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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________________________
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 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)
DELAWARE 94-3065014
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
477 N. Mathilda Avenue, California 94086
(Address of principal executive offices) (Zip code)
(408) 523-9200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
------------------- ------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
_______________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of registrant's voting and non-voting common
equity held by nonaffiliates of registrant, based upon the closing sale price of
the common stock on February 29, 2000, as reported on the NASDAQ National
Market, was approximately $906,146,914. Shares of common stock held by each
officer, director and holder of 5% or more of the outstanding common stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
Outstanding shares of registrant's common stock, $.001 par value, as of
February 29, 2000: 26,847,260
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive Proxy Statement for registrant's 2000 Annual
Meeting of Stockholders to be filed with the Commission pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
Form are incorporated by reference into Part III of this Form 10-K Report.
================================================================================
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PART I
This report includes a number of forward-looking statements. Such
statements reflect our current views with respect to future events and our
potential financial performance and are subject to risks and uncertainties that
could cause our actual results and financial position to differ materially from
what we say in this report. These factors include, but are not limited to, our
ability to maintain and establish strategic relationships; the risks inherent in
the development and delivery of complex technologies; our ability to attract,
retain and motivate qualified personnel; the emergence of new markets for our
products and services, and our ability to compete in those markets based on
timeliness, cost and market demand; and our limited financial resources. We more
fully discuss these and other risk factors in "Item 7--Management's Discussion
and Analysis of Financial Condition and Operating results--Risk Factors" and
elsewhere in this report.
TOPSwitch, TinySwitch and EcoSmart are trademarks of Power Integrations,
Inc.
Item 1. Business
Overview
We design, develop, manufacture and market proprietary, high-voltage,
analog integrated circuits, commonly referred to as ICs, for use primarily in
alternating current to direct current, or AC to DC, power conversion. We have
targeted high-volume power supply markets including:
. the cellular telephone market;
. the personal computer market;
. the cable and direct broadcast satellite decoder box market; and
. various other consumer and industrial electronics markets.
Our ICs cost-effectively bring the benefits of high levels of integration
to AC to DC switching supplies. We believe that the products in our TOPSwitch
family of high-voltage ICs, introduced in 1994, were the first highly integrated
power conversion ICs to achieve widespread market acceptance. We introduced
TOPSwitch II, an enhanced family of our ICs, in April 1997 and TinySwitch, a
family of more energy-efficient power conversion ICs, in September 1998.
Industry Background
Virtually every electronic device that plugs into a wall socket requires
some type of power supply to convert high-voltage AC, provided by electric
utilities, into low-voltage DC required by the devices. Additionally,
rechargeable, portable products, such as cellular phones and laptop computers,
also need an AC to DC power supply to recharge their batteries.
Before 1970, AC to DC power supplies used large, inefficient transformers,
which operated at low frequencies to convert power from AC to DC. In the 1970s,
the invention of high-voltage discrete semiconductors enabled the development of
a new generation of AC to DC "switching" power supplies, which allowed the use
of smaller, more efficient transformers to lower the voltage. Although these
discrete switchers offered advantages over older technologies, over the years
they have not kept pace with the technological advances made in the electronic
devices they power.
As the pressures from market forces have increased, the limitations of
discrete switchers have become more pronounced. Discrete switchers require
numerous components which limit the power supply designers' ability to reduce
the size, increase the functionality and improve the efficiency of switchers
while at the same time meeting stringent market cost and energy efficiency
requirements. In addition, discrete switchers involve a high level of
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design complexity, which limits the scalability of designs and increases
time-to-market and development risks for new products.
Early attempts to replace discrete switchers with integrated switchers,
using high-voltage analog ICs, did not achieve widespread acceptance in the
marketplace because they were not cost-effective. We addressed this opportunity
in 1994 by introducing our first cost effective IC, TOPSwitch. Our growth since
that time validates our belief that a substantial market opportunity exists for
high-voltage ICs that are cost effective and combine the benefits of integration
that discrete switcher and earlier transformer technologies lack.
Our Highly Integrated Solution
We have developed several families of high-voltage power conversion ICs,
which we believe are the first highly integrated power conversion ICs to achieve
widespread market acceptance. Since introducing our TOPSwitch family of products
in 1994, we have shipped approximately 350 million TOPSwitch ICs, 150 million of
which were shipped in 1999. These patented ICs achieve a high level of system
integration by combining a number of electronic components into a single IC. Our
TOPSwitch and TinySwitch products enable many power supplies in the 0.5 to 150-
watt power range to have a total cost equal to or lower than discrete switchers.
Our TOPSwitch and TinySwitch products offer the following key benefits to power
supplies:
. Fewer Components, Reduced Size and Enhanced Functionality
Our highly integrated TOPSwitch ICs enable the design and
production of cost-effective switchers that use up to 50% fewer
components and have enhanced functionality compared to discrete-
based solutions. For example, our ICs provide thermal and short
circuit protection without increasing system cost, while discrete
switchers must add additional components and cost to provide these
functions.
. Improved Efficiency
Our integrated circuit also improves electrical efficiency, which
reduces power consumption and excess heat generation. Our patented
low-loss, high-voltage device, combined with its control circuitry,
improves overall electrical efficiency during both full operation
and stand-by mode.
. Reduced Time-to-Market
Our integrated circuit makes power supply design simpler and once
customers have created designs using our ICs, they can apply that
design to new products, resulting in a shorter time-to-market and
reduced product development risk.
. Wide Power Range and Scalability
Products in our current TOPSwitch families can address a power
range of 0.5 to 150 watts. The scalable architecture of these ICs
allows switcher designers to adapt their existing TOPSwitch-based
designs to a wide range of products to address many different power
supply markets.
Strategy
Our objective is to be the leading provider of high-voltage power
conversion ICs. We intend to pursue the following strategies to accelerate
adoption of our products:
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. Target High-Volume Markets
Because of our products' scalability and ability to address a wide
power range, a small number of products address a wide variety of
customer needs, allowing us to take advantage of economies of scale
and making us more competitive.
. Focus on Markets that Can Derive Significant Benefits from Integration
We are initially focusing our efforts on those markets that are
particularly sensitive to size, portability, energy efficiency and
time to market issues. We achieved early success in the cellular phone
fast charger market, as cellular phone customers demanded more
portable travel chargers instead of stand-alone desktop chargers. We
have also achieved some success in the desktop PC market due to the
market's demand for stand-by power capability, and in the cable and
direct broadcast satellite decoder box market due to that market's
need for reducing component count and for shortening product design
cycles. As other markets emerge as significant opportunities for our
TOPSwitch products, we intend to focus our resources on the
development and penetration of those markets.
. Deliver Systems Solution and Provide Applications Expertise
To help potential customers decide to purchase our TOPSwitch products,
we offer comprehensive application design support. We provide
extensive application notes and production-ready reference design
boards. We also provide application-engineering support out of our
headquarters and through field application engineering labs located in
China, England, Germany, India, Japan, Korea, Singapore and Taiwan. We
have committed substantial resources to system support by dedicating
approximately 30% of our technical workforce to applications
engineering. We believe our power supply systems expertise and
investment in field applications engineering provide us significant
competitive advantages.
. Extend Technological Leadership in High-Voltage Analog ICs
Our proprietary device structures and fabrication processes as well as
analog circuit designs have resulted in 25 U.S. patents and 33 foreign
patents. These patents, in combination with our other intellectual
property, form the basis of our TOPSwitch and TinySwitch product
families. We recently introduced an enhanced TOPSwitch product family
that provides improved power capability and system cost advantages
while preserving the design simplicity of our original TOPSwitch
products. We continue to improve our device structures, wafer
fabrication processes and analog circuit designs and seek to obtain
additional patents to protect our intellectual property.
. Leverage Patented Technology in Strategic Relationships
We have established relationships with Matsushita Electronics
Corporation, and with OKI Electric Industry in order to take advantage
of these companies' high volume manufacturing resources, and in the
case of Matsushita, generate royalty revenues. Our wafer manufacturing
relationships with Matsushita and OKI enable us to focus on
fundamental high-voltage silicon technology, product design and
marketing while minimizing fixed costs and capital expenditures.
Matsushita also has licensed the right to manufacture our products for
sale in certain geographic regions and for use in its own products.
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Products
Below is a brief description of our products:
. The TOPSwitch Product Families
Our TOPSwitch high-voltage analog IC products are able to meet the
power conversion needs of a wide range of applications within high
volume markets. Sales of TOPSwitch products accounted for 93%, 95% and
97% of our net revenues in 1997, 1998 and 1999, respectively.
. TOPSwitch
The TOPSwitch family consists of 13 products, the first of
which was introduced in 1994. The key benefits of the
TOPSwitch family compared to discrete switchers include
fewer components, reduced size, enhanced functionality and
lower cost in many applications. Our TOPSwitch products
integrate a PWM controller, a high-voltage MOSFET and a
number of other electronic components into a single 3
terminal IC. These products are produced in two high-voltage
versions--a 350-volt version for the 115VAC-switcher
markets, including the United States and Japan, and a 700-
volt version for the 230VAC-switcher markets, including
Europe.
. TOPSwitch II
The TOPSwitch II family currently consists of 11 products,
the first of which was introduced in April 1997. The
TOPSwitch II products further lower the switcher costs by
improving the performance of TOPSwitch and addressing low
power applications. The TOPSwitch II family uses the same
proprietary architecture as the original TOPSwitch family,
enabling switcher designers experienced with TOPSwitch to
take advantage of the TOPSwitch II benefits without
implementing a new architecture.
. TinySwitch
The TinySwitch family currently consists of 5 products, the
first of which was introduced in September 1998. The
TinySwitch family of high voltage ICs is the first of our
new generation chips based on our new EcoSmart technology.
We developed our EcoSmart technology to enable a new class
of light, compact, energy-efficient power supplies to
address the growing global demand to reduce energy waste in
a wide range of electronic products. The TinySwitch product
line topology was specifically designed to address low power
applications of less than 10 watts.
. Other Products
Our products also include our SMP family, our INT family and a limited
number of custom products. Sales of these products accounted for 7%,
5% and 3% of our net revenues in 1997, 1998 and 1999, respectively. We
expect revenue from these products to continue to decline as a
percentage of net revenues.
. SMP
The SMP family is the original line of power conversion
products, which we developed for the AC to DC power supply
market. These products are used in applications where
switcher designers are willing to pay a premium price for
additional features such as variable frequency.
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. INT
The INT products are interface drivers for motor control
applications, which utilize our high-voltage process
technology.
. Custom Products
We also manufacture a limited number of custom products,
including a hook switch for telephones.
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Markets and Customers
Our strategy is to target high-volume power supply markets and to initially
focus on markets that can benefit the most from our highly integrated power
conversion ICs. The following chart shows representative customers and end users
of our products in power supplies in several major market segments.
<TABLE>
<CAPTION>
Market Segment Customers
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<S> <C>
. Cellular Phones
Battery Chargers Eastcom, Ericsson, Hyundai, ICC, Lucky Goldstar,
Motorola and its subsidiaries, Mitsubishi, Nokia,
Phihong Enterprises, Sagem, Samsung Electronics,
Tamura
. Desktop Computers
Stand-by Power Acbel (API), Artesyn, Astec, Compaq, Dell, Delta
Electronics, Hewlett Packard, Hipro, IBM, Intertek,
Liteon, Minebea, Magnetek, SPI, Tiger
. Cable and Direct Broadcast Satellite
Set-top Decoders Acbel (API), Amstrad, General Instruments, Grundig,
Hughes, Magnetek, Nokia, Pace, Pioneer, Samsung,
Scientific Atlanta, Sony
. PC Peripherals
Multi-media Monitor & Audio Harman, JBL, Logitech, Lucky Goldstar, Sony
Universal Serial Bus Nokia, Philips, Samsung, Sony
Removable Mass Storage Iomega, Electronique D2, Imation
. Consumer
TV Daewoo, Lucky Goldstar, Philips, Samsung, Sharp,
Sony, Tatung, Vestel, Xocexo, Zenith
VCR Aiwa, Daewoo, Sony
DVD Shinco, Thakral
. Industrial
Utility Meters Landis & Gyr, MTC, Schlumberger, Siemens
Uninterrupted Power Supply APC, Exide Electronics
. Home Appliances
Washing Machines, Air AKO-Werke, Fisher-Paykel, Kelon, Lucky Goldstar,
Conditioners, Dish Washers, Meide, Miele, Samsung, Shanghai Sinyuan
Vacuum Cleaners
</TABLE>
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Description of Our Primary Markets
. Cellular Phone Chargers
In the cellular phone market, size, portability and more recently,
energy efficiency are key market drivers for these products. We
believe a substantial market opportunity exists for small, energy
efficient power supplies for battery chargers. We estimate the
total available annual market for cell phone chargers was
approximately 300 million units in 1999.
. Desktop Computer Standby Power Supplies
Governmental authorities are promoting computer manufacturers to
use highly efficient stand-by power in new PCs to reduce the PCs'
power consumption when idle. Our TOPSwitch and TinySwitch products
are currently being used in computers to reduce the power consumed
when idle and to meet the market demand for more energy-efficient
computers. We estimate that the annual market for standby power
supplies for desktop PCs was approximately 90 million units in
1999.
. Cable and Direct Broadcast Satellite Decoder Boxes
Cable and direct broadcast satellite decoder box manufacturers are
particularly sensitive to component count, printed circuit board
space and the ability to shorten their product design cycles. Our
TopSwitch products are currently help them solve these problems and
provide other benefits inherent with an integrated solution. We
estimate that the annual market for power supplies in cable and
direct broadcast satellite decoder boxes was approximately 25
million units in 1999.
. Other Markets
Although we currently focus on the above key markets, we also sell
products into a wide variety of other markets, which include PC
peripherals, televisions, VCRs, industrial meters and home
appliances. As these and other markets emerge as significant
opportunities for our IC products, we intend to focus our resources
on the development and penetration of these markets.
Sales, Distribution and Marketing
We sell our products to original equipment manufacturers, OEMs, and
merchant power supply manufacturers through a direct sales staff and through a
worldwide network of independent sales representatives and distributors. We use
sales representatives throughout Asia and Europe. Our international sales
representatives also act as distributors. In the United States, we use one
national distributor and a number of regional sales representatives. We have
sales offices in Laguna Beach, California, Marietta, Georgia and, Wakefield,
Massachusetts, as well as in China, England, Germany, India, Korea and Taiwan.
For 1999, direct sales to OEMs and merchant power supply manufacturers
represented approximately 60% of our net revenues while sales through
distributors accounted for the remaining 40%. All distributors are entitled to
certain return privileges based on sales revenue and are protected from price
reductions affecting their inventories. Our distributors are not subject to
minimum purchase requirements and the sales representatives and distributors can
discontinue marketing any of our products at any time.
