Master Lease to the extent said obligations
apply to the Subleased Premises and Sublessee's use of the common areas,
except as specifically set forth herein. Sublessor hereby agrees to cause
Lessor, under the Master Lease, to perform all of the obligations of Lessor
thereunder to the extent said obligations apply to the Subleased Premises
and Sublessee's use of the common areas. Sublessee shall not commit or
permit to be committed on the Subleased Premises or on any other portion of
the Project any act or omission which violates any term or condition of the
Master Lease. Except to the extent waived or consented to in writing by the
other party or parties hereto who are affected thereby, neither of the
parties hereto will, by renegotiation of the Master Lease, assignment,
subletting, default or any other voluntary action, avoid or seek to avoid
the observance or performance of the terms to be observed or performed
hereunder by such party but, will at all times, in good faith assist in
carrying out all the terms of this Sublease and in taking all such action as
may be necessary or appropriate to protect the rights of the other party or
parties hereto who are affected thereby against impairment. Nothing
contained in this Section 2.1 or elsewhere in this Sublease shall prevent or
prohibit Sublessor (a) from exercising its right to terminate the Master
Lease pursuant to the terms thereof or (b) from assigning its interest in
this Sublease.
2.2 All of the terms and conditions contained in the Master Lease are
incorporated herein, except as specifically provided below, and shall
together with the terms and conditions specifically set forth in this
Sublease constitute the complete terms and conditions of this Sublease. 2
(Rent), 4G (Security Deposit), 39 (Basic Rent), 40 (Early Occupancy); and
paragraphs of the lease amendment #1 dated May 27, 1998: 2 (Termination
Agreement).
3. Premises:
Sublessor leases to Sublessee and Sublessee leases from Sublessor the Subleased
Premises upon all of the terms, covenants and conditions contained in this
Sublease. The Subleased Premises consist of approximately 13,769 square feet,
according to the Master Lease.
4. Rent:
Upon execution of this Agreement, Sublessee shall pay to Sublessor, at 501
Middlefield, Mountain View, as Rent for the Subleased Premises the sum of
Twenty-Four Thousand Six Hundred Forty-Six and 51/100 Dollars ($24,646.51),
representing the first month's rent. Thereafter, monthly rent shall be in
accordance with the following schedule:
<PAGE>
<TABLE>
<CAPTION>
Months Amount per Square Foot NNN
<S> <C>
01 - 12 $1.79
13 - 24 $1.89
25 - 36 $1.99
37 - end of term $2.09
</TABLE>
The rental amount shall be paid, without deductions, offset, prior notice or
demand. If the commencement date or the termination date of the Sublease occurs
on a date other than the first day or the last day, respectively, of a calendar
month, then the Rent for such partial month shall be prorated and the prorated
Rent shall be payable on the Sublease commencement date or on the first day of
the calendar month in which the Sublease termination date occurs, respectively.
Additionally, there is a management fee of $800 per month, which will be due
from Sublessee on the first of each month.
5. Security Deposit:
Upon execution of this Agreement, Sublessee shall pay to Sublessor an equivalent
of the last month's rent ($28,777.21) as a noninterest bearing Security Deposit.
In the event Sublessee has performed all of the terms and conditions of this
Sublease during the term hereof, Sublessor shall return to Sublessee, within
thirty (30) days after Sublessee has vacated the Subleased Premises, the
Security Deposit less any sums due and owing to Sublessor pursuant to the terms
of this Sublease.
6. Rights of Access and Use:
6.1 Use:
Sublessee shall use the Subleased Premises only for those purposes
permitted in the Master Lease.
6.2 Equipment:
Sublessee shall have the right to use Sublessor's furniture systems in
place in the Subleased Premises, as listed in Exhibit C attached hereto and
incorporated herein by this reference. Said furniture shall be returned to
Sublessor, normal wear and tear excepted, at the end of the Sublease. In
the event said furniture systems require repair other than normal wear and
tear, at the end of the Sublease, Sublessor may deduct the cost of such
repair from the Security Deposit.
7. Sublease Term:
7.1 Sublease Term:
The Sublease Term shall be for the period commencing on July 15, 1999, and
continuing through June 30, 2003. In no event shall the Sublease Term extend
beyond the Term of the Master Lease.
7.2 Inability to Deliver Possession:
In the event Sublessor is unable to deliver possession of the Subleased
Premises at the commencement of the term, Sublessor shall not be liable for
any damage caused thereby nor shall this Sublease be void or voidable, but
Sublessee shall not be liable for Rent until such time as Sublessor offers
to deliver possession of the Subleased Premises to Sublessee, but the term
hereof shall not be extended by such delay. If Sublessee, with Sublessor's
consent, takes possession prior to commencement of the term, Sublessee shall
do so subject to all the covenants and
2
<PAGE>
conditions hereof and shall pay Rent for the period ending with the
commencement of the term at the same rental as that prescribed for the first
month of the term prorated at the rate of 1/30th thereof per day. In the
event Sublessor has been unable to deliver possession of the Subleased
Premises within 30 days from the commencement date, Sublessee, at
Sublessee's option, may terminate this Sublease.
8. Notices:
All notices, demands, consents and approvals which may or are required to be
given by either party to the other hereunder shall be given in the manner
provided in the Master Lease at the addresses shown below. Sublessor shall
notify Sublessee of any Event of Default under the Master Lease, or of any other
event of which Sublessor has actual knowledge which will impair Sublessee's
ability to conduct its normal business at the Subleased Premises, as soon as
reasonably practicable following Sublessor's receipt of notice from the Lessor
of an Event of Default or actual knowledge of such impairment. If Sublessor
elects to terminate the Master Lease, Sublessor shall so notify Sublessee by
giving at least 30 days notice prior to the effective date of such termination.
<TABLE>
<CAPTION>
Sublessor's Address: c/o Netscape Communications Sublessee's Address: Power Integrations, Inc.
Corporation c/o Robert Steples
Attn: Real Estate Department 477 North Mathilda
501 East Middlefield Sunnyvale, CA 94086
Mountain View, CA 94043
<S> <C> <C> <C>
Phone Number: 650-937-5751 Phone Number: 408-523-9200
Fax Number: 650-937-5501 Fax Number: 408-523-9300
</TABLE>
9. Broker Fee:
Upon execution of the Sublease, Sublessor shall pay Cornish & Carey Commercial,
a licensed real estate broker, fees set forth in a separate agreement between
Sublessor and Broker for brokerage services rendered by Broker to Sublessor in
these transactions.
10. Broker Representation:
The only Brokers involved in this Sublease are Cornish & Carey Commercial
representing Sublessor and Colliers International representing Sublessee.
Sublessee shall indemnify Sublessor for any commission claims in conjunction
with this Sublease from other brokerage companies. Sublessor shall pay the
brokerage fees (50%/50%) to each brokerage company.
11. Sublessee Indemnity:
Sublessee shall defend, indemnify and hold Sublessor harmless from and against
any and all physical damage to the Premises or Sublessor's furniture located at
the Premises caused by Sublessee, or its agents, employees, contractors or
invitees or breach of the terms and conditions of this Sublease, including all
reasonable costs and expenses (including reasonable attorneys' fees) incurred by
the Sublessee in connection with any action, suit, proceeding, demand,
assessment or judgment incident to the foregoing.
3
<PAGE>
12. Assignment:
Sublessee may not assign this Sublease without the prior written consent of
Sublessor and Master Lessor.
Sublessor: AtWeb, Inc.
By: /s/ Date: July 21, 1999
---------------------------------- ------------------------------
Title: Senior VP
Sublessee: POWER INTEGRATIONS, INC.
By: /s/ Date: July 16, 1999
---------------------------------- ------------------------------
Title: Vice President - Finance/Administration
NOTICE TO SUBLESSOR AND SUBLESSEE: CORNISH & CAREY COMMERCIAL IS NOT AUTHORIZED
TO GIVE LEGAL OR TAX ADVICE; NOTHING CONTAINED IN THIS SUBLEASE OR ANY
DISCUSSIONS BETWEEN CORNISH & CAREY COMMERCIAL AND SUBLESSOR AND SUBLESSEE SHALL
BE DEEMED TO BE A REPRESENTATION OR RECOMMENDATION BY CORNISH & CAREY
COMMERCIAL, OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL EFFECT OR TAX
CONSEQUENCES OF THIS DOCUMENT OR ANY TRANSACTION RELATING THERETO. ALL PARTIES
ARE ENCOURAGED TO CONSULT WITH THEIR INDEPENDENT FINANCIAL CONSULTANTS AND/OR
ATTORNEYS REGARDING THE TRANSACTION CONTEMPLATED BY THIS PROPOSAL.
4
<PAGE>
Exhibit "A" Master Lease
Exhibit "B" Premises
Exhibit "C" Equipment List
LESSOR CONSENT
The undersigned, Lessor under the Master Lease attached as Attachment I, hereby
consents to the subletting of the Subleased Premises described herein on the
terms and conditions contained in this Sublease. This Consent shall apply only
to this Sublease and shall not be deemed to be a consent to any other Sublease.
Lessor: A&P FAMILY INVESTMENTS
By: Date:
---------------------------------- ------------------------------
ATTORNMENT AGREEMENT
Sublessee shall attorn to Lessor and perform all of Sublessee's obligations
under the Sublease directly to Lessor as if Lessor were the sublessor under the
Sublease. If Sublessee is not, at the time of the notice, in default, Lessor
shall continue to recognize the estate of Sublessee created under the Sublease.
If Sublessee is not in default, the Sublease shall continue with the same force
and effect as if Lessor and Sublessor had entered into a lease on the same
provisions as those contained in the Sublease, including, without limitation,
the Sublessee's right to extend the term of the Lease.
Lessor: A&P FAMILY INVESTMENTS
By: Date:
---------------------------------- ------------------------------
5
<PAGE>
SUBLEASE SUMMARY
686 West Maude Avenue, Sunnyvale
Sublease Dated July 1, 1999
Sublessor: AtWeb c/o Netscape Communications Corp
Attn: Real Estate Dept.
501 Middlefield, Mt. View, California 94043
Landlord: Peery & Arrillaga ("John Arrillaga Separate Property
Trust and Richard T. Peery Separate Property Trust")
Square Feet: 13,769
Lease Term: 3 years, 11 months
Commencement Date: August 1, 1999 (Commencement Memo still needed)
Termination Date: June 30, 2003
Monthly Rent: Base Rent Per Month
-------------------
8/l/99 - 6/30/00 $24,646.51
7/l/00 - 6/30/01 $26,023.41
7/l/01 - 6/30/02 $27,400.31
7/l/02 - 6/30/03 $28,777.21
Type of Rent: Triple Net - $800 monthly management fee (Paragraph 4
of Sublease). Sublessor has represented that triple
net costs (other than the management fee) are billed
quarterly.
Furniture and Equipment: Paragraph 6.2-POWI has right to use furniture and
equipment, free of charge, during term of sublease.
Security Deposit: $28,777.21
Signage: Monument signage
If you have any questions or would like further information contact:
Carla Lindorff
Colliers International
1960 The Alameda, Suite 100
San Jose, CA 95126
(408) 236-3161
Facsimile (408) 556-1926
[email protected]
S \Department\Adminsi\Wppool\CI\Lesumatweb8l6.Doc
<PAGE>
July 22, 1999
Atweb, Inc.
c/o Netscape, Inc.
501 East Middlefield Road, MV-030
Mt. View, CA 94043
Re: CONSENT TO SUBLEASE TO POWER INTEGRATIONS, INC., A CALIFORNIA CORPORATION
FOR A PERIOD OF THREE YEARS ELEVEN MONTHS COMMENCING AUGUST 1, 1999 AND
TERMINATING JUNE 30, 2003
Gentlemen:
This letter is written with regard to your proposed sublease of all of the
13,769 square feet of space (as shown on Exhibit A attached hereto) (the "Sublet
---------
Premises") leased by Tenant at 686 W. Maude Avenue, Suite 103, Sunnyvale,
California, under Lease Agreement dated December 18, 1997 ("Master Lease"), by
and between John Arrillaga Separate Property Trust and Richard T. Peery Separate
Property Trust ("Master Landlord"), and Atweb, Inc., a California corporation
("Tenant"), which Tenant is proposing to sublease to Power Integrations, Inc., a
Delaware corporation ("Subtenant") on the terms and conditions set forth in the
proposed Sublease dated July 1, 1999, submitted by Tenant to Master Landlord on
July 22, 1999 (the "Sublease").
Pursuant to Master Lease Paragraph 16 ("Assignment and Subletting") Master
Landlord hereby approves Tenant's subleasing said space to Subtenant, under the
Sublease, subject to the following terms and conditions:
1. Master Landlord's Consent shall in no way void or alter any of the terms of
the Lease by and between Master Landlord and Tenant, nor shall this Consent
alter or diminish in any way Tenant's obligations to Master Landlord.
2. Tenant shall not give Subtenant any rights or privileges in excess of those
given Tenant under the terms of the Master Lease.
3. Subtenant shall not have a separate address from the address of the
Premises. Therefore, Tenant shall provide Subtenant with internal mail
delivery. Tenant and Subtenant shall share (the pro rata shares to be
determined in a separate agreement between Tenant and Subtenant) the
existing signage allocated to Tenant for the Premises.
4. Master Landlord has not reviewed the terms of any agreement between Tenant
and Subtenant, and in approving said Sublease, Master Landlord is in no way
approving any term, covenant or condition therein contained, and said
Sublease is subject and subordinate to all terms, covenants and conditions
of the Master Lease. Master Landlord shall not be bound by any agreement
other than the terms of the Master Lease between Master Landlord and Tenant.
In the event of conflict in the terms, covenants and conditions between the
Sublease and the Master Lease, the terms, covenants and conditions of the
Master Lease shall prevail and take precedence over said Sublease. Master
Landlord does not make any warranties or representations as to the condition
of the Leased Premises or the terms of the Lease between Master Landlord and
Tenant. This Consent to Sublease shall in no event be construed as consent
to any future sublease agreement (including any extensions and/or amendments
to the current Sublease) between Tenant and Subtenant, or any other party;
and any future sublease agreement (including any extensions and/or
amendments to the current Sublease) between Tenant and Subtenant, or any
other party
1
<PAGE>
shall require the prior written consent of Master Landlord. Under no
circumstances will Master Landlord consent to a sub-sublease or assignment
under the Sublease.
5. A. It is agreed by all parties hereto that in the event the Master Lease is
rejected by Tenant under a Chapter 11 or 7 proceeding and/or Master Landlord
terminates the Master Lease, pursuant to any right therein contained, said
Sublease shall automatically terminate simultaneously with the Master Lease.