Our products are generally incorporated into a customer's power supply at
the design stage. Our sales and marketing efforts are focused on facilitating
the customer's use of our products in the design of new power supplies for
specific applications. An important competitive factor in determining whether a
customer decides to use our products in its designs is our commitment to provide
comprehensive application design support. We publish comprehensive databooks and
design guides and provide to our current and prospective customers extensive
application notes and production-ready reference design boards. In addition, we
provide application-engineering support out of our headquarters, and our field
application engineering labs provide local resources to
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support customers in key geographies. We focus particular efforts on building
relationships with, and providing support to, industry-leading OEMs and merchant
power supply manufacturers. We have committed substantial resources to system
support by dedicating approximately 30% of our technical workforce to
applications engineering.
Our end user base is highly concentrated, and a relatively small number of
OEMs, directly or indirectly through merchant power supply manufacturers,
accounted for a significant portion of our revenue in 1998 and 1999. Motorola is
presently our largest end user. Although the exact dollar amounts and
percentages of sales to Motorola are difficult to ascertain because most of such
sales occur through distributors or indirectly through sales to merchant power
supply manufacturers which, in turn, sell power supplies to Motorola, we
estimate that direct and indirect sales to Motorola accounted for approximately
23% of our net revenues for 1999. We estimate that our top ten customers,
including distributors which resell to Motorola and other large OEMs and
merchant power supply manufacturers, accounted for 67%, 67% and 68% of our net
revenues for 1997, 1998 and 1999, respectively. For 1997, Maxisum (Insight), a
distributor, and Phihong Enterprise, a merchant, accounted for 21% and 15% of
our net revenues, respectively. For 1998, Maxisum and Synnex Technologies, both
distributors, accounted for 22% and 13% of our net revenues, respectively. For
1999, these two distributors accounted for 16% and 11% of our net revenues,
respectively. No other customers accounted for more than 10% of net revenues
during 1997, 1998 and 1999. In 1997, 1998 and 1999, international sales
comprised 81%, 83% and 78%, respectively, of our net revenues.
Sales of our products are generally made pursuant to standard purchase
orders, which are frequently revised to reflect changes in the customer's
requirements. Product deliveries are scheduled upon our receipt of purchase
orders. Generally, these orders allow customers to reschedule delivery dates and
cancel purchase orders without significant penalties. For these reasons, we
believe that purchase orders received, while useful for scheduling production,
are not necessarily reliable indicators of future revenues.
In the Japanese market, we have a license agreement with Matsushita under
which Matsushita sells its versions of our products. While we continue to sell
products to our existing Japanese customers, in April 1997, as part of the
license agreement, we agreed not to pursue new business in Japan until after
June 2000. We believe that this arrangement will better meet our market
penetration and financial objectives in Japan. We support Matsushita's sales
efforts and our existing Japanese customers through our office in Japan.
Technology
. High-Voltage Transistor Structure and Process Technology
We have developed a proprietary high-voltage, power IC technology,
which uses our MOS transistor structure and proprietary process and
has resulted in 7 U.S. patents. The technology enables us to
integrate cost effectively on the same monolithic IC, high-voltage
n-channel transistors with industry standard CMOS and bipolar
components. The IC device structure and the wafer fabrication
process both contribute to the cost effectiveness of our high-
voltage technology. The device structure results in a transistor
conduction capability that is significantly higher than that of
competing technologies. The IC device structure can be implemented
on low cost silicon wafers using relatively large feature sizes, up
to a 3 micron CMOS process, when combined with our proprietary
implant process step.
. IC Design and System Technology
Our proprietary IC designs combine complex control circuits and
high-voltage transistors on the same monolithic IC and have
resulted in 17 U.S. patents. Our IC design technology takes
advantage of our high-voltage process to minimize the die size of
both the high-voltage device and control circuits and improve the
performance of our ICs versus alternative integration technologies.
The combination of our IC design technology and our system level
expertise in switchers has enabled us to develop the highly
integrated TOPSwitch ICs and scalable architecture for integrated
switchers.
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Research and Development
Our research and development efforts are focused on improving our high-
voltage device structures, wafer fabrication processes, analog circuit designs
and system level architecture. By these efforts, we seek to further reduce the
costs of our products, and improve the cost effectiveness and enhance the
functionality of our customers' power supplies. We have assembled a
multidisciplined team of highly skilled engineers to meet our research and
development goals. These engineers bring expertise in high-voltage structure and
process technology, analog design and power supply systems architecture.
In 1997, 1998 and 1999, we spent $5.3 million, $7.2 million and $10.8
million, respectively, on research and development efforts. We expect to
continue to invest substantial funds in research and development activities. The
development of high-voltage analog ICs is highly complex. We cannot guarantee
that we will develop and introduce new products in a timely and cost-effective
manner or that our development efforts will successfully permit our products to
meet changing market demands.
Intellectual Property and Other Proprietary Rights
We use a combination of patents, trademarks, copyrights, trade secrets and
confidentiality procedures to protect our intellectual property rights. We hold
25 U.S. patents and have generally filed for or received foreign patent
protection on these patents resulting in 33 foreign patents to date. The U.S.
patents have expiration dates ranging from 2006 to 2019. Seven of the U.S.
patents are related to the device structure of the high-voltage transistor, ten
are circuit patents that have been used in our products and three are circuit
patents that provide the foundation for our TOPSwitch products. Two of the U.S.
patents cover specific system applications using TOPSwitch. Additionally, we
have three new circuit patents which we believe will provide a basis for future
products. We are currently pursuing additional U.S. patent applications relating
to improvements and extensions of our products. We cannot guarantee that our
pending United States or foreign patent applications or any future United States
or foreign patent applications will be approved, that any issued patents will
protect our intellectual property or will not be challenged by third parties, or
that the patents of others will not have an adverse effect on our ability to do
business. Furthermore, we cannot guarantee that others will not independently
develop similar or competing technology or design around any of our patents. We
also hold nine trademarks, five in the U.S., two in California and two in Japan.
We regard as proprietary certain equipment, processes, information and
knowledge that we have developed and used in the design and manufacture of our
products. Our trade secrets include a proprietary high volume production process
that produces our patented high-voltage ICs. We attempt to protect our trade
secrets and other proprietary information through non-disclosure agreements,
proprietary information agreements with employees and consultants and other
security measures. Despite these efforts, we cannot guarantee that others will
not gain access to our trade secrets, or that we can meaningfully protect our
intellectual property. In addition, effective trade secret protection may be
unavailable or limited in certain foreign countries. Although we intend to
protect our rights vigorously, we cannot assure that such measures will be
completely successful.
We have granted a perpetual non-transferable license to Matsushita to use
our semiconductor patents and other intellectual property for our current high-
voltage technology, including our TOPSwitch technology and improvements on the
existing technology, which allows Matsushita to manufacture and design products
for internal use and for sale or other distribution to Japanese companies and to
subsidiaries of Japanese companies in Asia. To the extent the products they
manufacture and design are not based on the TOPSwitch technology, Matsushita may
make sales or other distribution to Asian companies in Asia. Matsushita has
granted us perpetual cross licenses to the technology developed by them under
their license rights. We have agreed not to license the technology licensed to
Matsushita to other Japanese companies or their subsidiaries prior to June 2000.
We have also agreed not to sell our products in Japan to new customers. In
exchange for its license rights, Matsushita has paid and will continue to pay to
us licensing fees for a fixed period and has paid or will pay royalties on
products using the licensed technology during fixed periods. In April 1997, we
amended our license agreement with Matsushita to explicitly include high-voltage
device technology being developed by us in return for an improved royalty
structure from Matsushita.
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We have also granted a perpetual, non-transferable license to AT&T
Microelectronics to use certain of our IC processes and device technologies in
the products AT&T sells. In addition, pursuant to an agreement with MagneTek,
Inc., we have granted MagneTek an exclusive, perpetual royalty-free license to
manufacture lighting products that incorporate certain of our technology.
Manufacturing
We contract with Matsushita and OKI to manufacture our wafers in foundries
located in Japan. Our semiconductor products are assembled and packaged by
independent subcontractors in China, Malaysia and the Philippines. We perform
testing, finishing and shipping at our facility in Sunnyvale, California. This
fabless manufacturing model enables us to focus on our engineering and design
strengths, minimize fixed costs on capital expenditures, and still have access
to high-volume manufacturing capacity. Our products do not require leading edge
process geometries for them to be cost-effective, and thus we can use
Matsushita's and OKI's older, low-cost facilities for wafer manufacturing. We
use a proprietary and sensitive implant process and must interact closely with
Matsushita and OKI to achieve satisfactory yields. Although we generally utilize
standard IC packages for assembly, some materials and aspects of assembly are
specific to our products. We require our manufacturers to use a high-voltage
molding compound that is difficult to process and is available from only one
supplier. 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.
As a result we must be involved with our contractors on an active engineering
basis to maintain and improve the process. We have developed process monitoring
equipment to support this effort and must provide adequate engineering resources
to provide similar support in the future.
Our wafer supply agreements with Matsushita and OKI expire in June 2000 and
September 2003, respectively. Under the terms of our agreement with Matsushita,
we establish minimum annual and monthly purchase and sale commitments annually
with the mutual agreement of Matsushita. We also establish pricing by good faith
agreement, subject to our right to most favored pricing. Under the terms of the
OKI agreement, OKI has agreed to reserve a specified amount of production
capacity and to sell wafers to us at fixed prices. Our agreements with both
Matsushita and OKI provide for the purchase of wafers in Japanese yen.
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. Contractual provisions limit the conditions under which
we can enter into such arrangements with other Japanese manufacturers or their
subsidiaries during the term of the agreement with Matsushita. In the event of a
supply disruption with OKI or Matsushita, if we were unable to quickly qualify
alternative manufacturing sources for existing or new products or if these
sources were unable to produce wafers with acceptable manufacturing yields, our
operating results would suffer.
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
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finishing, we typically need to receive wafers from Matsushita and 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 in the past 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. We carry a substantial amount of inventory of tested wafers
to help offset these factors to better serve our markets and meet customer
demand.
Competition
The high-voltage power supply industry is intensely competitive and
characterized by extreme price sensitivity. Accordingly, the most significant
competitive factor in the target markets for 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 families of high-voltage power conversion ICs offer
favorable cost-performance benefits compared to linear and discrete switcher
supplies in many high-volume applications. However, there has been sizeable
overcapacity of discrete components, which resulted in significant price erosion
for these products during 1998 and 1999. A continuation of the price decline of
discrete components, such as high-voltage Bipolar and MOSFET transistors and PWM
controller ICs, could adversely affect the cost effectiveness of the TOPSwitch
products. Also, older alternative technologies like linear transformers are more
cost-effective than discrete switchers and integrated switchers that use our ICs
in certain power ranges for certain applications. If power requirements for
certain applications in which our products are currently utilized, such as
battery chargers for cellular telephones, drop below certain power levels, these
older alternative technologies can be used more cost effectively than switchers.
Our TinySwitch IC family, introduced in September 1998, was specifically
designed to enhance the cost effectiveness of our integrated switcher solutions
in the low power range. However, we cannot guarantee that our efforts in this
area will be successful.
Recently, our TOPSwitch product families have begun to meet increased
competition from hybrid and single high-voltage ICs similar to TOPSwitch. These
competing products are being developed or have been developed and are being
produced by companies such as ON Semiconductor, STMicroelectronics, Fairchild
Semiconductor and Sanken Electric Company. We expect competition to increase as
companies like these see the success we have had in converting older
technologies to the integrated solutions enabled by our product offerings. To
the extent these competitors' products are more cost effective than our
products, our business, financial condition and operating results could be
materially adversely affected. Many of our emerging competitors, including
Motorola, STMicroelectronics, Samsung and Sanken, have significantly greater
financial, technical, manufacturing and marketing resources than do we. In the
context of a market where a high-voltage IC is designed into a customer's
product and the provider of such ICs is therefore the sole source of the IC for
that product, greater 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 such factors
as:
. 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;
. availability of wafer fabrication and finished good manufacturing
capability;
. availability of adequate sources of raw materials;
. protection of our products by effective utilization of intellectual
property laws; and
. general economic conditions.
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
12
<PAGE>
new companies entering this market. Our failure to compete successfully in the
high-voltage power supply business would materially adversely affect our
business, financial condition and operating results.
Employees
As of December 31, 1999, we employed 220 full time personnel, consisting of
88 in manufacturing, 61 in research and development, 50 in sales and marketing
and 21 in finance and administration.
Executive Officers of Power Integrations
As of February 29, 2000, our executive officers, which are elected by and
serve at the discretion of the board of directors, were as follows:
<TABLE>
<CAPTION>
Name With Power Integrations Age
- ---------------------- -------------------------------------------------------------- ---
<S> <C> <C>
Howard F. Earhart President, Chief Executive Officer and Chairman of the Board 60
Balu Balakrishnan Vice President, Engineering and Strategic Marketing 45
Roderick D. Davies Vice President, Operations 49
Joyce Engberg Vice President, Information Technology 50
Richard S. Fassler Vice President, Marketing 48
Vladimir Rumennik Vice President, Technology Development 54
Daniel M. Selleck Vice President, Worldwide Sales 53
Robert G. Staples Chief Financial Officer, Vice President, Finance and 52
Administration and Secretary
Clifford J. Walker Vice President, Corporate Development 48
Alan D. Bickell(1)(2) Director 63
Nicholas E. Brathwaite Director 41
R. Scott Brown(1) Director 58
E. Floyd Kvamme(1)(2) Director 62
Steven J. Sharp Director 58
</TABLE>
- ---------------
(1) Member of the compensation committee
(2) Member of the audit committee
Howard F. Earhart has served as our president, chief executive officer and
as a director since January 1995. From July 1994 to March 1995, Mr. Earhart
served as chief executive officer of Co-Active Computing, a personal computer
peer-to-peer network adapter company. From July 1994 to January 1995, Mr.
Earhart served as chief executive officer of Reach Software, a software company.
Balu Balakrishnan has served as our vice president, engineering and
strategic marketing since September 1997. From September 1994 to September 1997,
Mr. Balakrishnan served as our vice president, engineering and marketing. Mr.
Balakrishnan served as our vice president, design engineering from April 1989 to
September 1994.
Roderick D. Davies has served as our vice president, operations since
August 1999. In the previous eight years Mr. Davies held various positions,
including vice president of the business unit management, and marketing and
operations positions at International Rectifier, a worldwide supplier of power
semiconductors used for power conversion.
13
<PAGE>
Joyce Engberg has served as our vice president, information technology
since February 1999. From January 1996 to January 1999, Ms. Engberg served as
chief information officer of Spectrian, a manufacturer of RF power amplifiers.
From January 1993 to January 1996, Ms. Engberg served as director of technical
services of Consilium, a software company.
Richard S. Fassler has served as our vice president, marketing since
January 2000. From 1986 to 2000, Mr. Fassler held various positions, most
recently as the vice president of sales and marketing at IXYS Corporation, a
designer and developer of power semiconductors.
Vladimir Rumennik has served as our vice president, technology development
since April 1991. From February 1990 to March 1991, Mr. Rumennik was our
director of technology development. Prior to January 1990, Mr. Rumennik was a
manager at Signetics, a semiconductor company and a subsidiary of Philips
Semiconductor.
Daniel M. Selleck has served as our vice president, worldwide sales since
May 1993. From February 1984 to May 1993, Mr. Selleck held various sales
management positions with Philips Semiconductor including European regional
sales manager and western area sales manager in the United States.
Robert G. Staples has served as our chief financial officer, vice
president, finance and administration and secretary since June 1995. From
October 1994 to June 1995, Mr. Staples served as chief financial officer of MIS,
a software development company. From October 1993 to October 1994, Mr. Staples
served as chief financial officer of Simtec Corporation, a semiconductor
company.
Clifford J. Walker has served as our vice president, corporate development
since June 1995. From September 1994 to June 1995, Mr. Walker served as vice
president of Reach Software, a software company. From December 1993 to September
1994, Mr. Walker served as president of Morgan Walker, a consulting company.
Alan D. Bickell has served as a member of the board of directors since
April 1999. Mr. Bickell retired in 1996 after more than 30 years with Hewlett
Packard, serving as a corporate senior vice president and managing director of
geographic operations since 1992.
Nicholas E. Brathwaite has served as a member of the board of directors
since January 2000. Mr. Brathwaite currently serves as senior vice president and
chief technology officer for Flextronics International, a provider of
engineering, advanced electronics manufacturing and logistical services, and has
held various engineering management positions with Flextronics since 1995. From
1989 to 1995, Mr. Brathwaite held various management positions at nChip, a
multi-chip module company.
R. Scott Brown has served as member of the board of directors since July
1999. From 1985 to May 1999, Mr. Brown served as senior vice president of
worldwide sales and support for Xilinx, Inc., a designer and developer of
complete programmable logic solutions for use by electronic equipment
manufacturers.
E. Floyd Kvamme has served as a member of the board of directors since
September 1989. Mr. Kvamme has been a general partner of Kleiner Perkins
Caufield & Byers, a venture capital company, since 1984. Mr. Kvamme also serves
on the boards of Brio Technology, Harmonic Inc., National Semiconductor, Photon
Dynamics and several private companies.
Steven J. Sharp is one of our founders and has served as a member of the
board of directors since our inception. Mr. Sharp has served as president, chief
executive officer and chairman of the board of TriQuint Semiconductor, a
manufacturer of gallium arsenide integrated circuits, since September 1991.
14
<PAGE>
Item 2. Properties.
Our main executive, administrative, manufacturing and technical offices are
located in a 30,000 square foot facility in Sunnyvale, California under a lease
which expires in October 2003 with a conditional five-year option at fair market
value to the year 2008. Our manufacturing operations at this facility consist of
testing wafers and ICs. We have also acquired an additional 15,000 square foot
facility in Sunnyvale, California, which is leased through June 2003. On
December 29, 1999, we entered into a new lease for an 118,000 square foot
facility located in Hellyer Oaks Technology Park in San Jose, California, which
will become available in mid 2000, at which time we will relocate our Sunnyvale
operations to that site. The lease on the new facility has a term of 10 years,
expiring in May 2010 with two conditional five-year options, which if exercised
would extend the lease to May 2020.
Item 3. 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, the
jury returned a unanimous 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.
In March 2000, we entered into a settlement agreement with Motorola. Pursuant to
the settlement agreement, the court has issued a permanent injunction
prohibiting Motorola from selling the ICs that were the subject of the lawsuit.
Additionally, we will not collect the money judgment from Motorola and will
continue as a preferred supplier of high-voltage power conversion ICs for
cellular phone chargers that Motorola manufactures. The companies will work more
closely together to develop future generations of cellular phone chargers for
Motorola.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
15
<PAGE>
PART II
Item 5. Market for Power Integration's Common Equity and Related Stockholder
Matters.
Our common stock trades on the Nasdaq National Market under the symbol
"POWI." As of February 29, 2000, there were approximately 131 stockholders of
record. Because brokers and other institutions on behalf of stockholders hold
many of such shares, we are unable to estimate the total number of stockholders
represented by these record holders. The following table sets forth, for the
quarter indicated, the range of daily closing prices per share of our common
stock as reported on the Nasdaq National Market:
Price Range
----------------------
Year Ended December 31, 1999 High Low
---------------------------- --------- ---------
Fourth quarter $56.687 $34.875
Third quarter $38.625 $25.968
Second quarter $36.562 $14.218
First quarter $17.187 $10.750
Year Ended December 31, 1998 High Low
---------------------------- ------- -------
Fourth quarter $13.562 $ 5.625
Third quarter $ 6.781 $ 4.250
Second quarter $ 7.187 $ 4.062
First quarter $ 7.125 $ 4.687
All prices per share have been adjusted to reflect the 2-for-1 stock split
we effected on November 22, 1999.
We have not paid any cash dividends on our capital stock. We currently
intend to retain our earnings for use in the operation and expansion of our
business and, therefore, do not anticipate paying any cash dividends in the
foreseeable future.
16
<PAGE>
Item 6. Selected Financial Data.
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues:
Product sales........................................... $102,655 $68,206 $44,827 $23,324 $17,406
License fees and royalties.............................. 1,412 1,802 1,162 619 1,009
-------- ------- ------- ------- -------
Total net revenues................................... 104,067 70,008 45,989 23,943 18,415
Cost of revenues.......................................... 46,794 36,638 26,291 15,546 12,371
-------- ------- ------- ------- -------
Gross profit.............................................. 57,273 33,370 19,698 8,397 6,044
-------- ------- ------- ------- -------
Operating expenses:
Research and development................................ 10,764 7,231 5,253 3,519 2,044
Sales and marketing..................................... 11,085 8,468 6,417 3,905 2,744
General and administrative.............................. 8,760 3,641 2,053 1,558 1,619
-------- ------- ------- ------- -------
Total operating expenses............................. 30,609 19,340 13,723 8,982 6,407
-------- ------- ------- ------- -------
Income (loss) from operations............................. 26,664 14,030 5,975 (585) (363)
Interest and other income (expense), net.................. 2,147 1,248 (683) (726) (406)
-------- ------- ------- ------- -------
Income (loss) before provision for income taxes........... 28,811 15,278 5,292 (1,311) (769)
Provision for income taxes................................ 4,334 2,600 530 30 34
-------- ------- ------- ------- -------
Net income (loss)......................................... $ 24,477 $12,678 $ 4,762 $(1,341) $ (803)
======== ======= ======= ======= =======
Earnings (loss) per share:
Basic................................................... $0.94 $0.52 $1.26 $(0.78) $(0.69)
======== ======= ======= ======= =======
Diluted................................................. $0.87 $0.48 $0.25 $(0.78) $(0.69)
======== ======= ======= ======= =======
Shares used in per share calculation:
Basic................................................... 25,958 24,426 3,776 1,712 1,170
======== ======= ======= ======= =======
Diluted................................................. 28,197 26,452 18,678 1,712 1,170
======== ======= ======= ======= =======
<CAPTION>
December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments......... $ 61,672 $44,418 $29,008 $ 7,692 $ 3,800
Working capital........................................... 71,169 42,988 30,131 9,769 7,435
Total assets.............................................. 98,571 65,054 48,559 19,535 15,279
Long-term debt and capitalized lease obligations, net of
current portion.......................................... 1,393 1,963 2,435 5,499 2,219
Stockholders' equity...................................... 80,248 47,364 33,327 9,098 9,512
</TABLE>
17
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Operating results.
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.
Overview
We design, develop, manufacture and market proprietary, high-voltage, analog
ICs for use in AC to DC power conversion primarily for the cellular telephone,
personal computer, cable and direct broadcast satellite and various consumer
electronics markets. From our inception in March 1988 through 1993, we developed
numerous standard and custom products incorporating high levels of features and
functionality, each intended to address the needs of various markets. Although
we succeeded in developing the core of our patented technology during this
period, market penetration of our products was low because these products were
not as cost-effective as alternative products. Limited product revenue and the
high costs associated with developing and marketing numerous solutions to
numerous target markets resulted in our being unprofitable.
In 1993, we changed our strategy to focus on bringing cost-effective,
integrated products to the high-voltage AC to DC power supply markets. As a
result, in 1994, we completed development of TOPSwitch, the first in our family
of cost effective, high voltage, power conversion ICs. The TOPSwitch family of
products, with its proprietary integrated architecture, is designed to address
with relatively few products broad applications in a number of high-volume,
high-voltage AC to DC power supply markets. The initial target markets served by
TOPSwitch are particularly sensitive to size, portability, energy efficiency and
time-to-market. The TOPSwitch products and the solutions enabled by them are
significantly lower in cost than our previous products and the solutions enabled
by those products. Commercial shipments of TOPSwitch began in May 1994.
Primarily as a result of the increasing sales of TOPSwitch products, our net
revenues from product sales more than tripled between 1994 and 1995, increasing
from $5.0 million to $17.4 million. Net revenues from product sales increased
sequentially by 34% in 1996, 92% in 1997, 52% in 1998 and 51% in 1999.
By focusing on the TOPSwitch family of products, we were able to more
effectively utilize our resources and limit the growth of operating expenses in
1994 and 1995. Because of this and the growth in net revenues, operating
expenses were reduced from 77.5% of net revenues in 1994 to 34.8% of net
revenues in 1995. In response to increasing market acceptance of our TOPSwitch
products and faster revenue growth in 1996, we accelerated our investment in
research and development and sales and marketing, including technical customer
support. As a result, operating expenses were $9.0 million in 1996, $13.7
million in 1997, $19.3 million in 1998 and $30.6 million in 1999. Operating
expenses in 1999 included approximately $4.1 million in additional legal costs
related to the lawsuit filed against Motorola. Our legal expenses associated
with the Motorola litigation are expected to decline in future quarters.
However, we expect that all of our other operating expenses will increase in
absolute dollars, but will fluctuate as a percentage of net revenues, as we
continue to add resources to research and development, sales and marketing and
general and administrative activities.
Our quarterly and annual operating results are volatile and difficult to
predict. Our net revenues and operating results have varied significantly in the
past, are difficult to forecast and are subject to numerous factors both within
and outside of our control, As a result, our quarterly and annual operating
results may fluctuate significantly in the future. For a discussion of the
factors that may effect our quarterly and annual operating results, please see
Factors that May Affect Future Results of Operations.
18
<PAGE>
We license certain technologies and grant limited product manufacturing and
marketing rights to strategic parties in return for foundry relationships,
license fees and product royalty arrangements. Prior to the introduction of
TOPSwitch in 1994, our analog ICs generated limited product sales while license
fees and prepaid royalties accounted for a significant percentage of our total
revenues. In future periods, we expect license fees and royalties to consist
primarily of royalties on products shipped by licensees incorporating licensed
technology, and anticipate that license fees and royalties will account for a
small percentage of net revenues.
A portion of our cost of revenues consists of the cost of wafers. The contract
prices to purchase wafers from Matsushita and OKI are denominated in Japanese
yen. Changes in the exchange rate between the U.S. dollar and the Japanese yen
subject our gross profit and operating results to the potential for material
fluctuations. From time to time, as these strategic parties close old production
lines and move to new fabrication facilities, we must absorb a portion of the
costs of physically moving the manufacturing of our products to new production
lines, including the costs of installation of new process technologies.
Product revenues consist of sales to OEMs and merchant power supply
manufacturers and to distributors. Revenues from product sales to OEMs and
merchant power supply manufacturers are recognized upon shipment. At that time,
we provide for estimated sales returns and other allowances related to those
sales. Between 40 and 50 percent of our sales are made to distributors under
terms allowing certain rights of return and price protection for our products
held in the distributors' inventories. Therefore, we defer recognition of
revenue and the proportionate cost of revenues derived from sales to
distributors until the distributors resell our products to their customers. The
gross profit deferred as a result of this policy is reflected as "deferred
income on sales to distributors" on our consolidated balance sheet. See note 2
of notes to consolidated financial statements.
Results of Operations
The following table sets forth certain operating data as a percentage of total
net revenues for the periods indicated.
<TABLE>
<CAPTION>
Percentage of
Total Net Revenues
For the Years Ended December 31,
----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues:
Product sales.......................................................... 98.6% 97.4% 97.5%
License fees and royalties............................................. 1.4 2.6 2.5
----- ----- -----
Total net revenues.................................................. 100.0 100.0 100.0
Cost of revenues......................................................... 45.0 52.3 57.2
----- ----- -----
Gross profit............................................................. 55.0 47.7 42.8
----- ----- -----
Operating expenses:
Research and development............................................... 10.3 10.3 11.4
Sales and marketing.................................................... 10.7 12.1 14.0
General and administrative............................................. 8.4 5.2 4.4
----- ----- -----
Total operating expenses............................................ 29.4 27.6 29.8
----- ----- -----
Income from operations................................................... 25.6 20.1 13.0
Interest and other income (expense), net................................. 2.1 1.8 (1.5)
----- ----- -----
Income before provision for income taxes................................. 27.7 21.9 11.5
Provision for income taxes............................................... 4.2 3.7 1.1
----- ----- -----
Net income............................................................... 23.5% 18.2% 10.4%
===== ===== =====
</TABLE>
19
<PAGE>
Comparison of Years Ended December 31, 1998 and 1999
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 licensees of our technology. Net revenues increased 48.7% from $70.0 million
in 1998 to $104.1 million in 1999. Net revenues from product sales represented
$68.2 million and $102.7 million of net revenues in 1998 and 1999, respectively.
The increase in net revenues from product sales 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 accounted for approximately 39%
of our product revenues for 1999 compared to 26% of product revenues in 1998,
and increased 118% over 1998 sales to that market. Sales of our TOPSwitch and
TinySwitch products represented 97% and 95% of net revenues from product sales
in 1999 and 1998, respectively. Net revenues from royalties were $1.4 million in
1999 compared to $1.8 million in 1998. We expect net revenues from royalties to
continue to account for a small percentage of our net revenues.
International sales were $81.6 million in 1999 compared to $58.1 million in
1998, representing approximately 78% and 83% of net revenues in those respective
periods. Although the power supplies using our products are designed and
distributed worldwide, most of these power supplies are manufactured in Asia. As
a result, the largest portion of our net revenues is derived from sales to this
region. We expect international sales to continue to account for a large portion
of our net revenues.
In 1999, two separate customers accounted for approximately 16% and 11% of net
revenues. In 1998, the same customers accounted for approximately 22% and 13% of
net revenues, respectively. See note 2 of notes to consolidated financial
statements.
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 from Matsushita and OKI, the assembly and packaging
of our products, and internal labor and overhead associated with the testing of
both wafers and packaged components. These costs include expenses incurred in
connection with the physical move of the manufacturing of our products between
wafer production lines at our foundry suppliers and with the installation of new
process technologies at these foundries. These costs may recur from time to time
and adversely affect our cost of revenues.