Notwithstanding anything to the contrary set forth above, Master Landlord,
at Master Landlord's sole option and election, may choose to allow Subtenant
to remain in possession of the Sublet Premises leased under said Sublease
subject to all terms, covenants and conditions of said Master Lease by
giving Subtenant written notice prior to the effective date of termination
of said Master Lease, of Master Landlord's election to allow Subtenant to
remain in possession of the Sublet Premises in which event Subtenant shall
be entitled and obligated to remain in possession of the Sublet Premises
under the terms of said Sublease, subject to all terms, covenants and
conditions of the Master Lease, including, without limitation to, payment of
Basic Rent at the greater of: (i) the rate provided for in the Master Lease,
or (ii) the rate provided for in the Sublease. Such election by Master
Landlord shall not operate as a waiver of any claims Master Landlord may
have against Tenant. Following such written notice by Master Landlord
Subtenant shall then, as of the effective date of said termination of said
Master Lease, be liable to and shall attorn in writing directly to Master
Landlord as though said Sublease were executed directly between Master
Landlord and Subtenant; provided, however, it is specifically agreed between
the parties hereto, that whether Master Landlord elects to allow Subtenant
to remain in possession of the Sublet Premises under the terms of the
Sublease, subject to the Master Lease, or allow said Sublease to
automatically terminate simultaneously with the Master Lease, Master
Landlord shall not, in any event, nor under any circumstances be responsible
or liable to Subtenant for (i) the return of any security deposit paid by
Subtenant to Tenant, nor shall Subtenant be given credit for any prepaid
rental or other monetary consideration paid by Subtenant to Tenant under
said Sublease; (ii) any other claim or damage of any kind or nature
whatsoever by reason of or in connection with Master Landlord's termination
of said Master Lease and/or Sublease; and (iii) any default of Tenant under
the Sublease.
B. In the event Master Landlord has terminated the Master Lease, and has not
elected, in writing prior to the effective date of termination of said
Master Lease, to allow Subtenant to remain in the Sublet Premises as set
forth above, said Sublease shall terminate co-terminously with the effective
termination of the Master Lease automatically, without notice, and Subtenant
and/or Tenant, jointly and severally, shall surrender the Sublet Premises to
Master Landlord in good condition and repair as of the effective termination
of the Master Lease, with Master Landlord having no obligation or liability
whatsoever to Subtenant by reason of or in connection with such early
termination of the Master Lease. In the event Subtenant and/or Tenant fails
to timely surrender the Sublet Premises to Master Landlord in good condition
and repair as of the date the Master Lease terminates, Subtenant and/or
Tenant, jointly and severally, shall be liable to Master Landlord in such
event for all damages, costs, claims, losses, liabilities, fees or expenses
sustained by Master Landlord, including, but not limited to, loss of rental
income, attorney's fees and court costs resulting from or in connection with
Subtenant's failure to timely vacate the Sublet Premises and surrender the
Sublet Premises to Master Landlord as of the effective termination date of
said Master Lease.
C. As a condition to Landlord's consent to the Sublease, by execution of
this Consent to Sublease, Subtenant hereby agrees to be bound by the
following provision in relation to both Tenant and Master Landlord:
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<PAGE>
If Master Landlord and Tenant jointly and voluntarily elect, for any reason
whatsoever, to terminate the Master Lease prior to the scheduled Master
Lease Termination Date, then this Sublease (if then still in effect) shall
terminate concurrently with the termination of the Master Lease. Subtenant
expressly acknowledges and agrees that (1) the voluntary termination of the
Master Lease by Master Landlord and Tenant and the resulting termination of
this Sublease shall not give Subtenant any right or power to make any legal
or equitable claim against Master Landlord or Tenant, including without
limitation any claim for interference with contract or interference with
prospective economic advantage, and (2) Subtenant hereby waives any and all
rights it may have under law or at equity to challenge such an early
termination of the Sublease, and unconditionally releases and relieves
Master Landlord and Tenant, and their officers, directors, employees and
agents, from any and all claims, demands, and/or causes of action
whatsoever (collectively, "Claims"), whether such matters are known or
unknown, latent or apparent, suspected or unsuspected, foreseeable or
unforeseeable, which Subtenant may have arising out of or in connection
with any such early termination of this Sublease. Subtenant knowingly and
intentionally waives any and all protection which is or may be given by
Section 1542 of the California Civil Code which provides as follows: "A
general release does not extend to claims which the creditor does not know
or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with
debtor."
The term of this Sublease is therefore subject to early termination.
Subtenant's initials here below evidence (a) Subtenant's consideration of
and agreement to this early termination provision, (b) Subtenant's
acknowledgment that, in determining the net benefits to be derived by
Subtenant under the terms of this Sublease, Subtenant has anticipated the
potential for early termination, and (c) Subtenant's agreement to the
general waiver and release of Claims above.
Initials: /s/ Initials: /s/
------------------- -------------------
Subtenant Tenant
6. In consideration of Master Landlord's consent to the Sublease, Tenant
irrevocably assigns to Master Landlord, as security for Tenant's obligations
under this Lease, all rent and income payable to Tenant under the Sublease.
Therefore Master Landlord may collect all rent due under the Sublease and
apply it towards Tenant's obligations under the Master Lease. Tenant and
Subtenant agree to pay same to Master Landlord upon demand without further
consent of Tenant and Subtenant required; provided, however, that until the
occurrence of a default by Tenant under the Master Lease, Tenant shall have
the right to collect such rent. Tenant hereby irrevocably authorizes and
directs Subtenant, upon receipt of a written notice from Master Landlord
stating that a default exists in the performance of Tenant's obligations
under the Master Lease, to pay to Master Landlord the rents due and to
become due under the Sublease. Tenant agrees that Subtenant shall have the
right to rely on any such statement and request from Master Landlord, and
that Subtenant shall pay such rents to Master Landlord without any
obligation or right to inquire as to whether such default exists and
notwithstanding any notice or claim from Tenant to the contrary. Tenant
shall have no right or claim against Subtenant or Master Landlord for any
such rents so paid by Subtenant to Master Landlord. It is further agreed
between the parties hereto that neither Tenant's assignment of such rent and
income, nor Master Landlord's acceptance of any payment of rental or other
sum due by Subtenant to Tenant under said
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<PAGE>
sublease, whether payable directly to Master Landlord or endorsed to Master
Landlord by Tenant, shall in any way nor in any event be construed as
creating a direct contractual relationship between Master Landlord and
Subtenant, unless the Parties expressly so agree in writing and such
acceptance shall be deemed to be an accommodation by Master Landlord to, and
for the convenience of, Tenant and Subtenant. Any direct contractual
agreement between Master Landlord and Subtenant must be in writing.
7. Pursuant to the provisions of Paragraph 16 entitled "Assignment and
Subletting" of the Master Lease, Master Landlord hereby requires Tenant to
pay to Master Landlord, as Additional Rent, all rents and/or additional
consideration received by Tenant from said Sublease in excess of the Basic
Rent payable to Master Landlord in said Lease (hereinafter referred to as
"Excess Rent"). Tenant and Subtenant acknowledge that any Excess Rent is
owed to Master Landlord and Tenant hereby agrees to pay any Excess Rent to
Master Landlord as due under said Sublease. Tenant and Subtenant represent
and warrant to Master Landlord that: (1) the information to be completed and
provided by Tenant and Subtenant on the attached Exhibit B "Summary of
---------
Amounts/Consideration to be Paid by Subtenant" accurately represents amounts
to be paid by Subtenant under said Sublease; (2) no additional consideration
is due Tenant under said Sublease, other than the additional consideration
(if any) identified on Exhibit B; and (3) no changes in the terms and/or
---------
conditions of said Sublease shall be made without Master Landlord's prior
written approval.
8. This Consent is conditional upon Master Landlord's receipt of Master
Landlord's reasonable costs and attorney's fees, to which Master Landlord is
entitled under Paragraph 16 of the Master Lease. Tenant shall pay such fees
and costs to Landlord, pursuant to the invoice provided to Tenant by
Landlord with this Consent, upon execution of this Consent by Tenant and
Subtenant.
9. This Consent to Sublease shall only be considered effective, and Master
Date: Landlord's consent to the Sublease given, when (i) Landlord receives
payment from Tenant of Landlord's costs, and (ii) this Letter Agreement is
executed by Master Landlord, Tenant, and Subtenant, and Guarantors (if any)
under the Master Lease.
Please execute this letter in the space provided below, obtain the signature of
Subtenant, and return all copies to our office no later than August 4, 1999. In
the event Tenant fails to return the fully executed documents to Landlord by
August 4, 1999, this Consent shall be automatically rescinded, in which event,
Tenant shall be required to resubmit its request in the event Tenant desires to
go forward with said Sublease. A fully executed copy will be returned to you
after execution by the Master Landlord.
Very truly yours,
A&P FAMILY INVESTMENTS
By /s/
------------------------------------------
John Arrillaga
(Signatures Continued on Following Page)
4
<PAGE>
THE UNDERSIGNED Tenant and Subtenant do hereby jointly and severally agree to
the terms and conditions of this Consent to Sublease.
TENANT: SUBTENANT:
ATWEB, INC. POWER INTEGRATIONS, INC.
a California corporation a Delaware corporation
By /s/ By /s/
--------------------------------- ---------------------------------
Print Name Mark Starish Print Name Robert G. Staples
------------------------- -----------------------
Title Senior VP Title VP Finance & Admin.
------------------------------ ----------------------------
5
<PAGE>
EXHIBIT B TO "CONSENT TO SUBLEASE"
SUMMARY OF AMOUNTS/CONSIDERATION TO BE PAID BY SUBTENANT
<TABLE>
<CAPTION>
TOTAL CHARGE
PERIOD BASIC RENT R.E. TAXES PROP. INS. UTILITIES LANDSCAPE MISCELLANEOUS MISCELLANEOUS PER PERIOD
- ----------------------------------------------------------------------------------------------------------------------------------
BY MONTH TOTAL PSF TOTAL PSF TOTAL PSF TOTAL PSF TOTAL PSF TOTAL PSF TOTAL PSF TOTAL PSF
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1-12 $295,758.12 $1.79 PER MASTER LEASE
- ------------------------------------------------------------------------------------------------------------------------------------
13-24 $312,280.92 $1.89 "
- ------------------------------------------------------------------------------------------------------------------------------------
25-36 $328,803.72 $1.99 "
- ------------------------------------------------------------------------------------------------------------------------------------
37-47.5 $330,937.91 $2.09 "
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
IF ADDITIONAL SPACE IS NEEDED, PLEASE DUPLICATE AND ATTACH
*IF PAYMENTS ARE REQUIRED OTHER THAN MONTHLY, PLEASE INCLUDE THESE PAYMENTS AS WELL.
**IF SUBLEASE RENT PAID INCLUDES MISCELLANEOUS EXPENSES, PLEASE IDENTIFY THE $ AMOUNT/PSF
OF THE TOTAL RENT PAYMENT ALLOCATED TO BASIC RENT AND EACHADDITIONAL EXPENSE ITEM.
IS ANY ADDITIONAL CONSIDERATION (MONETARY AND/OR SERVICES) DUE UNDER THE SUBLEASE?: YES NO X
------- -------
IF "YES", IDENTIFY TYPE CONSIDERATION AND DOLLAR VALUE ASSIGNED TO SAID CONSIDERATION:
Type: ___________________________________________ TENANT SUBTENANT
ATWEB, INC. POWER INTEGRATIONS, INC.
Type: ___________________________________________
Type: ___________________________________________ By: /s/ By: /s/
------------ -------------------
Type: ___________________________________________ Printed: Mark Starish Printed: Robert G. Staples
------------ -------------------
IF ADDITIONAL SPACE IS NEEDED, PLEASE DUPLICATE AND ATTACH Title: Senior VP Title: VP Finance & Admin.
------------ -------------------
</TABLE>
<PAGE>
LEASE AGREEMENT
THIS LEASE, made this 18th day of December, 1997, between A&P FAMILY
INVESTMENTS, a California general partnership, hereinafter called Landlord, and
ATWEB, INC., a California corporation, hereinafter called Tenant.
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and takes from
Landlord those certain premises (the "Premises") outlined in red on Exhibit "A",
attached hereto and incorporated herein by this reference thereto more
particularly described as follows:
A portion of that certain 33,948 square foot, one-story building
located at 686 W. Maude Avenue, Suite 103, Sunnyvale, California
94086, consisting of approximately 4,793 square feet of space. Said
Premises is more particularly shown within the area outlined in Red on
Exhibit A attached hereto. The entire parcel, of which the Premises
---------
is a part, is shown within the area outlined in Green on Exhibit A
---------
attached. The Premises is leased on an "as-is" basis, in its present
condition, and in the configuration as shown in Red on Exhibit B
---------
attached hereto.
The word "Premises" as used throughout this Lease is hereby defined to
include the nonexclusive use of landscaped areas, sidewalks and driveways in
front of or adjacent to the Premises, and the nonexclusive use of the area
directly underneath or over such sidewalks and driveways. The gross leasable
area of the building shall be measured from outside of exterior walls to outside
of exterior walls, and shall include any atriums, covered entrances or egresses
and covered loading areas.
Said letting and hiring is upon and subject to the terms, covenants and
conditions hereinafter set forth and Tenant covenants as a material part of the
consideration for this Lease to perform and observe each and all of said terms,
covenants and conditions. This Lease is made upon the conditions of such
performance and observance.
1. USE. Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purpose of general
office, light manufacturing, research and development, and storage and other
uses necessary for Tenant to conduct Tenant's business, provided that such uses
shall be in accordance with all applicable governmental laws and ordinances, and
for no other purpose. Tenant shall not do or permit to be done in or about the
Premises nor bring or keep or permit to be brought or kept in or about the
Premises anything which is prohibited by or will in any way increase the
existing rate of (or otherwise affect) fire or any insurance covering the
Premises or any part thereof, or any of its contents, or will cause a
cancellation of any insurance covering the Premises or any part thereof, or any
of its contents. Tenant shall not do or permit to be done anything in, on or
about the Premises which will in any way obstruct or interfere with the rights
of other tenants or occupants of the Premises or neighboring premises or injure
or annoy them, or use or allow the Premises to be used for any improper,
immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or
permit any nuisance in, on or about the Premises. No sale by auction shall be
permitted on the Premises. Tenant shall not place any loads upon the floors,
walls, or ceiling which endanger the structure, or place any harmful fluids or
other materials in the drainage system of the building, or overload existing
electrical or other mechanical systems. No waste materials or refuse shall be
dumped upon or permitted to remain upon any part of the Premises or outside of
the building in which the Premises are a part, except in trash containers placed
inside exterior enclosures designated by Landlord for that purpose or inside of
the building proper where
1
<PAGE>
designated by Landlord. No materials, supplies, equipment, finished products
or semi-finished products, raw materials or articles of any nature shall be
stored upon or permitted to remain outside the Premises. Tenant shall not
place anything or allow anything to be placed near the glass of any window,
door partition or wall which may appear unsightly from outside the Premises.
No loudspeaker or other device, system or apparatus which can be heard outside
the Premises shall be used in or at the premises without the prior written
consent of Landlord. Tenant shall not commit or suffer to be committed any
waste in or upon the Premises. Tenant shall indemnify, defend and hold
Landlord harmless against any loss, expense, damage, reasonable attorneys'
fees or liability arising out of failure of Tenant to comply with any
applicable law. Tenant shall comply with any covenant, condition, or
restriction ("CC&R's") affecting the Premises. The provisions of this
paragraph are for the benefit of Landlord only and shall not be construed to
be for the benefit of any tenant or occupant of the Premises.