Gross profit increased from $33.4 million, or 47.7% of net revenues in 1998,
to $57.3 million, or 55.0% of net revenues, in 1999. Efficiencies realized from
higher volumes, reductions in wafer costs, and improved test yields contributed
to the improvement in gross profit. Gross profit also benefited from a one-time
credit from one of our wafer suppliers in the amount of $1.4 million recorded in
1999. The credit improved our gross profit by 1.3% for the year. 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, and 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 increased by approximately 48.9%, from $7.2 million in 1998
to $10.8 million in 1999. The increase was primarily the result of increased
salaries and other costs related to the hiring of additional engineering
personnel, outside consulting fees and expensed prototype materials resulting
from the transition of foundry manufacturing processes, and bringing newly
developed products into manufacturing. These expenses remained unchanged as a
percentage of net revenues at 10.3% in both 1998 and 1999.
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 increased approximately 30.9%,
from $8.5 million in 1998 to $11.1 million in 1999, which represented 12.1% and
10.7% of net revenues in each respective period. This increase in absolute
dollars represents the addition of personnel to support international sales and
field application engineers.
20
<PAGE>
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. In 1998 and 1999, general and administrative
expenses were $3.6 million and $8.8 million, respectively, which represented
5.2% and 8.4% of net revenues in each respective period. This increase in
general and administrative expenses was primarily attributable to increased
professional and legal expenses related to our patent infringement lawsuit filed
against Motorola.
Interest and other income, net. Interest and other income, net, was $1.2
million and $2.1 million in 1998 and 1999, respectively. The increase in other
income reflected additional interest income related to the increase in cash
equivalents and short-term investments from 1998 to 1999, and lower interest
expense related to a reduction in our capital equipment lease obligations.
Provision for income taxes. Provision for income taxes for 1998 and 1999
represents Federal, state and foreign taxes. The effective tax rate was 17% for
1998 and 15% for 1999. The difference between the statutory rate and our
effective tax rate for 1998 and 1999 is due to the impact of benefiting net
operating loss carryforwards, offset by the reduction in the deferred tax
valuation allowance. See note 7 of notes to consolidated financial statements.
Comparison of Years Ended December 31, 1997 and 1998
Net revenues. Net revenues increased 52.2% from $46.0 million in 1997 to $70.0
million in 1998. Net revenues from product sales represented $44.8 million and
$68.2 million of net revenues in 1997 and 1998, respectively. The increase in
net revenues from product sales was due primarily to increased sales of our
TOPSwitch family of products, which represented 95% of product sales in 1998.
The migration from TOPSwitch to TOPSwitch II resulted in TOPSwitch II accounting
for 45% of product sales in 1998 compared to 15% for 1997. We began commercial
shipment of TOPSwitch II in April 1997. Net revenues also grew because of an
increase in royalty revenues, from $1.2 million in 1997 to $1.8 million in 1998.
International sales increased by $20.9 million in 1998 compared to 1997,
growing from approximately 81% of net revenues in 1997 to approximately 83% of
net revenues in 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, the largest portion of our net revenues is
derived from sales to this region.
In 1998, two separate customers accounted for approximately 22% and 13% of net
revenues. In 1997, one of the same customers and one different customer
accounted for approximately 21% and 15% of net revenues, respectively. See note
2 of notes to consolidated financial statements.
Cost of revenues; Gross profit. Gross profit increased from $19.7 million, or
42.8% of net revenues, to $33.4 million, or 47.7% of net revenues, in 1997 and
1998, respectively. Efficiencies realized from higher volumes, reductions in
both wafers and packaging costs, improved test yields, and a favorable foreign
exchange rate between the U.S. dollar and the Japanese yen through most of the
year contributed to the improvement in gross profit.
Research and development expenses. Research and development expenses increased
by approximately 37.7%, from $5.3 million in 1997 to $7.2 million in 1998. The
increase was primarily the result of increased salaries and other costs related
to the hiring of additional engineering personnel, outside consulting fees and
expensed prototype materials resulting from the transition of foundry
manufacturing processes with Matsushita and OKI. These expenses decreased as a
percentage of net revenues from 11.4% in 1997 to 10.3% in 1998 due to increased
sales.
Sales and marketing expenses. Sales and marketing expenses increased
approximately 32%, from $6.4 million in 1997 to $8.5 million in 1998, which
represented 14.0% and 12.1% of net revenues, respectively. This increase
represented the addition of personnel to support international sales and field
application engineers.
21
<PAGE>
General and administrative expenses. In 1997 and 1998, general and
administrative expenses were $2.1 million and $3.6 million, respectively, which
represented 4.4% and 5.2% of net revenues, respectively. This increase in
absolute dollars was primarily attributable to increased professional and legal
expenses related to our patent infringement lawsuit filed against Motorola.
Interest and other income (expense), net. Interest and other income
(expense), net, was $683,000 net expense in 1997 and $1.2 million net income in
1998. The net expense in 1997 reflected interest incurred on capital equipment
lease obligations and on $3.0 million of subordinated debt, which originated in
the second quarter of 1996, partially offset by interest income earned on cash
and short-term investments. The net income in 1998 reflected an increase in
interest income due to the increase in cash and short-term investments from 1997
to 1998, and the reduction in interest expense due to the repayment of the
subordinated debt in 1997.
Provision for income taxes. Provision for income taxes for 1997 and 1998
represented Federal, state and foreign taxes. The effective tax rate was 10% for
1997 and 17% for 1998 reflecting the profitable results for both years. The
difference between the statutory rate and our effective tax rate for 1997 and
1998 was due to the impact of benefiting net operating loss carryforwards,
offset by the reduction in the deferred tax valuation allowance. See note 7 of
notes to consolidated financial statements.
22
<PAGE>
Selected Quarterly Results of Operations
The following tables set forth certain consolidated statement of operations
data for each of the quarters in the years ended December 31, 1999 and 1998 as
well as the percentage of our net revenues represented by each item. This
information has been derived from our unaudited consolidated financial
statements. The unaudited consolidated financial statements have been prepared
on the same basis as the audited consolidated financial statements contained
herein and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of such
information when read in conjunction with our annual audited consolidated
financial statements and notes thereto appearing elsewhere in this report. The
operating results for any quarter are not necessarily indicative of the results
for any subsequent period or for the entire fiscal year.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
1999 1999 1999 1999 1998 1998 1998 1998
---- ---- ---- ---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Product sales............................... $29,725 $29,829 $22,655 $20,446 $19,750 $19,907 $14,647 $13,902
License fees and royalties.................. 402 311 324 375 402 410 466 524
------- ------- ------- ------- ------- ------- ------- -------
Total net revenues........................ 30,127 30,140 22,979 20,821 20,152 20,317 15,113 14,426
Cost of revenues............................. 14,178 12,667 10,482 9,467 9,773 10,635 8,254 7,976
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................................. 15,949 17,473 12,497 11,354 10,379 9,682 6,859 6,450
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development.................... 3,080 2,813 2,535 2,336 2,005 1,947 1,720 1,559
Sales and marketing......................... 2,988 2,893 2,729 2,475 2,479 2,376 1,724 1,889
General and administrative.................. 1,640 4,324 1,427 1,369 1,296 1,067 730 548
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.................. 7,708 10,030 6,691 6,180 5,780 5,390 4,174 3,996
------- ------- ------- ------- ------- ------- ------- -------
Income from operations...................... 8,241 7,443 5,806 5,174 4,599 4,292 2,685 2,454
Interest and other income, net............... 620 510 433 584 473 399 189 187
------- ------- ------- ------- ------- ------- ------- -------
Income before provision for
Income taxes................................ 8,861 7,953 6,239 5,758 5,072 4,691 2,874 2,641
Provision for income taxes................... 1,346 1,185 939 864 865 351 721 663
------- ------- ------- ------- ------- ------- ------- -------
Net income................................... $ 7,515 $ 6,768 $ 5,300 $ 4,894 $ 4,207 $ 4,340 $ 2,153 $ 1,978
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share
Basic....................................... $ 0.28 $ 0.26 $0.21 $ 0.19 $ 0.17 $ 0.18 $ 0.09 $ 0.08
Diluted..................................... $ 0.26 $ 0.24 $0.19 $ 0.18 $ 0.16 $ 0.17 $ 0.08 $ 0.08
Shares used in per share calculation
Basic....................................... 26,440 26,275 25,814 25,289 24,904 24,459 24,174 24,160
Diluted..................................... 28,916 28,589 28,183 27,425 27,074 26,256 26,118 26,261
</TABLE>
<TABLE>
<CAPTION>
Percentage of Total Net Revenues
--------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
1999 1999 1999 1999 1998 1998 1998 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Product sales.............................. 98.7% 99.0% 98.6% 98.2% 98.0% 98.0% 96.9% 96.4%
License fees and royalties................. 1.3 1.0 1.4 1.8 2.0 2.0 3.1 3.6
----- ----- ----- ----- ----- ----- ----- -----
Total net revenues....................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues............................ 47.1 42.0 45.6 45.5 48.5 52.3 54.6 55.2
----- ----- ----- ----- ----- ----- ----- -----
Gross profit................................ 52.9 58.0 54.4 54.5 51.5 47.7 45.4 44.8
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Research and development................... 10.2 9.4 11.0 11.2 9.9 9.6 11.4 10.8
Sales and marketing........................ 9.9 9.6 11.9 11.9 12.3 11.7 11.4 13.1
General and administrative................. 5.4 14.3 6.2 6.6 6.4 5.3 4.8 3.8
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses................. 25.5 33.3 29.1 29.7 28.6 26.6 27.6 27.7
----- ----- ----- ----- ----- ----- ----- -----
Income from operations...................... 27.4 24.7 25.3 24.8 22.9 21.1 17.8 17.1
Interest and other income, net.............. 2.1 1.7 1.9 2.8 2.4 1.9 1.2 1.3
----- ----- ----- ----- ----- ----- ----- -----
Income before provision for income
Taxes...................................... 29.5 26.4 27.2 27.6 25.3 23.0 19.0 18.4
Provision for income taxes.................. 4.5 3.9 4.1 4.1 4.3 1.7 4.8 4.6
----- ----- ----- ----- ----- ----- ----- -----
Net income.................................. 25.0% 22.5% 23.1% 23.5% 21.0% 21.3% 14.2% 13.8%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
23
<PAGE>
Net revenues increased sequentially in the first, second and third quarters of
both 1999 and 1998, and were essentially unchanged from the third quarter to the
fourth quarter each year. Increases in product sales were due to growth in the
volume of sales from existing customers, the addition of new customers and the
introduction of the TinySwitch family of products in the third quarter of 1998.
Sequential net revenues were unchanged in the fourth quarters of 1999 and 1998
due, we believe, to the seasonal nature of some of our markets.
Our gross profit increased as a percentage of net revenues during each of the
seven quarters ended September 30, 1999 and was down in the quarter ended
December 31, 1999. The gross profit improvements generally were due to
efficiencies realized from higher volumes, reductions in material costs and
improved test yields. The third quarter of 1999 benefited approximately 4% from
a one-time credit from one of our wafer suppliers. The lower gross profit margin
in the fourth quarter was primarily due to continued pricing pressures from our
customers and a weakening dollar versus Japanese Yen.
Research and development expenses increased in absolute terms during the eight
quarters presented, primarily due to increased staffing in the areas of new
product design and technology development. Due to increases in net revenues,
research and development expenses remained relatively unchanged as a percent of
total net revenues.
Sales and marketing expenses generally increased in absolute dollars over the
eight quarters presented, primarily due to the additional staffing in sales and
application engineering and increased sales commissions due to the increased
revenues from product sales. Sales expenses were down in the first and second
quarters of 1998 due to reduced commissions because of lower seasonal net
revenues.
General and administrative expenses increased over the eight quarters
presented with significant increases from the third quarter of 1998 through the
end of 1999 primarily due to increased legal expense related to our patent
infringement lawsuit filed against Motorola.
Interest and other income, net essentially increased over the eight quarters
presented primarily from increased interest income due to higher cash balances
created by a net positive cash flow as well as cash proceeds from our initial
public offering in December 1997.
Liquidity and Capital Resources
Since our initial public offering of common stock in December 1997, our
principal source of funding has been cash from our operations with some funding
from capital equipment lease lines.
As of December 31, 1999, we had approximately $61.7 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 year ended
December 31, 1999 in the amount of $772,000. We may obtain additional financing
for equipment purchases in future quarters. As of December 31, 1999, we owed
approximately $2.9 million on our various capital equipment leases.
As of December 31, 1999, we had working capital, defined as current assets
less current liabilities, of approximately $71.2 million, which was an increase
of approximately $28.2 million over December 31, 1998. Our operating activities
generated cash of $22.9 million and $18.5 million in the year ended December 31,
1999 and 1998, respectively. Cash generated in the year ended December 31, 1999
was principally the result of net income in the amount of $24.5 million,
depreciation and amortization, tax benefits from employee stock plans and
increases in accounts payable and accrued liabilities. This was partially offset
by increases in accounts
24
<PAGE>
receivable, inventory and deferred income taxes. Cash generated in the year
ended December 31, 1998 was principally the result of net income of $12.7
million, depreciation and amortization, increases in deferred revenue, accounts
receivable 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 $13.5 million and $16.8 million for the years ended
December 31, 1999 and 1998, respectively. We also purchased capital assets in
the amount of $6.6 million and $2.0 million for the years ended December 31,
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 Readiness Disclosure
To date, we have not experienced any disruption in our products as a result
of, nor has any third-party vendor on whom we depend been affected by, the
commencement of the year 2000. Although we do not anticipate that our products
will be affected by the year 2000, if we, or our third-party providers, fail to
remedy any year 2000 issues, the result could be lost revenues, increased
operating expenses, the loss of customers and other business interruptions, any
of which could harm our business. The failure to adequately address year 2000
compliance issues in the delivery of products to our customers could result in
litigation against us, which could be costly and time consuming to defend.
In light of our experiences to date, we have not developed any further
contingency plans for year 2000 issues beyond those preparations made prior to
January 1, 2000. Our worst-case scenario for year 2000 problems would be our
inability to provide our products and services to our customers and resultant
decline in total revenues.
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.
We do not expect the adoption of SFAS No. 133 to have a material impact on our
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. We will adopt
SAB 101 as required in the first quarter of 2000 and are evaluating the effect
that such adoption may have on our consolidated results of operations and
financial position.
Factors That May Affect Future Results of Operations
In addition to the other information in this Report, the following factors
should be considered carefully in evaluating our business before purchasing
shares of our stock.
Our quarterly and annual operating results are volatile and difficult to
predict. If we fail to meet the expectations of public market analysts or
investors, the market price of our common stock may decrease significantly. 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
quarterly operating results will likely fall below the expectations of public
market analysts or investors. If that occurs, the price of our stock may
decline.
25
<PAGE>
Some of the factors that could affect our operating results include the
following:
. the volume and timing of orders received from customers;
. the volume and timing of orders placed by us with our foundries;
. 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 timing of investments in research and development and sales and
marketing;
. cyclical semiconductor industry conditions; and
. fluctuations in exchange rates, particularly the exchange rates between
the U.S. dollar and the Japanese yen.
Our quarterly results may be subject to seasonality. Historically, our
revenues are strongest in our third and fourth quarters, due to what we believe
are seasonal factors attributed to the high volume consumer markets for the end
products into which our ICs are sold. Our revenues have then followed a pattern
of being sequentially linear or somewhat down in the first and second quarters
of the next year.
We do not have long-term contracts with any of our customers and if they fail
to place, or if they cancel or reschedule orders for our products, our operating
results and business may suffer. Our business is characterized by short-term
customer orders and shipment schedules. 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. In addition, customer orders can be canceled or
rescheduled without significant penalty to the customer. In the past we have
experienced customer cancellations of substantial orders for reasons beyond our
control, and significant cancellations could occur again at any time.
We depend on Motorola for a significant portion of our net revenues and if we
lose Motorola as a customer, our operating results will suffer. For 1999,
direct sales to Motorola accounted for approximately 9% of our net revenues.
Indirect sales, through power supply merchants, which incorporate our ICs into
the products they produce for Motorola, accounted for approximately 13% of our
net revenues. For the quarter ended December 31, 1999, direct sales and indirect
sales to Motorola accounted for approximately 8% and 16% of our net revenues,
respectively. We expect that our operating results, in part, will depend on our
direct and indirect sales to Motorola for the foreseeable future.
Intense competition in the high-voltage power supply industry may lead to a
decrease in the average selling price and reduced sales volume of our products,
which may harm our business. The high-voltage power supply industry is
intensely competitive and characterized by significant price erosion. Our
products face competition from alternative technologies, including traditional
linear transformers and discrete switcher power supplies. If the price of
competing products decreases significantly, the cost effectiveness of our
products will be adversely affected. If power requirements for applications in
which our products are currently utilized, including battery chargers for
cellular telephones, drop below current power levels, these older alternative
technologies can be used more cost effectively than our TOPSwitch-based
switchers.
26
<PAGE>
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, including our ability to introduce new
products with higher average selling prices, would materially harm our operating
results.
If demand for our products declines in the cellular phone battery charger and
desktop personal computer stand-by markets, our net revenues will decrease.
Applications of our products in the cellular phone battery chargers and desktop
personal computer, or PC, stand-by markets have and will continue to 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 our net revenues to
decline and the price of our stock to fall. In addition, technological advances
in these markets may reduce demand for our products.
Because the sales cycle for our products can be lengthy, we may incur
substantial expenses before we generate significant revenues, if any. 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 research and
development and sales and marketing resources without any assurance of success,
often precede volume sales, if any, by a year or more. 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. 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.
Our products must meet exacting specifications, and undetected defects and
failures may occur which may cause customers to return or stop buying our
products. Our customers generally 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. If defects and failures occur in our
products, 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.
We depend on third-party suppliers to provide us with wafers for our products
and if they fail to provide us sufficient wafers, our business will suffer. 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 their
continued cooperation and, in many instances, their course of conduct deviates
from the literal provisions of the contracts. We cannot assure you that we will
continue to work successfully with Matsushita or OKI in the future, that they
will continue to provide us with sufficient capacity at their foundries to meet
our needs, or that either of them will not seek an early termination of its
wafer supply agreement with us. Our contract with Matsushita terminates in June
2000, and if we cannot extend our agreement with Matsushita, our net revenues
may decline. We estimate that it would take 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.
Although we provide Matsushita and OKI with rolling forecasts of our
production requirements, their ability 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 harm our business.
27
<PAGE>
If our third-party suppliers and independent subcontractors do not produce our
wafers and assemble our finished products at acceptable yields, our net revenues
may decline. 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. In
addition, our IC assembly process requires our manufacturers to use a high-
voltage molding compound available from only one vendor, 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. 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.
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. 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 activities 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:
. 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;
. tariffs and other trade barriers and restrictions; and
. the burdens of complying with a variety of foreign laws.
Our failure to adequately address these risks could reduce our international
sales, which would materially adversely affect our operating results.
Furthermore, because substantially all of our foreign sales are denominated in
U.S. dollars, increases in the value of the dollar 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.
If our efforts to enhance existing products and introduce new products are not
successful, we may not be able to generate demand for our products. Our 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.
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 these products will achieve market acceptance. Our or our customers'
failure to develop and introduce new products successfully and in a timely
manner would harm our business and may cause the price of our common stock to
fall. In addition, customers may defer or return orders for existing products in
response to the introduction of new
28
<PAGE>
products. Although we maintain reserves against returns, we cannot assure you
that these reserves will be adequate.
If our products do not penetrate additional markets, our business will not
grow as we predict. We believe that our future success depends in part upon our
ability to penetrate additional markets for our products. 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.
If we are unable to adequately protect or enforce our intellectual property
rights, we could lose market share, incur costly litigation expenses or lose
valuable assets. Our 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. From time to time we have received, and we may receive in the future,
communications alleging possible infringement of patents or other intellectual
property rights of others. Litigation, which could result in substantial cost to
us, may be necessary to enforce our patents or other intellectual property
rights or to defend us against claimed infringement of the rights of others. The
failure to obtain necessary licenses or other rights or litigation arising out
of infringement claims could cause us to lose market share and harm our
business.
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 must attract and retain qualified personnel to be successful and
competition for qualified personnel is intense in our market. 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 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 harm our business. 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 recent growth has strained our resources and if we fail to successfully
manage this growth, we may lose customers. We have experienced a period of
rapid growth and expansion, which has placed, and continues to place, a
significant strain on our resources. Relationships with our customers generally
require significant engineering support. A significant 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 impede our ability to
develop future generations of our products and to remain competitive. In
addition, any future periods of rapid growth or expansion could be expected to
place a significant strain on our limited managerial, financial and engineering
resources.
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
29
<PAGE>
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.
The future trading price of our common stock could be subject to wide
fluctuations in response to a variety of factors. The price of our common stock
has been, and is likely to be, volatile. 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, may
harm the market price of our common stock.
30
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure About Market Risks
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 December 31, 1999. All
investments mature, by policy, in 15 months or less.
(in thousands, except average interest rates)
<TABLE>
<CAPTION>
Average
Carrying Interest
Amount Rate
-------- --------
<S> <C> <C>
Cash Equivalents:
U.S. corporate securities......................................................... $ 5,488 6.64%
Tax-exempt securities............................................................. 20,500 4.33%
-------
Total cash equivalents....................................................... 25,988 4.82%
-------
Short-term Investments:
U.S. corporate securities......................................................... 17,897 5.28%
Foreign securities................................................................ 3,079 4.97%
Tax-exempt securities............................................................. 11,999 3.73%
-------
Total short-term investments................................................. 32,975 4.68%
-------
Total investment securities.................................................. $58,963 4.74%
=======
</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.
Item 8. Consolidated Financial Statements and Supplementary Data.
The Financial Statements and Supplementary Data required by this item are set
forth at the pages indicated at Item 14(a).
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
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<PAGE>
PART III
The SEC allows us to include information required in this report by referring
to other documents or reports we have already or will soon be filing. This is
called "Incorporation by Reference." We intend to file our definitive proxy
statement pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report, and certain information therein is
incorporated in this report by reference.
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Proposal No. 1--Election of Directors" and in Part I of this report under the
heading "Executive Officers of the Registrant."
The information required by this Item with respect to compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference to
information set forth in the definitive Proxy Statement under the heading
"Executive Compensation and Other Matters."
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Executive Compensation and Other Matters."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading "Stock
Ownership of Certain Beneficial Owners and Management."
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Certain Relationships and Related Transactions."
32
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this Form:
1. Financial Statements
Page
----
Report of Independent Public Accountants...................... 34
Consolidated Balance Sheets................................... 35
Consolidated Statements of Operations......................... 36
Consolidated Statements of Stockholders' Equity............... 37
Consolidated Statements of Cash Flows......................... 38
Notes to Consolidated Financial Statements.................... 39
2. Financial Statement Schedules
All schedules have been omitted because the required information is not
present or not present in amounts sufficient to require submission of the
schedules or because the information required is included in the
Consolidated Financial Statements or Notes thereto.
3. Exhibits
See Index to Exhibits. The Exhibits listed in the accompanying Index to
Exhibits are filed as part of this report.
(b) Reports on Form 8-K
Form 8-K filed on March 12, 1999 with the Securities and Exchange
Commission.
Form 8-K/A filed on March 22, 1999 with the Securities and Exchange
Commission.
33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Power Integrations, Inc.:
We have audited the accompanying consolidated balance sheets of Power
Integrations, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Power Integrations, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Jose, California
January 18, 2000 (except with respect
to the matter discussed in Note 8, as to
which is dated March 14, 2000)
34
<PAGE>
POWER INTEGRATIONS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1999 1998
-------- -------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents.......................................................... $ 27,883 $24,176
Short-term investments............................................................. 33,789 20,242
Accounts receivable, net of allowances of $990 in 1999 and $1,293 in 1998.......... 9,682 4,640
Inventories........................................................................ 11,406 8,845
Prepaid expenses and other current assets.......................................... 5,339 812
-------- -------
Total current assets............................................................ 88,099 58,715
-------- -------
PROPERTY AND EQUIPMENT, AT COST:
Machinery and equipment............................................................ 21,632 14,716
Leasehold improvements............................................................. 1,394 1,158
-------- -------
23,026 15,874
Less: Accumulated depreciation and amortization.................................... (12,554) (9,535)
-------- -------
10,472 6,339
-------- -------
$ 98,571 $65,054
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capitalized lease obligations................................... $ 1,228 $ 1,950
Accounts payable................................................................... 6,524 5,866
Accrued payroll and related expenses............................................... 3,994 2,394
Taxes payable and other accrued liabilities........................................ 1,818 2,951
Deferred income on sales to distributors........................................... 3,366 2,566
-------- -------
Total current liabilities....................................................... 16,930 15,727
-------- -------
CAPITALIZED LEASE OBLIGATIONS, net of current portion................................ 1,393 1,963
-------- -------
COMMITMENTS (NOTE 4)
STOCKHOLDERS' EQUITY:
Convertible Preferred Stock, $0.001 par value
Authorized--3,000,000 shares
Outstanding--none -- --
Common Stock, $0.001 par value
Authorized-- 40,000,000 shares
Outstanding--26,468,272 shares in 1999 and 24,994,128 shares in 1998............ 26 25
Additional paid-in capital......................................................... 65,553 57,276
Common stock warrants.............................................................. -- 12
Stockholder notes receivable....................................................... (201) (274)
Deferred compensation.............................................................. (181) (321)
Cumulative translation adjustment.................................................. (129) (57)
Retained earnings (deficit)........................................................ 15,180 (9,297)
-------- -------
Total stockholders' equity...................................................... 80,248 47,364
-------- -------
$ 98,571 $65,054
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
NET REVENUES: ----------- ------------ ------------
<S> <C> <C> <C>
Product sales........................................................... $102,655 $68,206 $44,827
License fees and royalties.............................................. 1,412 1,802 1,162
-------- ------- -------
Total net revenues................................................... 104,067 70,008 45,989
COST OF REVENUES.......................................................... 46,794 36,638 26,291
-------- ------- -------
GROSS PROFIT.............................................................. 57,273 33,370 19,698
-------- ------- -------
OPERATING EXPENSES:
Research and development................................................ 10,764 7,231 5,253
Sales and marketing..................................................... 11,085 8,468 6,417
General and administrative.............................................. 8,760 3,641 2,053
-------- ------- -------
Total operating expenses............................................. 30,609 19,340 13,723
-------- ------- -------
INCOME FROM OPERATIONS.................................................... 26,664 14,030 5,975
-------- ------- -------
OTHER INCOME (EXPENSE):
Interest income......................................................... 2,515 1,801 359
Interest expense........................................................ (302) (432) (832)
Other, net.............................................................. (66) (121) (210)
-------- ------- -------
Total other income (expense)......................................... 2,147 1,248 (683)
-------- ------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES.......................................................... 28,811 15,278 5,292
PROVISION FOR INCOME TAXES................................................ 4,334 2,600 530
-------- ------- -------
NET INCOME................................................................ $ 24,477 $12,678 $ 4,762
======== ======= =======
EARNINGS PER SHARE:
Basic................................................................... $ 0.94 $ 0.52 $ 1.26
======== ======= =======
Diluted................................................................. $ 0.87 $ 0.48 $ 0.25
======== ======= =======
SHARES USED IN PER SHARE CALCULATION:
Basic................................................................... 25,958 24,426 3,776
======== ======= =======
Diluted................................................................. 28,197 26,452 18,678
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
------------------- ---------------- Additional Stockholder
Paid-In Notes Deferred
Shares Amount Shares Amount Capital Warrants Receivable Compensation
-------- -------- ------ -------- ----------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1996................. 91,728 $ 35,271 1,752 $ 565 $ -- $ 12 $ -- $ --
Issuance of Common
Stock under employee
stock option plan................ -- -- 2,099 982 3 -- (405) --
Issuance of Common
Stock in connection
with Public Offering............. -- -- 5,400 5 18,840 -- -- --
Conversion of Preferred
Stock to
Common Stock..................... (91,728) (35,271) 14,895 15 35,256 -- -- --
Change in par value............... -- -- -- (2,108) 2,108 -- -- --
Deferred compensation............. -- -- -- 566 -- -- -- (566)
Amortization of deferred
compensation..................... -- -- -- -- -- -- -- 105
Translation adjustment............ -- -- -- -- -- -- -- --
Net income........................ -- -- -- -- -- -- -- --
------- -------- ------ ------- ------- -------- ----------- -----
BALANCE AT
DECEMBER 31, 1997................. -- -- 24,146 25 56,207 12 (405) (461)
Issuance of Common
Stock under employee
stock option plan, net of
repurchases..................... -- -- 275 -- 247 -- -- --
Issuance of Common
Stock under employee
stock purchase plan.............. -- -- 184 -- 627 -- -- --
Exercise of warrants, net......... -- -- 389 -- 46 -- -- --
Proceeds of stockholder
note repayment................... -- -- -- -- -- -- 131 --
Income tax benefit from
employee stock option plan....... -- -- -- -- 240 -- -- --
Additional IPO costs.............. -- -- -- -- (91) -- -- --
Amortization of deferred
compensation..................... -- -- -- -- -- -- -- 140
Translation adjustment............ -- -- -- -- -- -- -- --
Net income........................ -- -- -- -- -- -- -- --
------- -------- ------ ------- ------- -------- ----------- -----
BALANCE AT
DECEMBER 31, 1998................. -- -- 24,994 25 57,276 12 (274) (321)
Issuance of Common
Stock under employee
stock option plan, net of
repurchases..................... -- -- 769 1 1,678 -- -- --
Issuance of Common
Stock under employee
stock purchase plan.............. -- -- 351 -- 1,267 -- -- --
Exercise of warrants, net......... -- -- 354 -- 12 (12) -- --
Proceeds of stockholder
note repayment................... -- -- -- -- -- -- 73 --
Income tax benefit from
employee stock option plan....... -- -- -- -- 5,320 -- -- --
Amortization of deferred
Translation adjustment............ -- -- -- -- -- -- -- --
Net income........................ -- -- -- -- -- -- -- --
------- -------- ------ ------- ------- -------- ----------- -----
BALANCE AT DECEMBER 31, 1999........ -- $ -- 26,468 $ 26 $65,553 $ -- $ (201) $(181)
======= ======== ====== ======= ======= ======== =========== =====
<CAPTION>
Cumulative Retained Total
Translation Earnings Stockholders'
Adjustment (Deficit) Equity
------------ ------------- --------------
<S> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1996................. $ (13) $(26,737) $ 9,098
Issuance of Common
Stock under employee
stock option plan................ -- -- 580
Issuance of Common
Stock in connection
with Public Offering............. -- -- 18,845
Conversion of Preferred
Stock to
Common Stock..................... -- -- --
Change in par value............... -- -- --
Deferred compensation............. -- -- --
Amortization of deferred
compensation..................... -- -- 105
Translation adjustment............ (63) -- (63)
Net income........................ -- 4,762 4,762
----- -------- -------
BALANCE AT
DECEMBER 31, 1997................. (76) (21,975) 33,327
Issuance of Common
Stock under employee
stock option plan, net of
repurchases.............. -- -- 247
Issuance of Common
Stock under employee
stock purchase plan.............. -- -- 627
Exercise of warrants, net......... -- -- 46
Proceeds of stockholder
note repayment................... -- -- 131
Income tax benefit from
employee stock option plan....... -- -- 240
Additional IPO costs.............. -- -- (91)
Amortization of deferred
compensation..................... -- -- 140
Translation adjustment............ 19 -- 19
Net income........................ -- 12,678 12,678
----- -------- -------
BALANCE AT
DECEMBER 31, 1998................. (57) (9,297) 47,364
Issuance of Common
Stock under employee
stock option plan, net of
repurchases.............. -- -- 1,679
Issuance of Common
Stock under employee
stock purchase plan.............. -- -- 1,267
Exercise of warrants, net......... -- -- --
Proceeds of stockholder
note repayment................... -- -- 73
Income tax benefit from
employee stock option plan....... -- -- 5,320
Amortization of deferred
compensation..................... -- -- 140
Translation adjustment............ (72) -- (72)
Net income........................ -- 24,477 24,477
----- -------- -------
BALANCE AT
$(129) $ 15,180 $80,248
DECEMBER 31, 1999................. ===== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE>
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 24,477 $ 12,678 $ 4,762
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................................. 3,231 3,034 2,265
Deferred compensation expense.................................................. 140 140 105
Deferred income taxes.......................................................... (3,918) 240 --
Provision for (reduction in) accounts receivable and other allowances.......... (303) 24 984
Change in operating assets and liabilities:
Accounts receivable......................................................... (4,738) 1,579 (4,450)
Inventories................................................................. (2,561) (1,517) (3,390)
Prepaid expenses and other current assets................................... (610) (463) (49)
Accounts payable............................................................ 656 (1,036) 5,427
Accrued liabilities......................................................... 5,716 2,637 1,754
Deferred income on sales to distributors.................................... 800 1,186 646
-------- -------- --------
Net cash provided by operating activities................................ 22,890 18,502 8,054
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................ (6,592) (1,956) (1,439)
Purchases of short-term investments............................................ (52,070) (47,904) (13,402)
Proceeds from sales and maturities of short-term investments................... 38,524 31,117 14,357
-------- -------- --------
Net cash used in investing activities.................................... (20,138) (18,743) (484)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock..................................... 2,946 828 19,425
Proceeds from stockholder note repayment....................................... 73 131 --
Principal payments under capitalized lease obligations......................... (2,064) (2,095) (1,724)
Repayment related to note payable to a stockholder............................. -- -- (3,000)
-------- -------- --------
Net cash provided by (used in) financing activities...................... 955 (1,136) 14,701
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. 3,707 (1,377) 22,271
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................. 24,176 25,553 3,282
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....................................... $ 27,883 $ 24,176 $ 25,553
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Capitalized lease obligations incurred for property and equipment.............. $ 772 $ 1,786 $ 1,630
======== ======== ========
Conversion of preferred stock to common stock.................................. $ -- $ -- $ 35,271
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest......................................................... $ 312 $ 445 $ 832
======== ======== ========
Cash paid for income taxes..................................................... $ 3,208 $ 714 $ 164
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. THE COMPANY:
Power Integrations, Inc. (the "Company"), which was incorporated in
California on March 25, 1988 and reincorporated in Delaware in December 1997
(see Note 6), designs, develops, manufactures and markets proprietary, high-
voltage, analog integrated circuits for use in AC to DC power conversion
primarily for the cellular telephone, personal computer and various consumer and
industrial electronics markets.