2. TERM./1/
A. The term of this Lease shall be for a period of two (2) years (unless
sooner terminated as hereinafter provided) and, subject to Paragraphs 2B and 3,
shall commence on the 1st day of February, 1998 and end on the 31st day of
January, 2000.
B. Possession of the premises shall be deemed tendered and the term of the
Lease shall commence on February 1, 1998, or:
(a) As otherwise agreed in writing.
3. POSSESSION. If Landlord, for any reason whatsoever, cannot deliver
possession of said premises to Tenant at the commencement of the said term, as
hereinbefore specified, this Lease shall not be void or voidable; no obligation
of Tenant shall be affected thereby; nor shall Landlord or Landlord's agents be
liable to Tenant for any loss or damage resulting therefrom; but in that event
the commencement and termination dates of the Lease, and all other dates
affected thereby shall be revised to conform to the date of Landlord's delivery
of possession, as specified in Paragraph 2B above. The above is, however,
subject to the provision that the period of delay of delivery of the Premises
shall not exceed 30 days from the commencement date herein (except those delays
caused by Acts of God, strikes, war, utilities, governmental bodies, weather,
unavailable materials, and delays beyond Landlord's control shall be excluded in
calculating such period) in which instance Tenant, at its option, may, by
written notice to Landlord, terminate this Lease.
4. RENT.
A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord
may designate without deduction, offset, prior notice, or demand, and Landlord
agrees to accept as Basic Rent for the leased Premises the total sum of Two
Hundred Thirty-Five Thousand Eight Hundred Fifteen and 60/100 Dollars
($235,815.60) in lawful money of the United States of America, payable as
follows: See Paragraph 39 for Basic Rent Schedule.
- ---------------------------
/1/ It is agreed in the event said Lease commences on a date other than the
first day of the month the term of the Lease will be extended to account for
the number of days in the partial month. The Basic Rent during the resulting
partial month will be prorated (for the number of days in the partial month)
at the Basic Rent rate scheduled for the projected commencement date as shown
in Paragraph 39.
2
<PAGE>
B. Time for Payment. Full monthly rent is due in advance on the first day
of each calendar month. In the event that the term of this Lease commences on a
date other than the first day of a calendar month, on the date of commencement
of the term hereof Tenant shall pay to Landlord as rent for the period from such
date of commencement to the first day of the next succeeding calendar month that
proportion of the monthly rent hereunder which the number of days between such
date of commencement and the first day of the next succeeding calendar month
bears to thirty (30). In the event that the term of this Lease for any reason
ends on a date other than the last day of a calendar month, on the first day of
the last calendar month of the term hereof Tenant shall pay to Landlord as rent
for the period from said first day of said last calendar month to and including
the last day of the term hereof that proportion of the monthly rent hereunder
which the number of days between said first day of said last calendar month and
the last day of the term hereof bears to thirty (30).
C. Late Charge. Notwithstanding any other provision of this Lease, if
Tenant is in default in the payment of rental as set forth in this Paragraph 4
when due, or any part thereof, Tenant agrees to pay Landlord, in addition to the
delinquent rental due, a late charge for each rental payment in default ten (10)
days. Said late charge shall equal ten percent (10%) of each rental payment so
in default.
D. Additional Rent. Beginning with the commencement date of the term of
this Lease, Tenant shall pay to Landlord or to Landlord's designated agent in
addition to the Basic Rent and as Additional Rent the following:
(a) All Taxes relating to the Premises as set forth in Paragraph 9, and
(b) All insurance premiums relating to the Premises, as set forth in
Paragraph 12, and
(c) All charges, costs and expenses, which Tenant is required to pay
hereunder, together with all interest and penalties, costs and expenses,
including reasonable attorneys' fees and legal expenses, that may accrue thereto
in the event of Tenant's failure to pay such amounts, and all damages,
reasonable costs and expenses which Landlord may incur by reason of default of
Tenant or failure on Tenant's part to comply with the terms of this Lease. In
the event of nonpayment by Tenant of Additional Rent, Landlord shall have all
the rights and remedies with respect thereto as Landlord has for nonpayment of
rent.
The Additional Rent due hereunder shall be paid to Landlord or Landlord's
agent (i) within five (5) days for taxes and insurance and within thirty (30)
days for all other Additional Rent items after presentation of invoice from
Landlord or Landlord's agent setting forth such Additional Rent and/or (ii) at
the option of Landlord, Tenant shall pay to Landlord monthly, in advance,
Tenant's pro rata share of an amount estimated by Landlord to be Landlord's
approximate average monthly expenditure for such Additional Rent items, which
estimated amount shall be reconciled within one hundred twenty (120) days of the
end of each calendar year or more frequently if Landlord elects to do so at
Landlord's sole and absolute discretion as compared to Landlord's actual
expenditure for said Additional Rent items, with Tenant paying to Landlord, upon
demand, any amount of actual expenses expended by Landlord in excess of said
estimated amount, or Landlord crediting to Tenant (providing Tenant is not in
default in the performance of any of the terms, covenants and conditions of this
Lease) any amount of estimated payments made by Tenant in excess of Landlord's
actual expenditures for said Additional Rent items.
The respective obligations of Landlord and Tenant under this paragraph
shall survive the expiration or other termination of the term of this Lease, and
if the term hereof shall expire or shall otherwise terminate on a day other than
the last day of a calendar year, the actual Additional Rent incurred for the
calendar year in which the term hereof expires or otherwise terminates shall be
determined and settled on the basis of the statement of actual Additional Rent
for such calendar year and
3
<PAGE>
shall be prorated in the proportion which the number of days in such calendar
year preceding such expiration or termination bears to 365.
E. Fixed Management Fee. Beginning with the Commencement Date of the Term
of this Lease, Tenant shall pay to Landlord, in addition to the Basic Rent and
Additional Rent, a fixed monthly management fee ("Management Fee") equal to
three percent (3%) of the Basic Rent due for each month during the Lease Term.
F. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder
and all payments hereunder for Additional Rent shall be paid to Landlord at the
office of Landlord at A&P Family Investments, 2560 Mission College Blvd., Suite
101, Santa Clara, CA 95054 or to such other person or to such other place as
Landlord may from time to time designate in writing.
G. Security Deposit. Concurrently with Tenant's execution of this Lease,
Tenant shall deposit with Landlord the sum of Twenty Thousand One Hundred Thirty
and 60/100 Dollars ($20,130.60). Said sum shall be held by Landlord as a
Security Deposit for the faithful performance by Tenant of all of the terms,
covenants, and conditions of this Lease to be kept and performed by Tenant
during the term hereof. If Tenant defaults with respect to any provision of
this Lease, including, but not limited to, the provisions relating to the
payment of rent and any of the monetary sums due herewith, Landlord may (but
shall not be required to) use, apply or retain all or any part of this Security
Deposit for the payment of any other amount which Landlord may spend by reason
of Tenant's default or to compensate Landlord for any other loss or damage which
Landlord may suffer by reason of Tenant's default. If any portion of said
Deposit is so used or applied, Tenant shall, within ten (10) days after written
demand therefor, deposit cash with Landlord in the amount sufficient to restore
the Security Deposit to its original amount. Tenant's failure to do so shall be
a material breach of this Lease. Landlord shall not be required to keep this
Security Deposit separate from its general funds, and Tenant shall not be
entitled to interest on such Deposit. If Tenant fully and faithfully performs
every provision of this Lease to be performed by it, the Security Deposit or any
balance thereof shall be returned to Tenant (or at Landlord's option, to the
last assignee of Tenant's interest hereunder) at the expiration of the Lease
term and after Tenant has vacated the Premises. In the event of termination of
Landlord's interest in this Lease, Landlord shall transfer said Deposit to
Landlord's successor in interest whereupon Tenant agrees to release Landlord
from liability for the return of such Deposit or the accounting therefor.
5. ACCEPTANCE AND SURRENDER OF PREMISES. By entry hereunder, Tenant accepts
the Premises as being in good and sanitary order, condition and repair and
accepts the building and improvements included in the Premises in their present
condition and without representation or warranty by Landlord as to the condition
of such building or as to the use or occupancy which may be made thereof. Any
exceptions to the foregoing must be by written agreement executed by Landlord
and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner
termination of this Lease, to surrender the Premises promptly and peaceably to
Landlord in good condition and repair (damage by Acts of God, fire, normal wear
and tear excepted), with all interior walls painted, or cleaned so that they
appear freshly painted, and repaired and replaced, if damaged; all floors
cleaned and waxed; all carpets cleaned and shampooed; all broken, marred or
nonconforming acoustical ceiling tiles replaced; all windows washed; the air
conditioning and heating systems serviced by a reputable and licensed service
firm and in good operating condition and repair; the plumbing and electrical
systems and lighting in good order and repair, including replacement of any
burned out or broken light bulbs or ballasts; the lawn and shrubs in good
condition including the replacement of any dead or damaged plantings; the
sidewalk, driveways and parking areas in good order, condition and repair;
together with all alterations, additions, and improvements which may have been
made in, to, or on the Premises (except moveable trade fixtures installed at the
expense of Tenant) except that Tenant shall ascertain from Landlord within
thirty (30) days before the end of the term of this Lease whether Landlord
desires to have the Premises or any part or
4
<PAGE>
parts thereof restored to their condition and configuration as when the
Premises were delivered to Tenant and if Landlord shall so desire, then Tenant
shall restore said Premises or such part or parts thereof before the end of
this Lease at Tenant's sole cost and expense. Tenant, on or before the end of
the term or sooner termination of this Lease, shall remove all of Tenant's
personal property and trade fixtures from the Premises, and all property not
so removed on or before the end of the term or sooner termination of this
Lease shall be deemed abandoned by Tenant and title to same shall thereupon
pass to Landlord without compensation to Tenant. Landlord may, upon
termination of this Lease, remove all moveable furniture and equipment so
abandoned by Tenant, at Tenant's sole cost, and repair any damage caused by
such removal at Tenant's sole cost. If the Premises be not surrendered at the
end of the term or sooner termination of this Lease, Tenant shall indemnify
Landlord against loss or liability resulting from the delay by Tenant in so
surrendering the Premises including, without limitation, any claims made by
any succeeding tenant founded on such delay. Nothing contained herein shall be
construed as an extension of the term hereof or as a consent of Landlord to
any holding over by Tenant. The voluntary or other surrender of this Lease or
the Premises by Tenant or a mutual cancellation of this Lease shall not work
as a merger and, at the option of Landlord, shall either terminate all or any
existing subleases or subtenancies or operate as an assignment to Landlord of
all or any such subleases or subtenancies.
6. ALTERATIONS AND ADDITIONS. Tenant shall not make, or suffer to be made,
any alteration or addition to the Premises, or any part thereof, without the
written consent of Landlord first had and obtained by Tenant (such consent not
to be unreasonably withheld), but at the cost of Tenant, and any addition to,
or alteration of, the Premises, except moveable furniture and trade fixtures,
shall at once become a part of the premises and belong to Landlord. Landlord
reserves the right to approve all contractors and mechanics proposed by Tenant
to make such alterations and additions. Tenant shall retain title to all
moveable furniture and trade fixtures placed in the Premises. All heating,
lighting, electrical, air conditioning, floor to ceiling partitioning,
drapery, carpeting, and floor installations made by Tenant, together with all
property that has become an integral part of the Premises, shall not be deemed
trade fixtures. Tenant agrees that it will not proceed to make such alteration
or additions, without having obtained consent from Landlord to do so, and
until five (5) days from the receipt of such consent. In order to make such
alteration or additions, without having obtained consent from Landlord to do
so, and until five (5) days from the receipt of such consent, in order that
Landlord may post appropriate notices to avoid any liability to contractors or
material suppliers for payment for Tenant's improvements. Tenant will at all
times permit such notices to be posted and to remain posted until the
completion of work. Tenant shall, if required by Landlord, secure at Tenant's
own cost and expense, a completion and lien indemnity bond, satisfactory to
Landlord, for such work. Tenant further covenants and agrees that any
mechanic's lien filed against the Premises for work claimed to have been done
for, or materials claimed to have been furnished to Tenant, will be discharged
by Tenant, by bond or otherwise, within ten (10) days after the filing
thereof, at the cost and expense of Tenant. Any exceptions to the foregoing
must be made in writing and executed by both Landlord and Tenant.
7. TENANT MAINTENANCE. Tenant shall, at its sole cost and expense, keep and
maintain the Premises (including appurtenances) and every part thereof in a high
standard of maintenance and repair, and in good and sanitary condition.
Tenant's maintenance and repair responsibilities herein referred to include, but
are not limited to, janitorization, plumbing systems within the non-common areas
of the Premises (such as water and drain lines, sinks), electrical systems with
the non-common areas of the Premises (such as outlets, lighting fixtures, lamps,
bulbs, tubes, ballast), heating and air conditioning controls within the non-
common areas of the Premises (such as mixing boxes, thermostats, time clocks,
supply and return grills), all interior improvements within the Premises
including but not limited to: wall coverings, acoustical ceilings, vinyl tile,
carpeting, partitioning, doors (both interior and exterior, including closing
mechanisms, latches, locks), and all other interior improvements of any nature
whatsoever. Tenant agrees to provide carpet shields under all rolling chairs or
to otherwise be responsible for wear and tear of the carpets caused by such
rolling chairs if such wear and tear exceeds that caused by
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normal foot traffic in surrounding areas. Areas of excessive wear shall be
replaced at Tenant's sole expense upon Lease termination.