The Company is subject to a number of risks including, among others, the
volume and timing of orders received by the Company from its customers;
competitive pressures on selling prices; the volume and timing of orders placed
by the Company with its foundries; the availability of raw materials;
fluctuations in manufacturing yields, whether resulting from the transition to
new foundries or from other factors; changes in product mix, including the
impact of new product introductions on existing products; the Company's ability
to develop and bring to market new products and technologies on a timely basis;
the introduction of products and technologies by the Company's competitors;
market acceptance of the Company's and its customers' products; the timing of
investments in research and development and sales and marketing; cyclical
semiconductor industry conditions; fluctuations in exchange rates, particularly
exchange rates between the U.S. dollar and the Japanese yen; and changes in the
international business climate and economic conditions.
All of the wafers are manufactured by two offshore independent foundries.
Although there are a number of other suppliers that could provide similar
services, a change in suppliers could cause a delay in manufacturing and
possible loss of sales, which could adversely affect operating results.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation and Foreign Currency Translation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of intercompany transactions
and balances. The functional currencies of the Company's subsidiaries are the
local currencies. Accordingly, all assets and liabilities are translated into
U.S. dollars at the current exchange rates as of the applicable balance sheet
date. Revenues and expenses are translated at the average exchange rate
prevailing during the period. Cumulative gains and losses from the translation
of the foreign subsidiaries' financial statements have been included in
stockholders' equity.
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 December 31, 1999 and 1998, the Company's short-
term investments consist 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.
39
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below summarizes the value of the company's investments by major
security type as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(in thousands)
1999 1998
------- -------
<S> <C> <C>
Cash Equivalents:
U.S. corporate securities......................................................... $ 5,488 $15,596
Tax-exempt securities............................................................. 20,500 --
------- -------
Total cash equivalents....................................................... 25,988 15,596
------- -------
Short-term Investments:
U.S. corporate securities......................................................... 17,897 14,881
U.S. government securities........................................................ -- 959
Foreign securities................................................................ 3,079 3,922
Tax-exempt securities............................................................. 11,999 --
------- -------
Total short-term investments................................................. 32,975 19,762
------- -------
Total investment securities.................................................. $58,963 $35,358
======= =======
</TABLE>
Inventories
Inventories (which consist of costs associated with the purchases of wafers
from offshore foundries and of packaged components from several offshore
assembly manufacturers, as well as internal labor and overhead associated with
the testing of both wafers and packaged components) are stated at the lower of
cost (first-in, first-out) or market. Provisions, when required, are made to
reduce excess and obsolete inventories to their estimated net realizable values.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Raw materials......................................... $ 4,039 $3,132
Work-in-process....................................... 4,059 2,901
Finished goods........................................ 3,308 2,812
------- ------
$11,406 $8,845
======= ======
</TABLE>
Property and Equipment
Depreciation and amortization of property and equipment are provided using
the straight-line method over the shorter of the estimated useful lives of the
assets over a period of one to four years or over the applicable lease term.
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $9.0 million and $8.2
million, as of December 31, 1999 and 1998, respectively. Related accumulated
amortization on these leased assets was approximately $5.7 million and $4.7
million, as of December 31, 1999 and 1998, respectively.
40
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
In December 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings per Share." SFAS No. 128 requires companies
to compute earnings per share under two different methods (basic and diluted).
Basic earnings per share is calculated by dividing net income by the weighted
average shares of common stock outstanding during the period. Diluted earnings
per share is calculated by dividing net income by the weighted average shares of
outstanding common stock and common stock equivalents during the period. Common
stock equivalents included in the diluted calculation consist of dilutive shares
issuable upon the exercise of outstanding common stock options and warrants
computed using the treasury stock method.
A summary of the earnings per share calculation for each of the three years
ended December 31, 1999, 1998 and 1997 is as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic earnings per share:
Net Income.................................................................. $24,477 $12,678 $ 4,762
======= ======= =======
Weighted average common shares.............................................. 25,958 24,426 3,776
======= ======= =======
Basic earnings per share................................................. $ 0.94 $ 0.52 $ 1.26
======= ======= =======
Diluted earnings per share:
Net Income.................................................................. $24,477 $12,678 $ 4,762
======= ======= =======
Weighted average common shares.............................................. 25,958 24,426 3,776
Weighted average common share equivalents:
Preferred stock.......................................................... -- -- 14,078
Options.................................................................. 2,170 1,446 578
Employee stock purchase plan............................................. 69 10 --
Warrants................................................................. -- 570 246
------- ------- -------
Diluted weighted average common shares...................................... 28,197 26,452 18,678
======= ======= =======
Diluted earnings per share............................................... $ 0.87 $ 0.48 $ 0.25
======= ======= =======
</TABLE>
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
presentation of comprehensive income. SFAS No. 130, which was adopted by the
Company in the first quarter of 1998, requires companies to report a new measure
of income. "Comprehensive Income" is to include foreign currency translation
gains and losses and other unrealized gains and losses that have historically
been excluded from net income and reflected instead in equity. SFAS No. 130 did
not have a material impact on the Company's financial statements.
Segment Reporting
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 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.
41
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
will adopt SAB 101 as required in the first quarter of 2000 and is evaluating
the effect that such adoption may have on its consolidated results of operations
and financial position.
Revenue Recognition, Significant Customers
Product revenues consist of sales to OEMs and merchant power supply
manufacturers and to distributors. Revenues from product sales to OEM and
merchant power supply manufacturers are recognized upon shipment. The Company
provides for estimated sales returns and allowances related to such sales at the
time of shipment. During 1999, 1998 and 1997, sales to distributors of the
Company's products accounted for approximately 40%, 48% and 45% of net revenues,
respectively. Sales to distributors are made under terms allowing certain rights
of return and protection against subsequent price declines of the Company's
products held by the distributors. Pursuant to the Company's distributor
agreements, the Company protects its distributors' exposure related to the
impact of price reductions as well as products at distributors that are slow
moving or have been discontinued. These agreements, which may be canceled by
either party on a specified notice, generally contain a provision for the return
of the Company's product in the event the agreement with the distributor is
terminated. Accordingly, the Company defers recognition of revenue and the
proportionate costs of revenues derived from sales to distributors until such
distributors resell the Company's products to their customers. The margin
deferred as a result of this policy is reflected as "deferred income on sales to
distributors" in the accompanying consolidated balance sheets.
The Company has entered into a separate wafer supply and technology license
agreement with an unaffiliated wafer foundry. The wafer supply agreement, which
expires in June 2000, is renewable. In connection with the technology license
agreement, the Company is entitled to receive a royalty on sales of products by
the foundry, which incorporates the Company's technology into its own products.
For the years ended December 31, 1999, 1998 and 1997, revenue recognized under
this agreement was approximately $1.4 million, $1.8 million and $1.2 million,
respectively.
42
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's end user base is highly concentrated and a relatively small
number of OEMs, directly or indirectly through merchant power supply
manufacturers, accounted for a significant portion of the Company's revenue. For
the years ended December 31, 1999, 1998 and 1997, ten customers accounted for
approximately 68%, 67% and 67% of net revenues, respectively.
The following customers accounted for more than 10% of total net revenues:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
Customer 1999 1998 1997
-------- ---------- ---------- ----------
<S> <C> <C> <C>
A...................................... 16% 22% 21%
B...................................... * * 15%
C...................................... 11% 13% *
</TABLE>
- ----------------
* less than 10% or no sales to the customer
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. Export sales, which consist of domestic sales
to customers in foreign countries are comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Hong Kong/China....................................... 20% 26% 25%
Taiwan................................................ 19% 26% 28%
Western Europe........................................ 16% 15% 12%
Korea................................................. 13% 7% 5%
Japan................................................. 2% 3% 5%
Other................................................. 8% 6% 6%
---- ---- ----
Total export sales.................................. 78% 83% 81%
==== ==== ====
</TABLE>
Product Sales
Sales of TOPSwitch products accounted for 97%, 95% and 93% of total net
revenues in 1999, 1998 and 1997, respectively. TOPSwitch products include
TOPSwitch, TOPSwitch II and TinySwitch.
Foreign Currency Risk
The Company maintains a Japanese yen bank account with a U.S. bank for
payments to suppliers and for cash receipts from Japanese suppliers and
customers denominated in yen. For the years ended December 31, 1999 and 1998,
the Company realized foreign exchange transaction gains of approximately
$123,000 and $35,000, respectively. For the year ended December 31, 1997, the
Company realized a foreign exchange transaction loss of approximately $86,000.
These amounts are included in "other income (expense)," in the accompanying
consolidated statements of operations.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
43
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company has cash investment policies that limit cash
investments to short-term, low risk investments. With respect to trade
receivables, the Company performs ongoing credit evaluations of its customers'
financial condition and requires letters of credit whenever deemed necessary.
Additionally, the Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends related to past losses and other relevant information. As of December 31,
1999 and 1998, approximately 73% and 67% of accounts receivable, respectively,
were concentrated with ten customers.
3. BANK LINE OF CREDIT:
The Company entered into a $10.0 million revolving line of credit agreement
with a bank in October 1998. Advances under the agreement bear interest at a
fixed rate of the bank's LIBOR rate plus 1.5% per annum or at the bank's
variable interest rate. The Company has the option to choose between the two
rates. The agreement covers advances for commercial letters of credit and
standby letters of credit, used primarily for the shipment of wafers from our
wafer supply manufacturers to us, provided that at no time will the aggregate
sum of all advances exceed $10.0 million. As of December 31, 1999, there were
outstanding letters of credit totaling 96,587,000 Japanese yen (approximately
$964,000). As of December 31, 1998, there were outstanding letters of credit
totaling 382,478,000 Japanese yen (approximately $3.4 million). The agreement,
which expires on November 30, 2000, restricts the Company from entering into
certain transactions and contains certain financial covenants.
4. COMMITMENTS:
The Company leases its facilities under noncancellable operating leases,
which expire at various dates through October 2010. The lease for the Company's
main corporate facility in Sunnyvale, California expires in October 2003 and
contains a conditional five-year option at fair market value to the year 2008.
The Company also has an additional facility, which is leased through June 2003.
On December 29, 1999, the Company entered into a lease for a new facility, which
will become available in mid 2000, at which time the Company plans to relocate
its main operations to that site. The lease on the new facility has a term of 10
years, expiring in May 2010 with two conditional five-year options, which if
exercised would extend the lease to May 2020. Rent expense under all operating
leases was approximately $1.1 million, $500,000 and $291,000 in 1999, 1998 and
1997, respectively.