8. UTILITIES.
9. TAXES.
A. As Additional Rent and in accordance with Paragraph 4D of this Lease,
Tenant shall pay to the Landlord, or if Landlord so directs, directly to the Tax
Collector, all Real Property Taxes relating to the Premises. In the event the
Premises leased hereunder consist of only a portion of the entire tax parcel,
Tenant shall pay to Landlord Tenant's proportionate share of such real estate
taxes allocated to the leased Premises by square footage or other reasonable
basis as calculated and determined by Landlord. If the tax billing pertains
100% to the leased Premises, and Landlord chooses to have Tenant pay said real
estate taxes directly to the Tax Collector, then in such event it shall be the
responsibility of Tenant to obtain the tax and assessment bills and pay, prior
to delinquency, the applicable real property taxes and assessments pertaining to
the leased Premises, and failure to receive a bill for taxes and/or assessments
shall not provide a basis for cancellation of or nonresponsibility for payment
of penalties for nonpayment or late payment by Tenant. The term "Real Property
Taxes," as used herein, shall mean (i) all taxes, assessments, levies and other
charges of any kind or nature whatsoever, general and special, foreseen and
unforeseen (including all installments of principal and interest required to pay
any general or special assessments for public improvements and any increases
resulting from reassessments caused by any change in ownership of the Premises)
now or hereafter imposed by any governmental or quasi-governmental authority or
special district having the direct or indirect power to tax or levy assessments,
which are levied or assessed against, or with respect to the value, occupancy or
use of, all or any portion of the Premises (as now constructed or as may at any
time hereafter be constructed, altered, or otherwise changed) or Landlord's
interest therein; any improvements located within the Premises (regardless of
ownership); the fixtures, equipment and other property of Landlord, real or
personal, that are an integral part of and located in the Premises; or parking
areas, public utilities, or energy within the Premises; (ii) all charges, levies
or fees imposed by reason of environmental regulation or other governmental
control of the Premises; and (iii) all costs and fees (including reasonable
attorneys' fees) incurred by Landlord in reasonably contesting any Real Property
Tax and in negotiating with public authorities as to any Real Property Tax. If
at any time during the term of this Lease the taxation or assessment of the
Premises prevailing as of the commencement date of this Lease shall be altered
so that in lieu of or in addition to any Real Property Tax described above there
shall be levied, assessed or imposed (whether by reason of a change in the
method of taxation or assessment, creation of a new tax or charge, or any other
cause) an alternate or additional tax or charge (i) on the value, use or
occupancy of the Premises or Landlord's interest therein or (ii) on or measured
by the gross receipts, income or rentals from the Premises, on Landlord's
business of leasing the Premises, or computed in any manner with respect to the
operation of the Premises, then any such tax or charge, however designated,
shall be included within the meaning of the term "Real Property Taxes" for
purposes of this Lease. If any Real Property Tax is based upon property or
rents unrelated to the Premises, then only that part of such Real Property Tax
that is fairly allocable to the Premises shall be included within the meaning of
the term "Real Property Taxes." Notwithstanding the foregoing, the term "Real
Property Taxes" shall not include estate, inheritance, gift or franchise taxes
of Landlord or the federal or state net income tax imposed on Landlord's income
from all sources.
B. Taxes on Tenant's Property. Tenant shall be liable for and shall pay
ten days before delinquency, taxes levied against any personal property or trade
fixtures placed by Tenant in or about the Premises. If any such taxes on
Tenant's personal property or trade fixtures are levied against Landlord or
Landlord's property or if the assessed value of the Premises is increased by the
inclusion therein of a value placed upon such personal property or trade
fixtures of Tenant and if Landlord, after written notice
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to Tenant, pays the taxes based on such increased assessment, which Landlord
shall have the right to do regardless of the validity thereof, but only under
proper protest if requested by Tenant. Tenant shall upon demand, as the case
may be, repay to Landlord the taxes so levied against Landlord, or the
proportion of such taxes resulting from such increase in the assessment;
provided that in any such event Tenant shall have the right, in the name of
Landlord and with Landlord's full cooperation, to bring suit in any court of
competent jurisdiction to recover the amount of such taxes so paid under
protest, and any amount so recovered shall belong to Tenant.
10. LIABILITY INSURANCE. Tenant, at Tenant's expense, agrees to keep in force
during the term of this Lease a policy of commercial general liability insurance
with combined single limit coverage of not less than Two Million Dollars
($2,000,000) per occurrence for bodily injury and property damage occurring in,
on or about the Premises, including parking and landscaped areas. Such
insurance shall be primary and noncontributory as respects any insurance carried
by Landlord. The policy or policies effecting such insurance shall name
Landlord as additional insureds, and shall insure any liability of Landlord,
contingent or otherwise, as respects acts or omissions of Tenant, its agents,
employees or invitees or otherwise by any conduct or transactions of any of said
persons in or about or concerning the Premises, including any failure of Tenant
to observe or perform any of its obligations hereunder; shall be issued by an
insurance company admitted to transact business in the State of California; and
shall provide that the insurance effected thereby shall not be cancelled, except
upon thirty (30) days' prior written notice to Landlord. A certificate of
insurance of said policy shall be delivered to Landlord. If, during the term of
this Lease, in the considered opinion of Landlord's Lender, insurance advisor,
or counsel, the amount of insurance described in this Paragraph 10 is not
adequate, Tenant agrees to increase said coverage to such reasonable amount as
Landlord's Lender, insurance advisor, or counsel shall deem adequate.
11. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE.
Tenant shall maintain a policy or policies of fire and property damage insurance
in "all risk" form with a sprinkler leakage endorsement insuring the personal
property, inventory, trade fixtures, and leasehold improvements within the
leased Premises for the full replacement value thereof. The proceeds from any
of such policies shall be used for the repair or replacement of such items so
insured.
Tenant shall also maintain a policy or policies of workman's compensation
insurance and any other employee benefit insurance sufficient to comply with all
laws.
12. PROPERTY INSURANCE. Landlord shall purchase and keep in force, and as
Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall
pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (allocated to the leased Premises by square footage or other
equitable basis as calculated and determined by Landlord) of the deductibles on
insurance claims and the cost of, policy or policies of insurance covering loss
or damage to the Premises (excluding routine maintenance and repairs and
incidental damage or destruction caused by accidents or vandalism for which
Tenant is responsible under Paragraph 7) in the amount of the full replacement
value thereof, providing protection against those perils included within the
classification of "all risks" insurance and flood and/or earthquake insurance,
if available, plus a policy of rental income insurance in the amount of one
hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as
Additional Rent. If such insurance cost is increased due to Tenant's use of the
Premises, Tenant agrees to pay to Landlord the full cost of such increase.
Tenant shall have no interest in nor any right to the proceeds of any insurance
procured by Landlord for the Premises.
Landlord and Tenant do each hereby respectively release the other, to the
extent of insurance coverage of the releasing party, from any liability for loss
or damage caused by fire or any of the extended
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coverage casualties included in the releasing party's insurance policies,
irrespective of the cause of such fire or casualty; provided, however, that if
the insurance policy of either releasing party prohibits such waiver, then
this waiver shall not take effect until consent to such waiver is obtained. If
such waiver is so prohibited, the insured party affected shall promptly notify
the other party thereof.
13. INDEMNIFICATION. Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord for any injury to or death of any person or
damage to or destruction of property in or about the Premises by or from any
cause whatsoever, including, without limitation, gas, fire, oil, electricity or
leakage of any character from the roof, walls, basement or other portion of the
Premises but excluding, however, the willful misconduct or negligence of
Landlord, its agents, servants, employees, invitees, or contractors of which
negligence Landlord has knowledge and reasonable time to correct. Except as to
injury to persons or damage to property to the extent arising from the willful
misconduct or the negligence of Landlord, its agents, servants, employees,
invitees, or contractors, Tenant shall hold Landlord harmless from and defend
Landlord against any and all expenses, including reasonable attorneys' fees, in
connection therewith, arising out of any injury to or death of any person or
damage to or destruction of property occurring in, on or about the Premises, or
any part thereof, from any cause whatsoever.
14. COMPLIANCE. Tenant, at its sole cost and expense, shall promptly comply
with all laws, statutes, ordinances and governmental rules, regulations or
requirements now or hereafter in effect; with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted; and with
any direction or occupancy certificate issued pursuant to law by any public
officer; provided, however, that no such failure shall be deemed a breach of the
provisions if Tenant, immediately upon notification, commences to remedy or
rectify said failure. The judgement of any court of competent jurisdiction or
the admission of Tenant in any action against Tenant, whether Landlord be a
party thereto or not, that Tenant has violated any such law, statute, ordinance
or governmental rule, regulation, requirement, direction or provision, shall be
conclusive of that fact as between Landlord and Tenant. Tenant shall, at its
sole cost and expense, comply with any and all requirements pertaining to said
Premises, of any insurance organization or company, necessary for the
maintenance of reasonable fire and public liability insurance covering
requirements pertaining to said Premises, of any insurance organization or
company, necessary for the maintenance of reasonable fire and public liability
insurance covering the Premises.
15. LIENS. Tenant shall keep the Premises free from any liens arising out of
any work performed, materials furnished or obligation incurred by Tenant. In
the event that Tenant shall not, within ten (10) days following the imposition
of such lien, cause the same to be released of record, Landlord shall have, in
addition to all other remedies provided herein and by law, the right, but no
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All sums paid
by Landlord for such purpose, and all expenses incurred by it in connection
therewith, shall be payable to Landlord by Tenant on demand with interest at the
prime rate of interest as quoted by the Bank of America.
16. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, transfer, or
hypothecate the leasehold estate under this Lease, or any interest therein, and
shall nor sublet the Premises, or any part thereof, or any right or privilege
appurtenant thereto, or suffer any other person or entity to occupy or use the
Premises, or any portion thereof, without, in each case, the prior written
consent of Landlord which consent will not be unreasonably withheld. As a
condition for granting this consent to any assignment, transfer, or subletting,
Landlord shall require that Tenant agrees to pay to Landlord, as Additional
Rent, all rents and/or additional consideration due Tenant from its assignees,
transferees, or subtenants in excess of the Rent payable by Tenant to Landlord
hereunder for the assigned, transferred and/or subleased space. Tenant shall,
by thirty (30) days written notice, advise Landlord of its intent to assign or
transfer Tenant's
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interest in the lease or sublet the Premises or any portion thereof for any
part of the term hereof. Within thirty (30) days after receipt of said written
notice, Landlord may, in its sole discretion, elect to terminate this Lease as
to the portion of the Premises described in Tenant's notice on the date
specified in Tenant's notice by giving written notice of such election to
terminate. If no such notice to terminate is given to Tenant within said
thirty (30) day period, Tenant may proceed to locate an acceptable sublessee,
assignee, or other transferee for presentment to Landlord for Landlord's
approval, all in accordance with the terms, covenants, and conditions of this
paragraph 16. If Tenant intends to sublet the entire Premises and Landlord
elects to terminate this Lease, this Lease shall be terminated on the date
specified in Tenant's notice. If, however, this Lease shall terminate pursuant
to the foregoing with respect to less than all the Premises, the rent, as
defined and reserved hereinabove shall be adjusted on a pro rata basis to the
number of square feet retained by Tenant, and this Lease as so amended shall
continue in full force and effect. In the event Tenant is allowed to assign,
transfer or sublet the whole or any part of the Premises, with the prior
written consent of Landlord, no assignee, transferee or subtenant shall assign
or transfer this Lease, either in whole or in part, or sublet the whole or any
part of the Premises, without also having obtained the prior written consent
of Landlord. A consent of Landlord to one assignment, transfer, hypothecation,
subletting, occupation or use by any other person shall not release Tenant
from any of Tenant's obligations hereunder or be deemed to be a consent to any
subsequent similar or dissimilar assignment, transfer, hypothecation,
subletting, occupation or use by any other person. Any such assignment,
transfer, hypothecation, subletting, occupation or use without such consent
shall be void and shall constitute a breach of this Lease by Tenant and shall,
at the option of Landlord exercised by written notice to Tenant, terminate
this Lease. The leasehold estate under this Lease shall not, nor shall any
interest therein, be assignable for any purpose by operation of law without
the written consent of Landlord. As a condition to its consent, Landlord shall
require Tenant to pay all expenses in connection with the assignment, and
Landlord shall require Tenant's assignee or transferee (or other assignees or
transferees) to assume in writing all of the obligations under this Lease and
for Tenant to remain liable to Landlord under the Lease. Notwithstanding the
above, in no event will Landlord consent to a sub-sublease.
17. SUBORDINATION AND MORTGAGES. In the event Landlord's title or leasehold
interest is now or hereafter encumbered by a deed of trust, upon the interest of
Landlord in the land and buildings in which the demised Premises are located, to
secure a loan from a lender (hereinafter referred to as "Lender") to Landlord,
Tenant shall, at the request of Landlord or Lender, execute in writing an
agreement subordinating its rights under this Lease to the lien of such deed of
trust, or, if so requested, agreeing that the lien of Lender's deed of trust
shall be or remain subject and subordinate to the rights of Tenant under this
Lease. Notwithstanding any such subordination, Tenant's possession under this
Lease shall not be disturbed if Tenant is not in default and so long as Tenant
shall pay all rent and observe and perform all of the provisions set forth in
this Lease.
18. ENTRY BY LANDLORD. Landlord reserves, and shall at all reasonable times
after at least 24 hours notice (except in emergencies) have the right to enter
the Premises to inspect them; to perform any services to be provided by Landlord
hereunder; to make repairs or provide any services to contiguous tenant(s); to
submit the Premises to prospective purchasers, mortgagers or tenants; to post
notices of nonresponsibility; and to alter, improve or repair the Premises or
other parts of the building, all without abatement of rent, and may erect
scaffolding and other necessary structures in or through the Premises where
reasonably required by the character of the work to be performed; provided,
however, that the business of Tenant shall be interfered with to the least
extent that is reasonably practical. Any entry to the Premises by Landlord for
the purposes provided for herein shall not under any circumstances be construed
or deemed to be a forcible or unlawful entry into or a detainer of the Premises
or an eviction, actual or constructive, of Tenant from the Premises or any
portion thereof.
19. BANKRUPTCY AND DEFAULT. The commencement of a bankruptcy action or
liquidation action or reorganization action or insolvency action or an
assignment of or by Tenant for the benefit of
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creditors, or any similar action undertaken by Tenant, or the insolvency of
Tenant, shall, at Landlord's option, constitute a breach of this Lease by
Tenant. If the trustee or receiver appointed to serve during a bankruptcy,
liquidation, reorganization, insolvency or similar action elects to reject
Tenant's unexpired Lease, the trustee or receiver shall notify Landlord in
writing of its election within thirty (30) days after an order for relief in a
liquidation action or within thirty (30) days after the commencement of any
action.
Within thirty (30) days after court approval of the assumption of this
Lease, the trustee or receiver shall cure (or provide adequate assurance to the
reasonable satisfaction of Landlord that the trustee or receiver shall cure) any
and all previous defaults under the unexpired Lease and shall compensate
Landlord for all actual pecuniary loss and shall provide adequate assurance of
future performance under said Lease to the reasonable satisfaction of Landlord.
Adequate assurance of future performance, as used herein, includes, but shall
not be limited to: (i) assurance of source and payment of rent, and other
consideration due under this Lease; (ii) assurance that the assumption or
assignment of this Lease will not breach substantially any provision, such as
radius, location, use, or exclusivity provision, in any agreement relating to
the above described Premises.
Nothing contained in this section shall affect the existing right of
Landlord to refuse to accept an assignment upon commencement of or in connection
with a bankruptcy, liquidation, reorganization or insolvency action or an
assignment of Tenant for the benefit of creditors or other similar act. Nothing
contained in this Lease shall be construed as giving or granting or creating an
equity in the demised Premises to Tenant. In no event shall the leasehold
estate under this Lease, or any interest therein, be assigned by voluntary or
involuntary bankruptcy proceeding without the prior written consent of Landlord.
In no event shall this Lease or any rights or privileges hereunder be an asset
of Tenant under any bankruptcy, insolvency or reorganization proceedings.
The failure to perform or honor any covenant, condition or representation
made under this Lease shall constitute a default hereunder by Tenant upon
expiration of the appropriate grace period hereinafter provided. Tenant shall
have a period of five (5) days from the date of written notice from Landlord
within which to cure any default in the payment of rental or adjustment thereto.
Tenant shall have a period of thirty (30) days from the date of written notice
from Landlord within which to cure any other default under this Lease. Upon an
uncured default of this Lease by Tenant, Landlord shall have the following
rights and remedies in addition to any other rights or remedies available to
Landlord at law or in equity:
(a) The rights and remedies provided for by California Civil Code
Section 1951.2, including but not limited to, recovery of the worth at the
time of award of the amount by which the unpaid rent for the balance of the
term after the time of award exceeds the amount of rental loss for the same
period that Tenant proves could be reasonably avoided, as computed pursuant to
subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraphs
(2) and (3) of Section 1951.2 of the California Civil Code of the amount of
rental loss that could be reasonably avoided shall be made in the following
manner: Landlord and Tenant shall each select a licensed real estate broker in
the business of renting property of the same type and use as the Premises and
in the same geographic vicinity. Such two real estate brokers shall select a
third licensed real estate broker, and the three licensed real estate brokers
so selected shall determine the amount of the rental loss that could be
reasonably avoided from the balance of the term of this Lease after the time
of award. The decision of the majority of said licensed real estate brokers
shall be final and binding upon the parties hereto.
(b) The rights and remedies provided by California Civil Code Section
which allows Landlord to continue the Lease in effect and to enforce all of
its rights and remedies under this Lease, including the right to recover rent
as it becomes due, for so long as Landlord does not terminate Tenant's right
to possession; acts of maintenance or preservation, efforts to relet the
Premises, or the appointment
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of a receiver upon Landlord's initiative to protect its interests
under this Lease shall not constitute a termination of Tenant's right to
possession.
(c) The right to terminate this Lease by giving notice to Tenant in
accordance with applicable law.
(d) To the extent permitted by law, the right and power to enter the
Premises and remove therefrom all persons and property, to store such property
in a public warehouse or elsewhere at the cost of and for the account of Tenant,
and to sell such property and apply such proceeds therefrom pursuant to
applicable California law, Landlord, may from time to time sublet the Premises
or any part thereof for such term or terms (which may extend beyond the term of
this Lease) and at such rent and such other terms as Landlord in its reasonable
sole discretion may deem advisable, with the right to make alterations and
repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately
liable to pay Landlord, in addition to the indebtedness other than rent due
hereunder, the reasonable cost of such subletting, including, but not limited
to, reasonable attorneys' fees, and any real estate commissions actually paid,
and the cost of such reasonable alterations and repairs incurred by Landlord and
the amount, if any, by which the rent hereunder for the period of such
subletting (to the extent such period does not exceed the term hereof) exceed
the amount to be paid as rent for the Premises for such period or (ii) at the
option of Landlord, rents received from such subletting shall be applied first
to payment of indebtedness other than rent due hereunder from Tenant to
Landlord; second, to the payment of any costs of such subletting and of such
alterations and repairs; third, to payment of rent due and unpaid hereunder; and
the residue, if any, shall be held by Landlord and applied in payment of future
rent as the same becomes due hereunder. If Tenant has been credited with any
rent to be received by such subletting under option (i) and such rent shall not
be promptly paid to Landlord by the subtenant(s), or if such rentals received
from such subletting under option (ii) during any month be less than that to be
paid during that month by Tenant hereunder, Tenant shall pay any such deficiency
to Landlord. Such deficiency shall be calculated and paid monthly. No taking
possession of the Premises by Landlord, shall be construed as an election on its
part to terminate this Lease unless a written notice of such intention be given
to Tenant. Notwithstanding any such subletting without termination, Landlord
may at any time hereafter elect to terminate this Lease for such previous
breach.
(e) The right to have a receiver appointed for Tenant upon
application by Landlord, to take possession of the Premises and to apply any
rental collected from the Premises and to exercise all other rights and remedies
granted to Landlord pursuant to subparagraph d above.
20. ABANDONMENT. Tenant shall not vacate or abandon the Premises at any time
during the term of this Lease and if Tenant shall abandon, vacate or surrender
said Premises, or be dispossessed by the process of law, or otherwise, any
personal property belonging to Tenant and left on the Premises shall be deemed
to be abandoned, at the option of Landlord, except such property as may be
mortgaged to Landlord.
21. DESTRUCTION. In the event the Premises are destroyed in whole or in part
from any cause, except for routine maintenance and repairs and incidental damage
and destruction caused from vandalism and accidents for which Tenant is
responsible under Paragraph 7, Landlord may, at its option:
(a) Rebuild or restore the Premises to their condition prior to the
damage or destruction, or (providing that the Premises is damaged to the extent
of 33 1/3% of the replacement cost);
(b) Terminate this Lease
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If Landlord does not give Tenant notice in writing within thirty (30) days
from the destruction of the Premises of its election to either rebuild and
restore them, or to terminate this Lease, Landlord shall be deemed to have
elected to rebuild or restore them, in which event Landlord agrees, at its
expense except for any deductible, which is the responsibility of Tenant,
promptly to rebuild or restore the Premises to their condition prior to the
damage or destruction. Tenant shall be entitled to a reduction in rent while
such repair is being made in the proportion that the area of the Premises
rendered untenantable by such damage bears to the total area of the Premises. If
Landlord initially estimates that the rebuilding or restoration will exceed 180
days or if Landlord does not complete the rebuilding or restoration within one
hundred eighty (180) days following the date of destruction (such period of time
to be extended for delays caused by the fault or neglect of Tenant or because of
Acts of God, act of public agencies, labor disputes, strikes, fires, freight
embargoes, rainy or stormy weather, inability to obtain materials, supplies or
fuels, acts of contractors or subcontractors, or delay of the contractors or
subcontractors due to such causes or other contingencies beyond the control of
Landlord), then Tenant shall have the right to terminate this Lease by giving
fifteen (15) days prior written notice to Landlord. Notwithstanding anything
herein to the contrary, Landlord's obligation to rebuild or restore shall be
limited to the building and interior improvements constructed by Landlord as
they existed as of the commencement date of the Lease and shall not include
restoration of Tenant's trade fixtures, equipment, merchandise, or any
improvements, alterations or additions made by Tenant to the Premises, which
Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense
provided this Lease is not cancelled according to the provisions above.
Unless this Lease is terminated pursuant to the foregoing provisions, this
Lease shall remain in full force and effect. Tenant hereby expressly waives the
provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the
California Civil Code.
In the event that the building in which the Premises are situated is
damaged or destroyed to the extent of not less than 33 1/3% of the replacement
cost thereof, Landlord may elect to terminate this Lease, whether the Premises
be injured or not. Notwithstanding anything to the contrary herein, Landlord
may terminate this Lease in the event of an uninsured event or if insurance
proceeds are insufficient to cover one hundred percent of the rebuilding costs
net of the deductible.
22. EMINENT DOMAIN. If all or any part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or conveyance
in lieu thereof, this Lease shall terminate as to any portion of the Premises so
taken or conveyed on the date when title vests in the condemnor, and Landlord
shall be entitled to any and all payment, income, rent, award, or any interest
therein whatsoever which may be paid or made in connection with such taking or
conveyance, and Tenant shall have no claim against Landlord or otherwise for the
value of any unexpired term of this Lease. Notwithstanding the foregoing
paragraph, any compensation specifically awarded Tenant for loss of business,
Tenant's personal property, moving cost or loss of goodwill, shall be and remain
the property of Tenant.
If any action or proceeding is commenced for such taking of the Premises or
any part thereof, or if Landlord is advised in writing by any entity or body
having the right or power of condemnation of its intention to condemn the
premises or any portion thereof, then Landlord shall have the right to terminate
this Lease by giving Tenant written notice thereof within sixty (60) days of the
date of receipt of said written advice, or commencement of said action or
proceeding, or taking conveyance, which termination shall take place as of the
first to occur of the last day of the calendar month next following the month in
which such notice is given or the date on which title to the Premises shall vest
in the condemnor.
In the event of such a partial taking or conveyance of the Premises, if the
portion of the Premises taken or conveyed is so substantial that the Tenant
can no longer reasonably conduct its business, Tenant
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shall have the privilege of terminating this Lease within sixty (60) days from
the date of such taking or conveyance, upon written notice to Landlord of its
intention so to do, and upon giving of such notice this Lease shall terminate on
the last day of the calendar month next following the month in which such notice
is given, upon payment by Tenant of the rent from the date of such taking or
conveyance to the date of termination.
If a portion of the Premises be taken by condemnation or conveyance in lieu
thereof and neither Landlord nor Tenant shall terminate this Lease as provided
therein, this Lease shall continue in full force and effect as to the part of
the Premises not so taken or conveyed, and the rent herein shall be apportioned
as of the date of such taking or conveyance so that thereafter the rent to be
paid by Tenant shall be in the ratio that the area of the portion of the
Premises not so taken or conveyed bears to the total area of the Premises prior
to such taking.
23. SALE OR CONVEYANCE BY LANDLORD. In the event of a sale or conveyance of
the Premises or any interest therein, by any owner of the reversion then
constituting Landlord, the transferor shall thereby be released from any further
liability upon any of the terms, covenants or conditions (express or implied)
herein contained in favor of Tenant, and in such event, insofar as such transfer
is concerned, Tenant agrees to look solely to the responsibility of the
successor in interest of such transferor in and to the Premises and this Lease.
This Lease shall not be affected by any such sale or conveyance, and Tenant
agrees to attorn to the successor in interest of such transferor.
24. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the interest of Landlord
in the land and buildings in which the leased Premises are located (whether such
interest of Landlord is a fee title interest or a leasehold interest) is
encumbered by deed of trust, and such interest is acquired by the lender or any
third party through judicial foreclosure or by exercise of a power of sale at
private trustee's foreclosure sale, Tenant hereby agrees to attorn to the
purchaser at any such foreclosure sale and to recognize such purchaser as the
Landlord under this Lease. In the event the lien of the deed of trust securing
the loan from a Lender to Landlord is prior and paramount to the Lease, this
Lease shall nonetheless continue in full force and effect for the remainder of
the unexpired term hereof, at the same rental herein reserved and upon all the
other terms, conditions and covenants herein contained.
25. HOLDING OVER. Any holding over by Tenant after expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall not constitute a renewal or extension of the Lease or
give Tenant any rights in or to the leased Premises except as expressly provided
in this Lease. Any holding over after the expiration or other termination of
the term of this Lease, with the consent of Landlord, shall be construed to be a
tenancy from month to month, on the same terms and conditions herein specified
insofar as applicable except that the monthly Basic Rent shall be increased to
an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent
required during the last month of the Lease term.
26. CERTIFICATE OF ESTOPPEL. Tenant shall at any time upon not less than ten
(10) days prior written notice from Landlord execute, acknowledge and deliver to
Landlord a statement in writing (i) certifying that the Lease is unmodified and
in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect) and the date to which the rent and other charges are paid in
advance, if any, and (ii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any, are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Tenant's failure to deliver such statement within such time shall be conclusive
upon Tenant that this Lease is in full force and effect, without modification
except as may be represented by Landlord; that there are no uncured defaults in
Landlord's performance, and that not more than one month's rent has been paid in
advance.
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27. CONSTRUCTION CHANGES. It is understood that the description of the
Premises and the location of ductwork, plumbing and other facilities therein are
subject to such minor changes as Landlord or Landlord's architect determines to
be desirable in the course of construction of the Premises, and no such changes
shall affect this Lease or entitle Tenant to any reduction of rent hereunder or
result in any liability of Landlord to Tenant. Landlord does not guarantee the
accuracy of any drawing supplied to Tenant and verification of the accuracy of
such drawings rests with Tenant.
28. RIGHT OF LANDLORD TO PERFORM. All terms, covenants and conditions of this
Lease to be performed or observed by Tenant shall be performed or observed by
Tenant at Tenant's sole cost and expense and without any reduction of rent. If
Tenant shall fail to pay any sum of money, or other rent, required to be paid by
it hereunder and such failure shall continue for five (5) days after written
notice by Landlord, or shall fail to perform any other term or covenant
hereunder on its part to be performed, and such failure shall continue for
thirty (30) days after written notice thereof by Landlord, Landlord, without
waiving or releasing Tenant from any obligation of Tenant hereunder, may, but
shall not be obligated to, make any such payment or perform any such other term
or covenant on Tenant's part to be performed. All sums so paid by Landlord and
all necessary costs of such performance by Landlord together with interest
thereon at the rate of the prime rate of interest per annum as quoted by the
Bank of America from the date of such payment on performance by Landlord, shall
be paid (and Tenant covenants to make such payment) to Landlord on demand by
Landlord, and Landlord shall have (in addition to any other right or remedy of
Landlord) the same rights and remedies in the event of nonpayment by Tenant as
in the case of failure by Tenant in the payment of rent hereunder.
29. ATTORNEYS' FEES.
A. In the event that either Landlord or Tenant should bring suit for the
possession of the Premises, for the recovery of any sum due under this Lease, or
because of the breach of any provision of this Lease, or for any other relief
against the other party hereunder, then all costs and expenses, including
reasonable attorneys' fees incurred by the prevailing party therein shall be
paid by the other party, which obligation on the part of the other party shall
be deemed to have accrued on the date of the commencement of such action and
shall be enforceable whether or not the action is prosecuted to judgment.
B. Should Landlord be named as a defendant in any suit brought against
Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant
shall pay to Landlord its costs and expenses incurred in such suit, including a
reasonable attorney's fee.
30. WAIVER. The waiver by either party of the other party's failure to perform
or observe any term, covenant or condition herein contained to be performed or
observed by such waiving party shall not be deemed to be a waiver of such term,
covenant or condition or any subsequent failure of the party failing to perform
or observe the same or any other such term, covenant or condition therein
contained, and no custom or practice which may develop between the parties
hereto during the term hereof shall be deemed a waiver, or in any way affect,
the right of either party to insist upon performance and observance by the other
party in strict accordance with the terms hereof.
31. NOTICES. All notices, demands, requests, advices or designations which may
be or are required to be given by either party to the other hereunder shall be
in writing. All notices, demands, requests, advices or designations by Landlord
to Tenant shall be sufficiently given, made or delivered if personally served on
Tenant by leaving the same at the Premises or if sent by United States certified
or registered mail, postage prepaid, addressed to Tenant at the Premises. All
notices, demands, requests, advices or designations by Tenant to Landlord shall
be sent by United States certified or registered mail, postage prepaid,
addressed to Landlord at its offices at A&P Family Investments, 2560 Mission
College Blvd.,
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Suite 101, Santa Clara, California 95054. Each notice, request, demand, advice
or designation referred to in this paragraph shall be deemed received on the
date of the personal service or mailing thereof in the manner herein provided,
as the case may be.
32. EXAMINATION OF LEASE. Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a lease,
and this instrument is not effective as a lease or otherwise until its execution
and delivery by both Landlord and Tenant.
33. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord fails
to perform obligations required of Landlord within a reasonable time, but in no
event earlier than (30) days after written notice by Tenant to Landlord and to
the holder of any first mortgage or deed of trust covering the Premises whose
name and address shall have heretofore been furnished to Tenant in writing,
specifying wherein Landlord has failed to perform such obligations; provided,
however, that if the nature of Landlord's obligations is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
34. CORPORATE AUTHORITY. If Tenant is a corporation (or a partnership), each
individual executing this Lease on behalf of said corporation (or partnership)
in accordance with the by-laws of said corporation (or partnership in accordance
with the partnership agreement) and that the Lease is binding upon said
corporation (or partnership) in accordance with its terms. If Tenant is a
corporation, Tenant shall, within thirty (30) days after execution of this
Lease, deliver to Landlord a certified copy of the resolution of the Board of
Directors of said corporation authorizing or ratifying the execution of this
Lease.
35. OMITTED.
36. LIMITATION OF LIABILITY. In consideration of the benefits accruing
hereunder, Tenant and all successors and assigns covenant and agree that, in the
event of any actual or alleged failure, breach or default hereunder by Landlord:
(a) the sole and exclusive remedy shall be against Landlord's interest in
the Premises leased herein;
(b) no partner of Landlord shall be sued or named as a party in any suit
or action (except as may be necessary to secure jurisdiction of the partnership;
(c) no service of process shall be made against any partner of Landlord
(except as may be necessary to secure jurisdiction of the partnership);
(d) no partner of Landlord shall be required to answer or otherwise plead
to any service of process;
(e) no judgment will be taken against any partner of Landlord;
(f) any judgment taken against any partner of Landlord may be vacated and
set aside at any time without hearing;
(g) no writ of execution will ever be levied against the assets of any
partner of Landlord;
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(h) these covenants and agreements are enforceable both by Landlord and
also by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements shall be
applicable to any covenant or agreement either expressly contained in this Lease
or imposed by statute or at common law.
37. SIGNS. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the written consent
of Landlord first had and obtained and Landlord shall have the right to remove
any such sign, placard, picture, advertisement, name or notice without notice to
and at the expense of Tenant. If Tenant is allowed to print or affix or in any
way place a sign in, on, or about the Premises, upon expiration or other sooner
termination of this Lease, Tenant at Tenant's sole cost and expense shall both
remove such sign and repair all damage in such a manner as to restore all
aspects of the appearance of the Premises to the condition prior to the
placement of said sign.
All approved signs or lettering on outside doors shall be printed, painted,
affixed or inscribed at the expense of Tenant by a person approved of by
Landlord.
Tenant shall not place anything or allow anything to be placed near the
glass of any window, door partition or wall which may appear unsightly from
outside the Premises.
38. MISCELLANEOUS AND GENERAL PROVISIONS.
A. Use of Building Name. Tenant shall not, without the written consent of
Landlord, use the name of the building for any purpose other than as the address
of the business conducted by Tenant in the Premises.
B. Choice of Law; Severability. This Lease shall in all respects be
governed by and construed in accordance with the laws of the State of
California. If any provision of this Lease shall be invalid, unenforceable or
ineffective for any reason whatsoever, all other provisions hereof shall be and
remain in full force and effect.
C. Definition of Terms. The term "Premises" includes the space leased
hereby and any improvements now or hereafter installed therein or attached
thereto. The term "Landlord" or any pronoun used in place thereof includes the
plural as well as the singular and the successors and assigns of Landlord. The
term "Tenant" or any pronoun used in place thereof includes the plural as well
as the singular and individuals, firms, associations, partnerships and
corporations, and their and each of their respective heirs, executors,
administrators, successors and permitted assigns, according to the context
hereof, and the provisions of this Lease shall inure to the benefit of and bind
such heirs, executors, administrators, successors and permitted assigns.
The term "person" includes the plural as well as the singular and
individuals, firms, associations, partnerships and corporations. Words used in
any gender include other genders. If there be more than one Tenant the
obligations of Tenant hereunder are joint and several. The paragraph headings
of this Lease are for convenience of reference only and shall have no effect
upon the construction or interpretation of any provision hereof.
D. Time of Essence. Time is of the essence of this Lease and of each and
all of its provisions.
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E. Quitclaim. At the expiration or earlier termination of this Lease,
Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days
after written demand from Landlord to Tenant, any quitclaim deed or other
document required by any reputable title company, licensed to operate in the
State of California, to remove the cloud or encumbrance created by this Lease
from the real property of which Tenant's Premises are a part.
F. Incorporation of Prior Agreements; Amendments. This instrument along
with any exhibits and attachments hereto constitutes the entire agreement
between Landlord and Tenant relative to the Premises and this agreement and the
exhibits and attachments may be altered, amended or revoked only by an
instrument in writing signed by both Landlord and Tenant. Landlord and Tenant
agree hereby that all prior or contemporaneous oral agreements between and among
themselves and their agents or representatives relative to the leasing of the
Premises are merged in or revoked by this agreement.
G. Recording. Neither Landlord nor Tenant shall record this Lease or a
short form memorandum hereof without the consent of the other.
H. Amendments for Financing. Tenant further agrees to execute any
amendments required by a lender to enable Landlord to obtain financing, so long
as Tenant's rights hereunder are not substantially affected.
I. Additional Paragraphs. Paragraphs 39 through 52 are added hereto and
are included as a part of this Lease.
J. Clauses, Plats and Riders. Clauses, plats and riders, if any, signed
by Landlord and Tenant and endorsed on or affixed to this Lease are a part
hereof.
K. Diminution of Light, Air or View. Tenant covenants and agrees that no
diminution or shutting off of light, air or view by any structure which may be
hereafter erected (whether or not by Landlord) shall in any way affect this
Lease, entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year last written below.
LANDLORD: TENANT:
A&P FAMILY INVESTMENTS ATWEB, INC.
a California general partnership a California corporation
General Partner:
By: /s/
------------------------------
By: /s/ Title: CFO
------------------------------ ------------------------------
John Arrillaga, Trustee
Type or Print Name
--------------------
Date: 12/29/97
---------------------------- Date: 12/29/97
------------------------------
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Paragraphs 39 through 52 to Lease Agreement dated December 18, 1997, By and
Between A&P Family Investments, a California general partnership, as Landlord,
and AtWeb, Inc., a California corporation, as Tenant for 4,793 + Square Feet of
-
Space Located at 686 W. Maude Avenue, Suite 103, Sunnyvale, California 94086.
39. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate
sum of TWO HUNDRED THIRTY FIVE THOUSAND EIGHT HUNDRED FIFTEEN AND 60/100 DOLLARS
($235,815.60) shall be payable as follows:
On February 1, 1998, the sum of NINE THOUSAND FIVE HUNDRED EIGHTY SIX AND
NO/100 DOLLARS ($9,586.00) shall be due, and a like sum due on the first day of
each month thereafter, through and including January 1, 1999.
On February 1, 1999, the sum of TEN THOUSAND SIXTY FIVE AND 30/100 DOLLARS
($10,065.30) shall be due, and a like sum due on the first day of each month
thereafter, through and including January 1, 2000; or until the entire aggregate
sum of TWO HUNDRED THIRTY FIVE THOUSAND EIGHT HUNDRED FIFTEEN AND 60/100 DOLLARS
($235,815.60) has been paid.
40. EARLY OCCUPANCY: Tenant shall have the right to occupy the Premises prior
to the scheduled Lease Commencement Date. This Lease shall commence and Tenant
shall pay to Landlord, effective as of the date Tenant so occupies the Premises,
all Additional Rent expenses which are Tenant's responsibility hereunder
(however, Tenant shall not be responsible for paying Basic Rent during the early
occupancy period), and Tenant shall be obligated to perform, and be bound by,
each and every term, covenant and condition of this Lease. In the event Tenant
occupies the Premises prior to February 1, 1998, the Term of this Lease will be
extended to include the early occupancy period (i.e. If Tenant occupies said
space on January 1, 1998, the Lease Term will be extended for one month from a
two year Term to a two year one month Term).
41. "AS-IS" BASIS: It is hereby agreed that the Premises leased hereunder is
leased strictly on an "as-is" basis and in its present condition, and in the
configuration as shown on Exhibit B attached hereto, and by reference made a
---------
part hereof. It is specifically agreed between the parties that Landlord shall
not be required to make, nor be responsible for any cost, in connection with any
repair, restoration, and/or improvement to the Premises in order for this Lease
to commence, or thereafter, throughout the Term of this Lease. Notwithstanding
anything to the contrary within this Lease, Landlord makes no warranty or
representation of any kind or nature whatsoever as to the condition or repair of
the Premises, nor as to the use or occupancy which may be made thereof.
42. RULES AND REGULATIONS AND COMMON AREA: Subject to the terms and conditions
of this Lease and such Rules and Regulations as Landlord may from time to time
prescribe, Tenant and Tenant's employees, invitees and customers shall, in
common with other occupants of the Parcel/Building in which the premises are
located, and their respective employees, invitees and customers, and others
entitled to the use thereof, have the non-exclusive right to use the access
roads, parking areas, and facilities provided and designated by Landlord for the
general use and convenience of the occupants of the Parcel/Building in which the
Premises are located, which areas and facilities are referred to herein as
"Common Area". This right shall terminate upon the termination of this Lease.
Landlord reserves the right from time to time to make changes in the shape,
size, location, amount and extent of Common Area. Landlord further reserves the
right to promulgate such reasonable rules and regulations relating to the use of
the Common Area, and any part or parts thereof, as Landlord may deem appropriate
for the best interests of the occupants of the Parcel/Building. Such Rules and
Regulations may be amended by Landlord from time to time, with or without
advance notice, and all amendments shall be effective upon
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delivery of a copy to Tenant. Landlord shall not be responsible to Tenant for
the non-performance by any other tenant or occupant of the Parcel/Building of
any of said Rules and Regulations.
Landlord shall operate, manage and maintain the Common Area. The manner in
which the Common Area shall be maintained and the expenditures for such
maintenance shall be at the discretion of Landlord.
43. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF
THE PARCEL AND BUILDING IN WHICH THE PREMISES ARE LOCATED: As Additional Rent
and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord
Tenant's proportionate share (calculated on a square footage or other equitable
basis as calculated by Landlord) of all expenses of operation, management,
maintenance and repair of the Common Areas of the Parcel including, but not
limited to, license, permit, and inspection fees; security; utility charges
associated with exterior landscaping and lighting (including water and sewer
charges); all charges incurred in the maintenance and replacement of landscaped
areas, lakes, parking lots and paved areas (including repairs, replacement,
resealing and restriping), sidewalks, driveways, maintenance, repair and
replacement of all fixtures and electrical, mechanical and plumbing systems;
supplies, materials, equipment and tools; the cost of capital expenditures which
have the effect of reducing operating expenses, provided, however, that in the
event Landlord makes such capital improvements, Landlord may amortize its
investment in said improvements (together with interest at the rate of fifteen
(15%) percent per annum on the unamortized balance) as an operating expense in
accordance with standard accounting practices, provided, that such amortization
is not at a rate greater than the anticipated savings in the operating expenses.
As Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant
shall pay its proportionate share (calculated on a square footage or other
equitable basis as calculated by Landlord) of the cost of operation (including
common utilities), management, maintenance, and repair of the building
(including structural and common areas such as lobbies, restrooms, janitor's
closets, hallways, elevators, mechanical and telephone rooms, stairwells,
entrances, spaces above the ceilings and janitorization of said common areas) in
which the Premises are located. The maintenance items herein referred to
include, but are not limited to, all windows, window frames, plate glass,
glazing, truck doors, main plumbing systems of the building (such as water drain
lines, sinks, toilets, faucets, drains, showers and water fountains), main
electrical systems (such as panels and conduits), heating and airconditioning
systems (such as compressors, fans, air handlers, ducts, boilers, heaters),
structural elements and exterior surfaces of the building; store fronts, roof,
downspouts, building common area interiors (such as wall coverings, window
coverings, floor coverings and partitioning), ceilings, building exterior doors,
skylights (if any), automatic fire extinguishing systems, and elevators (if
any); license, permit and inspection fees; security, supplies, materials,
equipment and tools; the cost of capital expenditures which have the effect of
reducing operating expenses, provided, however, that in the event Landlord makes
such capital improvements, Landlord may amortize its investment in said
improvements (together with interest at the rate of fifteen (15%) percent per
annum on the unamortized balance) as an operating expense in accordance with
standard accounting practices, provided, that such amortization is not at a rate
greater than the anticipated savings in the operating expenses. Tenant hereby
waives all rights hereunder, and benefits of, subsection 1 of Section 1932 and
Sections 1941 and 1942 of the California Civil Code and under any similar law,
statute or ordinance now or hereafter in effect.
"Additional Rent" as used herein shall not include Landlord's debt repayments;
interest on charges, expenses directly or indirectly incurred by Landlord for
the benefit of any other tenant; cost for the installation of partitioning or
any other tenant improvements; cost of attracting tenants; depreciation;
interest; or executive salaries.
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44. UTILITIES OF THE BUILDING IN WHICH THE PREMISES ARE LOCATED: As Additional
Rent and in accordance with paragraph 4D of this Lease Tenant shall pay its
proportionate share (calculated on a square footage or other equitable basis as
calculated by Landlord) of the cost of all utility charges such as water, gas,
electricity, (telephone, telex and other electronic communications service, if
applicable) sewer service, waste pick-up and any other utilities, materials or
services furnished directly to the building in which the Premises are located,
including, without limitation, any temporary or permanent utility surcharge or
other exactions whether or not hereinafter imposed.
Landlord shall not be liable for and Tenant shall not be entitled to any
abatement or reduction of rent by reason of any interruption or failure of
utility services to the Premises when such interruption or failure is caused by
accident, breakage, repair, strikes, lockouts, or other labor disturbances or
labor disputes of any nature, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord.
Provided that Tenant is not in default in the performance or observance of any
of the terms, covenants or conditions of this Lease to be performed or observed
by it, Landlord shall furnish to the Premises between the hours of 8:00 am and
6:00 pm, Mondays through Fridays (holidays excepted) and subject to the rules
and regulations of the Common Area hereinbefore referred to, reasonable
quantities of water, gas, and electricity suitable for the intended use of the
Premises and heat and airconditioning required in Landlord's judgment for the
comfortable use and occupation of the Premises for such purposes. Tenant agrees
that at all times it will cooperate fully with Landlord and abide by all
regulations and requirements that Landlord may prescribe for the proper
functioning and protection of the building heating, ventilating and
airconditioning systems. Whenever heat generating machines, equipment, or any
other devices (including exhaust fans) are used in the Premises by Tenant which
affect the temperature or otherwise maintained by the airconditioning system,
Landlord shall have the right to install supplementary airconditioning units in
the Premises and the cost thereof, including the cost of installation and the
cost of operation and maintenance thereof, shall be paid by Tenant to Landlord
upon demand by Landlord. Tenant will not, without the written consent of
Landlord, use any apparatus or device in the Premises (including, without
limitation), electronic data processing machines or machines using current in
excess of 110 Volts which will in any way increase the amount of electricity,
gas, water or airconditioning usually furnished or supplied to premises being
used as general office space, or connect with electric current (except through
existing electrical outlets in the Premises), or with gas or water pipes any
apparatus or device for the purposes of using electric current, gas, or water.