A significant portion of the Company's machinery and equipment is leased
under agreements accounted for as capital leases. The Company leased
approximately $772,000 and $1.8 million of equipment during 1999 and 1998,
respectively, under various capital leasing arrangements. In 1998, the Company
entered into a new capital lease line of credit agreement, which allowed for
combined borrowings of up to $4.4 million to finance the acquisition of property
and equipment. The capital leasing agreement expired on June 30, 1999.
44
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under all noncancellable operating and
capital lease agreements as of December 31, 1999 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Fiscal Year Operating Capital
----------- --------- -------
<S> <C> <C>
2000 $ 2,185 $ 1,373
2001 3,157 758
2002 3,066 463
2003 2,859 241
2004 2,126 42
Thereafter 12,997 --
------- -------
Total minimum lease payments.................................................. $26,390 2,877
=======
Less: Amounts representing interest on capital leases (4.4% to 14.9%)......... (256)
-------
2,621
Less: Current portion.......................................................... (1,228)
-------
Long-term portion.............................................................. $ 1,393
=======
</TABLE>
5. PREFERRED STOCK PURCHASE RIGHTS PLAN:
In February 1999, the Company adopted a Preferred Stock Purchase Rights
Plan (the "Plan") designed to enable all stockholders to realize the full value
of their investment and to provide for fair and equal treatment for all
stockholders in the event that an unsolicited attempt is made to acquire the
Company. Under the Plan, stockholders received one Right to purchase one one-
thousandth of a share of a new series of Preferred Stock for each outstanding
share of Common Stock held of record at the close of business on March 12, 1999
at $150.00 per Right, when someone acquires 15 percent or more of the Company's
Common Stock or announces a tender offer which could result in such person
owning 15 percent or more of the Common Stock. Each one one-thousandth of a
share of the new Preferred Stock has terms designed to make it substantially the
economic equivalent of one share of Common Stock. Prior to someone acquiring 15
percent, the Rights can be redeemed for $.001 each by action of the Board of
Directors. Under certain circumstances, if someone acquires 15 percent or more
of the Common Stock, the Rights permit the stockholders other than the acquiror
to purchase the Company's Common Stock having a market value of twice the
exercise price of the Rights, in lieu of the Preferred Stock. Alternatively,
when the Rights become exercisable, the Board of Directors may authorize the
issuance of one share of Common Stock in exchange for each Right that is then
exercisable. In addition, in the event of certain business combinations, the
Rights permit the purchase of the Common Stock of an acquiror at a 50 percent
discount. Rights held by the acquiror will become null and void in both cases.
The Rights expire on February 23, 2009.
6. STOCKHOLDERS' EQUITY:
Preferred Stock
With the closing of the Company's IPO in December 1997, all of the
outstanding convertible preferred stock automatically converted into 14,895,116
shares of common stock. Upon conversion of the outstanding preferred stock to
common stock, such preferred stock was retired. The Company is authorized to
issue 3,000,000 shares of new $0.001 par value preferred stock, of which none
was outstanding as of December 31, 1999.
45
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock
As of December 31, 1999, the Company was authorized to issue 40,000,000
shares of $0.001 par value common stock. On October 25, 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, that was applicable to stockholders
of record at the close of business on November 8, 1999, and effective on
November 22, 1999. All references to share and per-share data for all periods
presented have been adjusted to give effect to this two-for-one stock split.
1988 Stock Option Plan
In June 1988, the board of directors approved the 1988 Stock Option Plan
(the "1988 Plan"), whereby the board of directors may grant options to key
employees, directors and consultants to purchase the Company's common stock at
exercise prices of not less than 85% of the fair value of the shares at the date
of grant. Options expire ten years after the date of grant (five years if the
option is granted to a ten percent owner optionee) and generally vest over 50
months. Options granted under the 1988 Plan will remain outstanding in
accordance with their terms, but effective July 1997, the board of directors had
determined that no further options would be granted under the 1988 Plan.
1997 Stock Option Plan
In June 1997, the board of directors approved the 1997 Stock Option Plan
(the "1997 Plan"), whereby the board of directors may grant options to key
employees, directors and consultants to purchase the Company's common stock at
exercise prices of not less than 85% of the fair value of the shares at the date
of grant. As of December 31, 1999, the 1997 Plan's maximum share reserve is
5,514,160 shares, which is comprised of the sum of (i) 2,571,196 shares (new
shares allocated to the 1997 Plan) and (ii) 2,942,964 shares granted pursuant to
the 1988 Plan (the "1988 Plan Options"). The number of shares available for
issuance under the 1997 Plan, at any time, is reduced by the number of shares
remaining subject to the 1988 Plan Options. Options expire ten years after the
date of grant (five years if the option is granted to a ten percent owner
optionee) and generally vest over 48 months.
1997 Outside Directors Stock Option Plan
In September 1997, the board of directors approved an Outside Director
Stock Option Plan (the "Directors Plan"). A total of 400,000 shares of common
stock have been reserved for issuance under the Directors Plan. The Directors
Plan provides for the grant of nonstatutory stock options to nonemployee
directors of the Company. The Directors Plan is designed to work automatically
without administration; however, to the extent administration is necessary, it
will be performed by the board of directors. The Directors Plan provides that
each current and future nonemployee director of the Company will be granted an
option to purchase 30,000 shares of common stock on the effective date or the
date on which the optionee first becomes a nonemployee director of the Company
after the effective date as the case may be (the "Initial Grant"). Thereafter,
each nonemployee director who has served on the board of directors continuously
for 6 months will be granted an additional option to purchase 10,000 shares of
common stock (an "Annual Grant"). Subject to an optionee's continuous service
with the Company, approximately 1/3/rd/ of an Initial Grant will become
exercisable one year after the date of grant and 1/36/th/ of the Initial Grant
will become exercisable monthly thereafter. Each Annual Grant will become
exercisable in twelve monthly installments beginning in the 25th month after the
date of grant, subject to the optionee's continuous service. The exercise price
per share of all options granted under the Directors Plan will equal the fair
market value of a share of common stock on the date of grant. Options granted
under the Directors Plan have a term of ten years and are non-transferable. In
the event of certain changes in control of the Company, options outstanding
under the Directors Plan will become immediately exercisable and vested in full.
46
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998 Nonstatutory Stock Option Plan
In July 1998, the board of directors approved the 1998 Nonstatutory Stock
Option Plan (the "1998 Plan"), whereby the board of directors may grant
nonstatutory options to employees and consultants to purchase the Company's
common stock at exercise prices of not less than 85% of the fair value of the
shares at the date of grant. As of December 31, 1999, the maximum share reserve
under this plan was 1,000,000 shares. Options expire ten years after the date of
grant (five years if the option is granted to a ten percent owner optionee) and
generally vest over 48 months.
The following table summarizes option activity under the Company's option
plans:
(prices are weighted average prices)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
Beginning of year........... 2,666,422 $ 3.11 1,749,512 $1.38 2,592,852 $0.40
Granted................... 1,704,875 $18.06 1,317,300 $5.08 1,324,864 $1.35
Exercised................. (769,316) $ 2.15 (275,476) $0.89 (2,099,204) $0.28
Cancelled................. (272,906) $11.23 (124,914) $3.28 (69,000) $0.71
--------- --------- ----------
Options outstanding,
end of year................. 3,329,075 $10.40 2,666,422 $3.11 1,749,512 $1.38
========= ========= ==========
Exercisable, end of year........ 723,496 $ 3.71 727,348 $1.11 475,258 $0.49
========= ========= ==========
</TABLE>
Options issued under the 1988, 1997 and 1998 plans may be exercised at any
time prior to their expiration. Options issued under the Directors Plan are
exercisable upon vesting. In addition, the Company has the right, upon
termination of an optionholder's employment or service with the Company, at its
discretion, to repurchase any unvested shares issued under the 1988, 1997 and
1998 plans at the original purchase price. Under the terms of the option plans,
an option holder may not sell shares obtained upon the exercise of an option
until the option has vested as to those shares. As of December 31, 1999, an
aggregate of 148,240 shares of common stock issued under the 1988, 1997 and 1998
plans are subject to repurchase by the Company at $0.68 to $0.85 per share and a
weighted average repurchase price of $0.81 per share.
The Company accounts for its Plans under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Had compensation expense for the Plans been
determined under a fair value method consistent with SFAS No. 123, "Accounting
for Stock Based Compensation," the Company's net income would have been
decreased to the following pro forma amounts (in thousands, except per share
information):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported................................................................... $24,477 $12,678 $4,762
Pro forma..................................................................... $18,891 $11,599 $4,427
Basic earnings per share:
As reported................................................................... $ 0.94 $ 0.52 $ 1.26
Pro forma..................................................................... $ 0.73 $ 0.47 $ 1.17
Diluted earnings per share:
As reported................................................................... $ 0.87 $ 0.48 $ 0.25
Pro forma..................................................................... $ 0.67 $ 0.44 $ 0.24
</TABLE>
47
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted-average grant date fair value of options granted during fiscal
years 1999, 1998 and 1997 was $11.85, $10.15 and $1.68, respectively. The fair
value of each option grant is estimated on the date of grant using the Black-
Scholes option pricing model with the following weighted average assumptions
used for grants in 1999, 1998 and 1997: risk-free interest rates of 5.625, 5.25
and 6.2 percent, respectively; expected dividend yields of zero percent;
expected lives of 1.5 years for 1999 and 1998, and 4 years for 1997; expected
volatility of 84%, 73% and 70% for 1999, 1998 and 1997, respectively.
The following table summarizes the stock options outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------- ----------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Life Price Outstanding Price
- -------------------- --------------- --------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
$ 0.26--$ 4.00 595,536 6.75 $ 1.08 410,319 $ 0.98
$ 4.25--$ 4.38 916,336 8.50 $ 4.37 144,699 $ 4.37
$ 4.42--$ 11.06 301,405 8.28 $ 8.94 98,209 $ 5.60
$ 12.00--$ 29.19 1,363,623 9.31 $14.22 69,269 $15.43
$ 30.69--$ 51.50 152,175 9.79 $26.84 1,000 $33.20
--------- -------
$ 0.26--$ 51.50 3,329,075 8.56 $10.40 723,496 $ 3.71
========= =======
</TABLE>
1997 Employee Stock Purchase Plan
Under the 1997 Employee Stock Purchase Plan (the "Purchase Plan"), 1,000,000
shares of common stock are reserved for issuance to eligible employees. The
Purchase Plan permits employees to purchase common stock through payroll
deductions, which may not exceed 15 percent of an employee's compensation, at
85% of the lower of the fair market value of the Company's common stock on the
first or the last day of each offering period. As of December 31, 1999, 534,770
shares had been purchased and 465,230 shares were reserved for future issuance
under the Purchase Plan.
Stockholder Notes Receivable
In July 1997, in connection with the purchase of common stock upon exercise of
stock options granted to certain officers and employees of the Company, the
Company loaned to these officers and employees an aggregate of $405,000, at an
interest rate of 6.65% pursuant to Promissory Note and Pledge Agreements. These
loans, which are secured by 238,231 shares of common stock, are full recourse
notes, and are due in full without regard to the value of the Company's common
stock in July 2002, or at the Company's option upon (i) termination of
employment with the Company, (ii) a default in the payment of any installment or
principal and/or interest when due, (iii) a sale of the pledged stock or (iv)
acceleration being reasonably necessary for the Company to comply with any
regulations promulgated by the Board of Governors of the Federal Reserve System
affecting the extension of credit in connection with the Company's securities.
As of December 31, 1999, the unpaid principal portion of these loans was
$201,000.
Deferred Compensation
In connection with the issuance of stock options to employees and
consultants prior to December 1997, the Company recorded deferred compensation
in the aggregate amount of approximately $566,000, representing the difference
between the fair market value of the Company's common stock and the exercise
price of the stock
48
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
options at the date of grant. The Company is amortizing the deferred
compensation expense over the shorter of the period in which the employee,
director or consultant provides services or the applicable vesting period, which
is typically over 48 months. Amortization expense was $140,000 in each of the
years ended December 31, 1999 and 1998 and $105,000 in 1997. Compensation
expense is decreased in the period of forfeiture for any accrued, but unvested
compensation arising from the early termination of an option holder's services.
No compensation expense related to any other periods presented has been
recorded.
Warrants
In connection with the issuance of Series E Preferred Stock in 1994, the
Company issued warrants for the purchase of Series E Preferred Stock, which upon
the completion of the IPO and the reincorporation in Delaware, were
automatically converted to purchase 20,728 shares of common stock at $5.74 per
share. These warrants were exercised in 1998.
In connection with an equipment lease agreement entered into during 1993
with a leasing company, the Company issued a warrant for the purchase of
preferred stock. Upon the completion of the IPO and the reincorporation in
Delaware, the warrant was automatically converted to purchase 16,303 shares of
common stock at $3.68 per share. This same warrant provides for the purchase of
additional preferred stock, which, upon the completion of the IPO and the
reincorporation in Delaware, was automatically converted to purchase 12,551
shares of common stock at $4.78 per share. This warrant was exercised in 1999.
The Company leased additional equipment during 1994 from the same company and,
as part of this lease, the Company issued a warrant for the purchase of
preferred stock. Upon the completion of the IPO and the reincorporation in
Delaware, the warrant automatically converted into a warrant to purchase 12,551
shares of common stock at $4.78 per share. This warrant was exercised in 1999.
In 1995, the Company leased additional equipment from the same company and
issued a warrant to purchase preferred stock, which upon the completion of the
IPO and the reincorporation in Delaware, automatically converted into a warrant
to purchase 24,509 shares of common stock at $3.67 per share. This warrant was
exercised in 1999.
In connection with an equipment leasing agreement entered into during 1995
with a leasing company, the Company issued a warrant to purchase 41,165 shares
of the Company's common stock at $6.34 per share. This warrant was exercised in
1998.
In connection with obtaining the revolving line of credit agreement with a
bank in 1995, the Company issued the bank warrants to purchase preferred stock.
Upon the completion of the IPO and the reincorporation in Delaware, the warrants
were automatically converted to purchase 146,786 shares of common stock at $3.67
per share. These warrants were exercised in 1998. In connection with the renewal
of the line of credit agreement in 1996, the Company issued the bank a warrant
to purchase 23,149 shares of common stock at $6.34 per share. This warrant was
exercised in 1998.
In connection with the issuance of a note payable to a stockholder in 1996,
the Company issued a warrant to purchase 176,470 shares of the Company's common
stock at $1.36 per share. This warrant was exercised in 1999.
Shares Reserved
As of December 31, 1999, the Company had 4,256,118 shares of common stock
reserved for future issuance under Stock Option and Stock Purchase Plans.
49
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. INCOME TAXES:
The Company accounts for income taxes under SFAS No. 109 "Accounting for
Income Taxes." SFAS No. 109 provides for a liability approach to accounting for
income taxes under which deferred income taxes are provided based upon enacted
tax laws and rates applicable to the periods in which taxes become payable.