If Tenant shall require water, gas, or electric current in excess of that
usually furnished or supplied to premises being used as general office space,
Tenant shall first obtain the written consent of Landlord, which consent shall
not be unreasonably withheld and Landlord may cause an electric current, gas or
water meter to be installed in the Premises in order to measure the amount of
electric current, gas or water consumed for any such excess use. The cost of
any such meter and of the installation, maintenance and repair thereof, all
charges for such excess water, gas and electric current consumed (as shown by
such meters and at the rates then charged by the furnishing public utility); and
any additional expense incurred by Landlord in keeping account of electric
current, gas, or water so consumed shall be paid by Tenant, and Tenant agrees to
pay Landlord therefor promptly upon demand by Landlord.
45. PARKING: Tenant shall have the right to the nonexclusive use of nineteen
(19) parking spaces in the common parking area of the building. Tenant agrees
that Tenant, Tenant's employees, agents, representatives, and/or invitees shall
not use parking spaces in excess of said 19 parking spaces allocated to Tenant
hereunder. Landlord shall have the right, at Landlord's sole discretion, to
specifically designate the location of Tenant's parking spaces within the common
parking area of the building in the event of a dispute among the tenants
occupying the building referred to herein, in which event Tenant agrees that
Tenant, Tenant's employees, agents, representatives and/or invitees shall not
use any parking spaces other than those parking spaces specifically designated
by Landlord for Tenant's use. Said parking spaces, if specifically designated
by Landlord to Tenant, may be relocated by Landlord at any time, and from time
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to time. Landlord reserves the right, at Landlord's sole discretion, to rescind
any specific designation of parking spaces, thereby returning Tenant's parking
spaces to the common parking area. Landlord shall give Tenant written notice of
any change in Tenant's parking spaces. Tenant shall not, at any time, park or
permit to be parked, any trucks or vehicles adjacent to the loading area so as
to interfere in any way with the use of such areas, nor shall Tenant, at any
time, park or permit the parking of Tenant's trucks and other vehicles or the
trucks or vehicles of Tenant's suppliers or others, in any portion of the common
areas not designated by Landlord for such use by Tenant. Tenant shall not park
nor permit to be parked, any inoperative vehicles or equipment on any portion of
the common parking area or other common areas of the building. Tenant agrees to
assume responsibility for compliance by its employees with the parking provision
contained herein. If Tenant or its employees park in other than designated
parking areas, then Landlord may charge Tenant, as an additional charge, and
Tenant agrees to pay Ten Dollars ($10.00) per day for each day or partial day
each such vehicle is parking in any area other than that designated. Tenant
hereby authorizes Landlord, at Tenant's sole expense, to tow away from the
building any vehicle belonging to Tenant or Tenant's employees parked in
violation of these provisions, or to attach violation stickers or notices to
such vehicles. Tenant shall use the parking area for vehicle parking only and
shall not use the parking areas for storage.
46. ASSESSMENT CREDITS. The demised property herein may be subject to a
special assessment levied by the City of Sunnyvale as part of an Improvement
District. As a part of said special assessment proceedings (if any), additional
bonds were or may be sold and assessments were or may be levied to provide for
construction contingencies and reserve funds. Interest shall be earned on such
funds created for contingencies and on reserve funds which will be credited for
the benefit of said assessment district. To the extent surpluses are created in
said district through unused contingency funds, interest earnings or reserve
funds, such surpluses shall be deemed the property of Landlord. Notwithstanding
that such surpluses may be credited on assessments otherwise due against the
Leased Premises, Tenant shall pay to Landlord, as additional rent if, and at the
time of any such credit of surpluses, an amount equal to all such surpluses so
credited. For example: if (i) the property is subject to an annual assessment
of $1,000.00, and (ii) a surplus of $200.00 is credited towards the current
year's assessment which reduces the assessment amount shown on the property tax
bill from $1,000.00 to $800.00, Tenant shall, upon receipt of notice from
Landlord, pay to Landlord said $200.00 credit as Additional Rent.
47. ASSIGNMENT AND SUBLETTING (CONTINUED): Any and all sublease agreement(s)
between Tenant and any and all subtenant(s) (which agreements must be consented
to by Landlord, pursuant to the requirements of this Lease) shall contain the
following language:
"If Landlord and Tenant jointly and voluntarily elect, for any reason
whatsoever, to terminate the Master Lease prior to the scheduled Master
Lease termination date, then this Sublease (if then still in effect) shall
terminate concurrently with the termination of the Master Lease. Subtenant
expressly acknowledges and agrees that (1) the voluntary termination of the
Master Lease by Landlord and Tenant and the resulting termination of this
Sublease shall not give Subtenant any right or power to make any legal or
equitable claim against Landlord, including without limitation any claim
for interference with contract or interference with prospective economic
advantage, and (2) Subtenant hereby waives any and all rights it may have
under law or at equity against Landlord to challenge such an early
termination of the Sublease, and unconditionally releases and relieves
Landlord, and its officers, directors, employees and agents, from any and
all claims, demands, and/or causes of action whatsoever (collectively,
("Claims"), whether such matters are known or unknown, latent or apparent,
suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may
have arising out of or in connection with any such early termination of
this Sublease. Subtenant knowingly and intentionally waives any and all
protection which is or may be given by Section 1542 of the California Civil
Code which provides as follows: "A general release does not extend to
claims which the creditor does not
24
<PAGE>
know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with
debtor."
The term of this Sublease is therefore subject to early termination.
Subtenant's initials here below evidence (a) Subtenant's consideration or
and agreement to this early termination provision, (b) Subtenant's
acknowledgment that, in determining the net benefits to be derived by
Subtenant under the terms of this Sublease, Subtenant has anticipated the
potential for early termination, and (c) Subtenant's agreement to the
general waiver and release of Claims above.
Initials: ____________ Initials: ____________
Subtenant Tenant
48. BANKRUPTCY AND DEFAULT: Paragraph 19 is modified to provide that with
respect to non-monetary defaults not involving Tenant's failure to pay Basic
Rent or Additional Rent, Tenant shall not be in default of any non-monetary
obligation if (i) more than thirty (30) days is required to cure such non-
monetary default, and (ii) Tenant commences cure of such default as soon as
reasonably practicable after receiving written notice of such default from
Landlord and thereafter continuously and with due diligence prosecutes such cure
to completion.
49. ABANDONMENT: Paragraph 20 is modified to provide that Tenant shall not be
in default under the Lease if it leaves all or any part of Premises vacant so
long as (i) Tenant is performing all of its other obligations under the Lease
including the obligation to pay Basic Rent and Additional Rent, (ii) Tenant
provides on-site security during normal business hours for those parts of the
Premises left vacant; (iii) such vacancy does not materially and adversely
affect the validity or coverage of any policy of insurance carried by Landlord
with respect to the Premises, and (iv) the utilities and heating and ventilation
system are operated and maintained to the extent necessary to prevent damage to
the Premises or its systems.
50. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to
the existence or use of "Hazardous Materials" (as defined herein) on, in, under
or about the Premises and real property located beneath said Premises and the
common areas of the Parcel, which includes the entire parcel of land on which
the Premises are located as shown in Green on Exhibit A attached hereto
---------
(hereinafter collectively referred to as the "Property"):
A. As used herein, the term "Hazardous Materials" shall mean any material,
waste, chemical mixture or byproduct which is or hereafter is defined, listed or
designated under Environmental Laws (defined below) as a pollutant, or as a
contaminant, or as a toxic or hazardous substance, waste or material, or any
other unwholesome, hazardous, toxic biohazardous, or radioactive material,
waste, chemical, mixture or byproduct, or which is listed, regulated or
restricted by any Environmental Law (including, without limitation, petroleum
hydrocarbons or any distillates or derivatives or fractions thereof,
polychlorinated biphenyls, or asbestos). As used herein, the term
"Environmental Laws" shall mean any applicable Federal, State or California or
local government law (including common law), statute, regulation, rule,
ordinance, permit, license, order, requirement, agreement, or approval, or any
determination, judgment, directive, or order of any executive or judicial
authority at any level of Federal, State of California or local government
(whether now existing or subsequently adopted or promulgated) relating to
pollution or the protection of the environment, ecology, natural resources, or
public health and safety.
B. Tenant shall obtain Landlord's written consent, which may be withheld
in Landlord's discretion, prior to the occurrence of any Tenant's Hazardous
Materials Activities (defined below); provided, however, that Landlord's consent
shall not be required for normal use in compliance with
25
<PAGE>
applicable Environmental Laws of customary household and office supplies (Tenant
shall first provide Landlord with a list of said materials use), such as mild
cleaners, lubricants and copier toner. As used herein, the term "Tenant's
Hazardous Materials Activities" shall mean any and all use, handling,
generation, storage, disposal, treatment, transportation, release, discharge, or
emission of any Hazardous Materials on, in, beneath, to, from, at or about the
Property, in connection with Tenant's use of the Property, or by Tenant or by
any of Tenant's agents, employees, contractors, vendors, invitees, visitors or
its future subtenants or assignees. Tenant agrees that any and all Tenant's
Hazardous Materials Activities shall be conducted in strict, full compliance
with applicable Environmental Law at Tenant's expense, and shall not result in
any contamination of the Property or the environment. Tenant agrees to provide
Landlord with prompt written notice of any spill or release of Hazardous
Materials at the Property during the term of the Lease of which Tenant becomes
aware, and further agrees to provide Landlord with prompt written notice of any
violation of Environmental Laws in connection with Tenant's Hazardous Materials
Activities of which Tenant becomes aware. If Tenant's Hazardous Materials
Activities involve Hazardous Materials other than normal use of customary
household and office supplies, Tenant also agrees at Tenant's expense: (i) to
install such Hazardous Materials monitoring, storage and containment devices as
Landlord reasonably deems necessary (Landlord shall have no obligation to
evaluate the need for any such installation or require any such installation);
(ii) provide Landlord with a written inventory of such Hazardous Materials,
including an update of same each year upon the anniversary date of the
Commencement Date of the Lease ("Anniversary Date"), and (iii) on each
Anniversary Date, to retain a qualified environmental consultant, acceptable to
Landlord, to evaluate whether Tenant is in compliance with all applicable
Environmental Laws with respect to Tenant's Hazardous Materials Activities.
Tenant, at its expense, shall submit to Landlord, a report from such
environmental consultant which discusses the environmental consultant's findings
within two (2) months of each Anniversary Date. Tenant, at its expense, shall
promptly undertake and complete any and all steps necessary, and in full
compliance with applicable Environmental Laws, to fully correct any and all
problems or deficiencies identified by the environmental consultant, and
promptly provide Landlord with documentation of all such corrections.
C. Prior to termination or expiration of the Lease, Tenant at its expense,
shall (i) properly remove from the Property all Hazardous Materials which come
to be located at the Property in connection with Tenant's Hazardous Materials
Activities, and (ii) fully comply with and complete all facility closure
requirements of applicable Environmental Laws regarding Tenant's Hazardous
Materials Activities, including but not limited to (x) properly restoring and
repairing the Property to the extent damaged by such closure activities, and (y)
obtaining from the local Fire Department or other appropriate governmental
authority with jurisdiction a written concurrence that closure has been
completed in compliance with applicable Environmental Laws. Tenant shall
promptly provide Landlord with copies of any claims, notices, work plans, data
and reports prepared, received or submitted in connection with any such closure
activities.
D. If Landlord, in its sole discretion, believes that the Property has
become contaminated as a result of Tenant's Hazardous Materials Activities,
Landlord in addition to any other rights it may have under this Lease or under
Environmental Laws or other laws, may enter upon the Property and conduct
inspection, sampling and analysis, including but not limited to obtaining and
analyzing samples of soil and groundwater, for the purpose of determining the
nature and extent of such contamination. Tenant shall promptly reimburse
Landlord for the costs of such an investigation, including but not limited to
reasonable attorneys' fees Landlord incurs with respect to such investigation,
that discloses Hazardous Materials contamination for which Tenant is liable
under this Lease. Except as may be required of Tenant by applicable
Environmental Laws, Tenant shall not perform any sampling, testing, or drilling
to identify the presence of any Hazardous Materials at the Property, without
Landlord's prior written consent which may be withheld in Landlord's discretion.
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
sampling, testing or drilling performed pursuant to the preceding sentence.
26
<PAGE>
E. Tenant shall indemnify, defend (with legal counsel acceptable to
Landlord, whose consent shall not unreasonably be withheld) and hold harmless
Landlord, its employees, assigns, successors, successors-in-interest, agents and
representatives from and against any and all claims (including but not limited
to third party claims from a private party or a government authority),
liabilities, obligations, losses, causes of action, demands, governmental
proceedings or directives, fines, penalties, expenses, costs (including but not
limited to reasonable attorneys', consultants' and other agents' fees and
costs), and damages, which arise from or relate to: (i) Tenant's Hazardous
Materials Activities; (ii) any Hazardous Materials contamination caused by
Tenant prior to the Commencement Date of the Lease; or (iii) the breach of any
obligation of Tenant under this Paragraph 50 (collectively, "Tenant's
Environmental Indemnification"). Tenant's Environmental Indemnification shall
include but is not limited to the obligation to promptly and fully reimburse
Landlord for losses in or reductions to rental income, and diminution in fair
market value of the Property. Tenant's Environmental Indemnification shall
further include but is not limited to the obligation to diligently and properly
implement to completion, at Tenant's expense, any and all environmental
investigation, removal, remediation, monitoring, reporting, closure activities,
or other environmental response action (collectively, "Response Actions").
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
Response Actions.
It is agreed that the Tenant's responsibilities related to Hazardous Materials
will survive the expiration or termination of this Lease and that Landlord may
obtain specific performance of Tenant's responsibilities under this Paragraph
50.
51. CONSENT: Whenever the consent of one party to the other is required
hereunder, such consent shall not be unreasonably withheld.
52. AUTHORITY TO EXECUTE: The parties executing this Lease Agreement hereby
warrant and represent that they are properly authorized to execute this Lease
Agreement and bind the parties on behalf of whom they execute this Lease
Agreement and to all of the terms, covenants and conditions of this Lease
Agreement as they relate to the respective parties hereto.
27
<PAGE>
AMENDMENT NO. 1
TO LEASE
THIS AMENDMENT NO. 1 is made and entered into this 27th day of May, 1998,
by and between A&P Family Investments, as LANDLORD, and Atweb, Inc., a
California corporation, as TENANT.
RECITALS
A. WHEREAS, by Lease Agreement dated December 18, 1997 Landlord leased to
Tenant approximately 4,793+ square feet of that certain 33,948+ square foot
- -
building located at 686 W. Maude Avenue, Suite 103, Sunnyvale, California, the
details of which are more particularly set forth in said December 18, 1997 Lease
Agreement, and
B. WHEREAS, it is now the desire of the parties hereto to amend the Lease
by (i) increasing the square footage of the Leased Premises by 8,976+ square
-
feet effective July 1, 1998, (ii) extending the Lease Term for an additional
three years and five months, (iii) amending the Basic Rent schedule and
Aggregate Rent accordingly, (iv) increasing the Security Deposit required under
the Lease, (v) increasing Tenant's non-exclusive parking spaces, (vi) and
amending Lease Paragraph 16 ("Assignment and Subletting") of said Lease
Agreement as hereinafter set forth.
AGREEMENT
NOW THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and in consideration of the hereinafter mutual promises, the
parties hereto do agree as follows:
1. INCREASED PREMISES: Subject to Paragraph 2 below, effective July 1,
------------------
1998, the size of the Leased Premises will be increased by 8,976+ square feet
-
("Increased Space"), or from 4,793+ square feet to 13,769+ square feet of space.
- -
Total said Premises are more particularly shown within the area outlined in Red
on Exhibit A. The entire parcel, of which the Leased Premises is a part, is
---------
shown within the area outlined in Green on Exhibit A. The additional 8,976+
--------- -
square feet of space is leased on an "as-is" basis, in its present condition and
configuration, as set forth in Blue on Exhibit B attached hereto, with the
---------
entire interior leased Premises shown in Red on Exhibit B.
---------
2. AMENDMENT SUBJECT TO LANDLORD'S OBTAINING TERMINATION AGREEMENT WITH
--------------------------------------------------------------------
CURRENT TENANT FOR CURRENT TENANT'S SPACE: This Amendment is subject to
- -----------------------------------------
Landlord obtaining, from Manex Systems, Inc. ("Manex"), the current tenant
occupying the Increased Space to be leased hereunder, a Termination Agreement
satisfactory to Landlord on or before June 30, 1998. In the event Landlord is
unable to obtain said satisfactory Termination Agreement on or before June 30,
1998, and/or in the event Manex fails to timely vacate the Increased Space and
surrender same to Landlord free and clear of its occupancy, this Amendment
shall, at Landlord's option: a) be rescinded, or b) the Commencement Date of
the Increased Premises hereof shall be modified to reflect the date Landlord so
obtains said satisfactory Termination Agreement and receives possession of the
Increased Premises free and clear of Manex's occupancy; provided, however, that
said period of delay caused by Manex shall not extend beyond September 28, 1998.
In the event Landlord cannot deliver said Increased Premises by September 28,
1998, this Amendment No. 1 shall be automatically rescinded.
3. TERM OF LEASE: Subject to Paragraph 2 above, it is agreed between the
-------------
parties that the Term of said Lease Agreement shall be extended for an
additional three (3) year five (5) month period, and the Lease Termination Date
shall be changed from January 31, 2000 to June 30, 2003.
1
<PAGE>
4. BASIC RENT SCHEDULE: Subject to Paragraph 2 above, the Basic Rent
-------------------
schedule, as shown in Paragraph 4(A) of the Lease Agreement shall be amended as
follows:
On July 1, 1998, the sum of TWENTY THREE THOUSAND FIFTY AND NO/100 DOLLARS
($23,050.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including January 1, 1999.
On February 1, 1999, the sum of TWENTY THREE THOUSAND FIVE HUNDRED TWENTY
NINE AND 30/100 DOLLARS ($23,529.30) shall be due, and a like sum due on the
first day of each month thereafter, through and including June 1, 1999.
On July 1, 1999, the sum of TWENTY FOUR THOUSAND FOUR HUNDRED TWENTY SIX
AND 90/100 DOLLARS ($24,426.90) shall be due, and a like sum due on the first
day of each month thereafter, through and including January 1, 2000.
On February 1, 2000, the sum of TWENTY FOUR THOUSAND NINE HUNDRED SIX AND
20/100 DOLLARS ($24,906.20) shall be due, and a like sum due on the first day of
each month thereafter, through and including June 1, 2000.
On July 1, 2000, the sum of TWENTY FIVE THOUSAND EIGHT HUNDRED THREE AND
80/100 DOLLARS ($25,803.80) shall be due, and a like sum due on the first day of
each month thereafter, through and including January 1, 2001.
On February 1, 2001, the sum of TWENTY SIX THOUSAND TWO HUNDRED EIGHTY
THREE AND 10/100 DOLLARS ($26,283.10) shall be due, and a like sum due on the
first day of each month thereafter, through and including June 1, 2001.
On July 1, 2001, the sum of TWENTY SEVEN THOUSAND ONE HUNDRED EIGHTY AND
70/100 DOLLARS ($27,180.70) shall be due, and a like sum due on the first day of
each month thereafter, through and including January 1, 2002.
On February 1, 2002, the sum of TWENTY SEVEN THOUSAND SIX HUNDRED SIXTY AND
NO/100 DOLLARS ($27,660.00) shall be due, and a like sum due on the first day of
each month thereafter, through and including June 1, 2002.
On July 1, 2002, the sum of TWENTY EIGHT THOUSAND FIVE HUNDRED FIFTY SEVEN
AND 60/100 DOLLARS ($28,557.60) shall be due, and a like sum due on the first
day of each month thereafter, through and including January 1, 2003.
On February 1, 2003, the sum of TWENTY NINE THOUSAND THIRTY SIX AND 90/100
DOLLARS ($29,036.90) shall be due, and a like sum due on the first day of each
month thereafter, through and including June 1, 2003.
As a result of the increase in square feet leased and the Extended Term,
the Aggregate Rental shall be increased by $1,372,324.90, or from $235,815.60 to
$1,608,140.50.
5. INCREASED PARKING: Tenant's nonexclusive parking spaces shall be
-----------------
increased by 39 spaces or from 19 spaces to 58 spaces.
6. SECURITY DEPOSIT: Tenant's Security Deposit shall be increased by
----------------
$37,943.20, or from $20,130.60 to $58,073.80, payable upon Tenant's execution of
this Amendment No. 1.
2
<PAGE>
7. ASSIGNMENT AND SUBLETTING: Lease Paragraph 16 ("Assignment and
-------------------------
Subletting") shall be amended to include the following language:
"Notwithstanding the foregoing, Landlord and Tenant agree that it shall not
be unreasonable for Landlord to refuse to consent to a proposed assignment,
sublease or other transfer ("Proposed Transfer") if the Premises or and other
portion of the Property would become subject to additional or different
Government Requirements as a direct or indirect consequence of the Proposed
Transfer and/or the Proposed Transferee's use and occupancy of the Premises and
the Property. However, Landlord may, in its sole discretion, consent to such a
Proposed Transfer where Landlord is indemnified by Tenant and (i) Subtenant or
(ii) Assignee, in form and substance satisfactory to Landlord's counsel, by
Tenant and/or the Proposed Transferee from and against any and all costs,
expenses, obligations and liability arising out of the Proposed Transfer and or
the Proposed Transferee's use and occupancy of the Premises and the Property."
EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and conditions of
said December 18, 1997 Lease Agreement shall remain in full force and effect.
3
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment No. 1
to Lease as of the day and year last written below.
LANDLORD: TENANT:
A&P FAMILY INVESTMENTS ATWEB, INC.
a California corporation
By ____________________________________ By: __________________________
John Arrillaga, Trustee of the Richard
T. Peery 1076 Children Trusts, as its
General Partner ______________________________
Print or Type Name
Date: _________________________________
Title: _______________________
Date:_________________________
4
<PAGE>
Rent Increase Calculations
<TABLE>
<CAPTION>
Space (sq. ft.) 4,793 13,769
Current New
<S> <C> <C> <C> <C> <C>
Jun 9,586.00 2.00 9,586.00 2.00
Jul 9,586.00 2.00 23,050.00 1.67
Aug 9,586.00 2.00 23,050.00 1.67
Sep 9,586.00 2.00 23,050.00 1.67
Oct 9,586.00 2.00 23,050.00 1.67
Nov 9,586.00 2.00 23,050.00 1.67
Dec 9,586.00 2.00 23,050.00 1.67
1999 Jan 9,586.00 2.00 23,050.00 1.67
Feb 10,065.00 2.10 23,529.00 1.71
Mar 10,065.00 2.10 23,529.00 1.71
Apr 10,065.00 2.10 23,529.00 1.71
May 10,065.00 2.10 23,529.00 1.71
Jun 10,065.00 2.10 23,529.00 1.71
Jul 10,065.00 2.10 24,427.00 1.77
Aug 10,065.00 2.10 24,427.00 1.77
Sep 10,065.00 2.10 24,427.00 1.77
Oct 10,065.00 2.10 24,427.00 1.77
Nov 10,065.00 2.10 24,427.00 1.77
Dec 10,065.00 2.10 24,427.00 1.77
2000 Jan 10,065.00 2.10 24,427.00 1.77
Feb 24,906.00 1.81
Mar 24,906.00 1.81
Apr 24,906.00 1.81
May 24,906.00 1.81
Jun 24,906.00 1.81
Jul 25,804.00 1.87
Aug 25,804.00 1.87
Sep 25,804.00 1.87
Oct 25,804.00 1.87
Nov 25,804.00 1.87
Dec 25,804.00 1.87
2001 Jan 25,804.00 1.87
Feb 26,283.00 1.91
Mar 26,283.00 1.91
Apr 26,283.00 1.91
May 26,283.00 1.91
Jun 26,283.00 1.91
Jul 27,181.00 1.97
Aug 27,181.00 1.97
Sep 27,181.00 1.97
Oct 27,181.00 1.97
Nov 27,181.00 1.97
Dec 27,181.00 1.97
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Current New
<S> <C> <C> <C> <C>
2002 Jan 27,181.00 1.97
Feb 27,660.00 2.01
Mar 27,660.00 2.01
Apr 27,660.00 2.01
May 27,660.00 2.01
Jun 27,660.00 2.01
Jul 28,558.00 2.07
Aug 28,558.00 2.07
Sep 28,558.00 2.07
Oct 28,558.00 2.07
Nov 28,558.00 2.07
Dec 28,558.00 2.07
2003 Jan 28,558.00 2.07
Feb 29,037.00 2.11
Mar 29,037.00 2.11
Apr 29,037.00 2.11
May 29,037.00 2.11
Jun 29,037.00 2.11
Totals: 197,468.00 1,569,801.00
</TABLE>
6
<PAGE>
AMENDMENT NO. 2
TO LEASE
THIS AMENDMENT NO. 2 is made and entered into this 27th day of May, 1998,
by and between A&P FAMILY INVESTMENTS, a California general partnership, as
LANDLORD, and MANEX SYSTEMS, INC., a California corporation, as TENANT.
RECITALS
A. WHEREAS, by Lease Agreement dated July 7, 1995 Landlord leased to
Tenant approximately 9,672 + square feet of that certain 34,675 + square foot
- -
building located at 686 W. Maude Avenue, Suite 101, Sunnyvale, California, the
details of which are more particularly set forth in said July 7, 1995 Lease
Agreement, and
B. WHEREAS, said Lease was amended by Amendment No. 1 dated December 26,
1995, which corrected the size of the Leased Premises and the total size of the
Building in which the Premises are located, established the Lease Commencement
Date of August 7, 1995, and adjusting the Basic Rent and Aggregate Rent
accordingly, and,
C. WHEREAS, it is now the desire of the parties hereto to amend the Lease
by terminating said Lease effective June 30, 1998 and amending the Basic Rent
schedule and Aggregate Rent of said Lease Agreement as hereinafter set forth.
AGREEMENT
NOW THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and in consideration of the hereinafter mutual promises, the
parties hereto do agree as follows:
1. TERMINATION OF LEASE: As an accommodation to Tenant, Landlord has
--------------------
agreed to the early termination of said Lease Agreement effective June 30, 1998,
subject to the terms and conditions stated herein. Tenant shall be responsible
for relinquishing the Premises in the condition required under Lease Paragraph 5
("Acceptance and Surrender of Premises") and Lease Paragraph 6 ("Alterations and
Additions"). Prior to Lease Termination, Landlord and Tenant shall conduct a
joint inspection of the Premises to determine the extent of the work required by
Tenant to comply with the provisions of said Paragraphs 5 and 6 ("Restoration
Work"). In lieu of Tenant completing the required Restoration Work, Tenant
agrees to pay to Landlord a fee equal to the total of the estimates received
from Landlord's contractors for the Restoration Work ("Restoration Fee"). Said
Restoration Fee shall be paid by Tenant to Landlord within ten days after Tenant
receives Landlord's statement of said Restoration Fee. Tenant shall be
responsible for paying all Basic Rent and Additional Rent and fulfilling all
Lease obligations as contained in said Lease through the date of termination.
Notwithstanding the above, Tenant's obligations as stated in Lease Paragraphs 14
("Compliance") and 47 ("Hazardous Materials") shall survive the Termination Date
of this Lease.
2. EARLY TERMINATION OF LEASE CONTINGENT UPON LANDLORD OBTAINING AN
----------------------------------------------------------------
AGREEMENT WITH THIRD PARTY TO LEASE SAID PREMISES: Landlord's agreement to
- --------------------------------------------------
allow the early termination of Tenant's Lease is subject to and conditional upon
Landlord obtaining an executed agreement from AtWeb, Inc. ("AtWeb") to lease
said Premises, upon terms and conditions acceptable to Landlord, effective the
day following the early Termination Date of Tenant's Lease. In the event
Landlord is unable to obtain said executed agreement with AtWeb on or before
June 30, 1998, the Termination Date of this Lease shall be modified to reflect
the date Landlord so
1
<PAGE>
obtains said agreement and is able to transfer possession of the Premises to
AtWeb. In the event Landlord does not obtain an executed Lease Agreement with
AtWeb, this Lease shall continue in full force and effect through the scheduled
Lease Termination Date of July 31, 2000 and this Amendment No. 2 shall be
automatically rescinded. In no event shall Tenant's termination date exceed the
original Termination Date of July 31, 2000 (provided Tenant fully complies with
the terms and conditions in Paragraph 5, "Acceptance and Surrender of Premises",
of the Lease Agreement).
3. AGGREGATE RENT: The Aggregate Basic Rent for the Lease shall be
--------------
decreased by $201,511.20 or from $357,682.92 to $156,171.72.
EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and conditions of
said July 7, 1995 Lease Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment No. 2
to Lease as of the day and year last written below.
LANDLORD: TENANT:
A&P FAMILY INVESTMENTS MANEX SYSTEMS, INC.
a California corporation
RICHARD T. PEERY 1976 CHILDREN
TRUSTS
By ___________________________________ By ________________________
John Arrillaga, Trustee, as general partner
Date: ________________________________ ___________________________
Print Name/Title
Date: _____________________
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 25,971
<SECURITIES> 34,846
<RECEIVABLES> 10,770
<ALLOWANCES> 1,296
<INVENTORY> 7,021
<CURRENT-ASSETS> 82,140
<PP&E> 20,641
<DEPRECIATION> 11,840
<TOTAL-ASSETS> 90,941
<CURRENT-LIABILITIES> 18,688
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 70,572
<TOTAL-LIABILITY-AND-EQUITY> 90,941
<SALES> 72,930
<TOTAL-REVENUES> 73,940
<CGS> 32,616
<TOTAL-COSTS> 32,616
<OTHER-EXPENSES> 22,901
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 241
<INCOME-PRETAX> 19,950
<INCOME-TAX> 2,988
<INCOME-CONTINUING> 16,962
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,962
<EPS-BASIC> 1.32
<EPS-DILUTED> 1.22
</TABLE>