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current provision:
Federal......................................................... $ 7,621 $ 1,886 $ 262
State........................................................... 616 694 55
Foreign......................................................... 15 20 16
------- ------- -------
8,252 2,600 333
------- ------- -------
Deferred provision (benefit):
Federal......................................................... 1,125 4,136 1,946
State........................................................... 99 (103) (404)
Foreign......................................................... -- -- --
------- ------- -------
1,224 4,033 1,542
------- ------- -------
Net decrease in valuation allowance................................ (5,142) (4,033) (1,345)
------- ------- -------
$ 4,334 $ 2,600 $ 530
======= ======= =======
</TABLE>
The provision for income taxes differs from the amount, which would result
by applying the applicable Federal income tax rate to income before provision
for income taxes as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Provision computed at Federal statutory rate......................... 35.0% 35.0% 34.0%
State tax provision, net of Federal benefit.......................... 3.1 3.1 3.0
Foreign tax.......................................................... -- 0.1 0.3
Change in valuation allowance........................................ (17.9) (23.0) (25.4)
Research and development credits..................................... (3.4) (3.0) (6.2)
Foreign sales corporation............................................ (2.5) -- --
Non deductible expenses and other.................................... 0.7 4.8 4.3
----- ----- -----
15.0% 17.0% 10.0%
===== ===== =====
</TABLE>
The components of the net deferred income tax asset were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Tax credit carryforwards.......................................................... $ 494 $ 1,128
Inventory reserves................................................................ 1,896 2,283
Accounts receivable allowances.................................................... 377 527
Accrued vacation.................................................................. 121 132
Other cumulative temporary differences............................................ 1,030 1,072
------ -------
3,918 5,142
Valuation allowance............................................................... -- (5,142)
------ -------
$3,918 $ --
====== =======
</TABLE>
50
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The deferred tax asset of $3.9 million at December 31, 1999 is included in
prepaid expenses and other current assets in the accompanying consolidated
balance sheet. Realization of the deferred tax asset is dependent on generating
sufficient future taxable income. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
asset will be realized.
As of December 31, 1999, the Company had research and development tax
credit carryforwards of approximately $494,000. These carryforwards expire in
various periods from 2010 to 2019. The United States Tax Reform Act of 1986
contains provisions that limit research and development credits available to be
used in any given year upon the occurrence of certain events.
8. 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, the
jury returned a unanimous 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. In March 2000, the Company and Motorola
entered into a settlement agreement. Pursuant to the settlement agreement, the
Court has issued a permanent injunction prohibiting Motorola from selling the
ICs that were the subject of the lawsuit. Additionally the Company will not
collect the money judgment from Motorola and will continue as a preferred
supplier of high-voltage power conversion ICs for cellular phone chargers that
Motorola manufactures. The companies will work more closely together to develop
future generations of cellular phone chargers for Motorola.
51
<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.
/s/ ROBERT G. STAPLES
Dated: March 28, 2000 By: --------------------------------
Robert G. Staples
Chief Financial Officer
52
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Howard F. Earhart and Robert G. Staples
his true and lawful attorney-in-fact and agent, with full power of substitution
and, for him and in his name, place and stead, in any and all capacities to sign
any and all amendments to this Report on Form 10-K, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE
CAPACITIES AND ON THE DATES INDICATED.
/s/ HOWARD F. EARHART
Dated: March 28, 2000 By: -----------------------------
Howard F. Earhart
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
/s/ ROBERT G. STAPLES
Dated: March 28, 2000 By: -----------------------------
Robert G. Staples
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
/s/ ALAN D. BICKELL
Dated: March 28, 2000 By: -----------------------------
Alan D. Bickell
Director
Dated: March 28, 2000 By: /s/ NICHOLAS E. BRATHWAITE
-----------------------------
Nicholas E. Brathwaite
Director
By: /s/ R. SCOTT BROWN
Dated: March 28, 2000 -----------------------------
R. Scott Brown
Director
By: /s/ E. FLOYD KVAMME
Dated: March 28, 2000 ------------------------------
E. Floyd Kvamme
Director
By: /s/ STEVEN J. SHARP
Dated: March 28, 2000 ------------------------------
Steven J. Sharp
Director
53
<PAGE>
POWER INTEGRATIONS, INC
EXHIBITS
TO
FORM 10-K ANNUAL REPORT
For the Year Ended
December 31, 1999
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.1*** Restated Certificate of Incorporation (we also filed in our
Current Report on Form 8-K filed with the SEC on March 12,
1999, a Certificate of Designation which amends this
Restated Certificate).
3.2*++ By-Laws, as amended February 24, 1999.
4.1* Fifth Amended and Restated Rights Agreement dated April 27,
1995, as amended, by and among us and certain of our
investors.
4.2* Investors' Rights Agreement dated as of May 22, 1996 between
us and Hambrecht & Quist Transition Capital, LLC.
10.1* Form of Indemnification Agreement for directors and
officers.
10.2* 1988 Stock Option Plan and forms of agreements thereunder.
10.3* 1997 Stock Option Plan and forms of agreements thereunder.
10.4* 1997 Outside Directors Stock Option Plan and forms of
agreements thereunder.
10.5* 1997 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.6* Amended Technology License Agreement dated as of June 29,
1995, as amended on April 1, 1997 between us and Matsushita.
10.7* Amended Wafer Foundry Agreement dated as of June 29, 1997,
between us and Matsushita.
10.9* Master Equipment Lease Agreement dated as of February 11,
1997 among us and Finova Technology Finance, Inc.
10.10* Master Lease Agreement dated as of September 3, 1996 between
us and Leasing Technologies International, Inc.
10.11* Master Equipment Lease Agreement dated as of November 17,
1995 between us and Lighthouse Capital Partners, L.P.
10.12* Master Equipment Lease Agreement dated as of December 29,
1993, as amended, between us and MMC/GATX Partnership No. 1.
<PAGE>
10.14* Founder Stock Purchase Agreement between us and Steven J.
Sharp dated as of April 13, 1988.
10.15* Founder Stock Purchase Agreement between us and Klas H.
Eklund dated as of April 13, 1988.
10.16* Founder Stock Purchase Agreement between us and Arthur E.
Fury dated as of April 13, 1988.
10.18** Industrial Building Lease between us and Mathilda
Development, a California limited partnership, dated as of
June 3, 1998.
10.21+ Wafer Supply Agreement between us and OKI, dated as of
October 1, 1998.
10.22+ Master Equipment Lease Agreement between us and Metlife
Capital Limited Partnership, dated as of July 31, 1998.
10.23*** Loan Agreement between us and Union Bank of California,
N.A., dated as of October 16, 1998.
10.24+++ Amendment Number One, dated as of February 26, 1999, to the
Wafer Supply Agreement between us and OKI, dated as of
October 1, 1998.
10.25**** Sublease between us and Atweb, dated as of July 1, 1999.
10.26 Lease agreement dated as of December 29, 1999 between us and
Lincoln - RECP Hellyer OPCO, LLC, a Delaware limited
liability company.
21.1* List of subsidiaries.
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney (See signature page).
27.1 Financial Data Schedule.
_________________
* As filed with the SEC in our Registration Statement on Form S-1 on
September 11, 1997.
** As filed with the SEC in our quarterly report on Form 10-Q on August 12,
1998.
*** As filed with the SEC in our annual report on Form 10-K on March 16, 1999.
**** As filed with the SEC in our quarterly report on Form 10-Q on November 9,
1999.
+ As filed with the SEC in our quarterly report on Form 10-Q on November 10,
1998.
++ We filed an amendment to the Bylaws with the SEC in our Current Report on
Form 8-K on March 12, 1999.
+++ As filed with the SEC in our quarterly report on Form 10-Q on May 10,
1999.
<PAGE>
EXHIBIT 10.26
Lease Agreement
Basic Lease Information
<TABLE>
<S> <C>
Lease Date: December 29, 1999
Landlord: LINCOLN-RECP HELLYER OPCO, LLC,
a Delaware limited liability company
Landlord's Address: c/o Legacy Partners Commercial, Inc.
101 Lincoln Centre Drive, Fourth Floor
Foster City, California 94404-1167
Tenant: POWER INTEGRATIONS, INC.,
a Delaware corporation
Tenant's Address: 477 N. Mathilda Avenue, Sunnyvale, California 94086
changing to 5245 and 5265 Hellyer Avenue, San Jose, California 95138
Premises: Estimated to be approximately 118,632 rentable square feet as shown on Exhibit A
---------
Premises Address: 5245 Hellyer Avenue (Building A) and 5265 Hellyer Avenue (Building B)
San Jose, California 95138
Buildings A & B: Approximately 118,632 rentable square feet
Lot (Building's tax parcel): APN 678-20-040
Park: Hellyer Oaks Technology Park: Approximately 177,948 rentable square feet
Term: June 1, 2000 ("Commencement Date"), through
May 31, 2010 ("Expiration Date")
Base Rent ((P)3): Seventy Six Thousand Five Hundred Seventeen and 64/100 Dollars ($76,517.64) per month ($.645 NNN per
rentable square foot) commencing June 1, 2000 through July 31, 2000.
Adjustments to Base Rent: Effective August 1, 2000, the Base Rent shall increase to $153,035.28 per month ($1.29 NNN per
rentable square foot)
Effective June 1, 2001, the Base Rent shall increase to $159,156.69 per month ($1.3416 NNN per
rentable square foot)
Effective June 1, 2002, the Base Rent shall increase to $165,522.96 per month ($1.3953 NNN per
rentable square foot)
Effective June 1, 2003, the Base Rent shall increase to $172,143.88 per month ($1.4511 NNN per
rentable square foot)
Effective June 1, 2004, the Base Rent shall increase to $179,029.63 per month ($1.5091 NNN per
rentable square foot)
Effective June 1, 2005, the Base Rent shall increase to $186,190.82 per month ($1.5695 NNN per
rentable square foot)
Effective June 1, 2006, the Base Rent shall increase to $193,638.45 per month ($1.6323 NNN per
rentable square foot)
Effective June 1, 2007, the Base Rent shall increase to $201,383.99 per month ($1.6976 NNN per
rentable square foot)
Effective June 1, 2008, the Base Rent shall increase to $209,439.34 per month ($1.7655 NNN per
rentable square foot)
Effective June 1, 2009, the Base Rent shall increase to $217,816.93 per month ($1.8361 NNN per
rentable square foot )
Advance Rent ((P)3): One Hundred Seventy Nine Thousand One Hundred Ninety-Three and 64/100 Dollars ($179,193.64)
Security Deposit ((P)4): Two Hundred Forty Three Thousand Nine Hundred Seventy-Five and 28/100 Dollars ($243,975.28)
*Tenant's Share of Operating Expenses ((P)6.1): 66.67% of the Park
*Tenant's Share of Tax Expenses ((P)6.2): 66.67% of the Park
*Tenant's Share of Common Area Utility Costs ((P)7.2): 66.67% of the Park
*Tenant's Share of Utility Expenses ((P)7.1): 100% of the Buildings
*The amount of Tenant's Share of the expenses as referenced above shall be
subject to modification as set forth in this Lease.
Permitted Uses ((P)9): The Premises shall be used solely for the office, administration, marketing, sales, R&D and light
manufacturing of electronic components and for no other purposes without Landlord's prior written consent,
which shall not be unreasonably withheld, but only to the extent permitted by the City of San Jose and all
agencies and governmental authorities having jurisdiction thereof
Unreserved
Parking Spaces: Four hundred twenty-nine (429) non-exclusive and non-designated spaces and ten (10) designated spaces for
Tenant's exclusive use.
</TABLE>
1
<PAGE>
Broker ((P)38): Colliers International for Tenant
Colliers International for Landlord
Exhibits: Exhibit A - Premises, Building, Lot and/or Park
Exhibit B - Tenant Improvements
Exhibit C - Rules and Regulations
Exhibit D - [Intentionally Omitted]
Exhibit E - Tenant's Initial Hazardous Materials Disclosure
Certificate
Exhibit F - Change of Commencement Date - Example
Exhibit G - Sign Criteria
Exhibit H - Subordination, Non-Disturbance and Attornment
Agreement
Exhibit I - Shell Improvement Plans
Addenda: Addendum 1- Options to Extend the Lease
2
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Section Page
<S> <C>
1. Premises................................................................................. 4
2. Occupancy; Adjustment of Commencement Date............................................... 4
3. Rent..................................................................................... 4
4. Security Deposit......................................................................... 5
5. Condition of Premises; Improvements...................................................... 5
6. Additional Rent.......................................................................... 5
7. Utilities and Services................................................................... 7
8. Late Charges............................................................................. 8
9. Use of Premises.......................................................................... 8
10. Alterations; Surrender of Premises....................................................... 9
11. Repairs and Maintenance.................................................................. 10
12. Insurance................................................................................ 10
13. Waiver of Subrogation.................................................................... 11
14. Limitation of Liability and Indemnity.................................................... 11
15. Assignment and Subleasing................................................................ 12
16. Ad Valorem Taxes......................................................................... 13
17. Subordination............................................................................ 14
18. Right of Entry........................................................................... 14
19. Estoppel Certificate..................................................................... 14
20. Tenant's Default......................................................................... 15
21. Remedies for Tenant's Default............................................................ 15
22. Holding Over............................................................................. 16
23. Landlord's Default....................................................................... 16
24. Parking.................................................................................. 16
25. Sale of Premises......................................................................... 16
26. Waiver................................................................................... 17
27. Casualty Damage.......................................................................... 17
28. Condemnation............................................................................. 18
29. Environmental Matters/Hazardous Materials................................................ 18
30. Financial Statements..................................................................... 20
31. General Provisions....................................................................... 20
32. Signs.................................................................................... 21
33. Mortgagee Protection..................................................................... 21
34. Quitclaim................................................................................ 21
35. Modifications for Lender................................................................. 21
36. Warranties of Tenant..................................................................... 21
37. Compliance with Americans with Disabilities Act.......................................... 21
38. Brokerage Commission..................................................................... 22
39. Quiet Enjoyment.......................................................................... 22
40. Landlord's Ability to Perform Tenant's Unperformed Obligations........................... 22
41. Satellite Dish........................................................................... 22
42. Tenant's Ability to Perform Landlord's Unperformed Obligations........................... 23
</TABLE>
3
<PAGE>
Lease Agreement
Date: The Basic Lease Information set forth on Page 1 and this Lease are and
shall be construed as a single instrument.
1. Premises
Landlord hereby leases the Premises to Tenant upon the terms and conditions
contained herein. Tenant shall have the right to use, on a non-exclusive basis,
parking areas and ancillary facilities located within the Common Areas of the
Park, subject to the terms of this Lease. Landlord and Tenant hereby acknowledge
and agree that as of the Lease Date the Building has not been constructed on the
Lot and all of the Buildings have not been fully constructed within the Park.
Tenant further agrees that the number of rentable square feet of the Building,
the Lot and the Park may subsequently change during the Term of this Lease
commensurate with any modifications by Landlord, and Tenant's Share shall
accordingly change.
2. Occupancy; Adjustment of Commencement Date
2.1 If on February 1, 2000, Landlord has not delivered possession of the
Premises with only the Shell Improvements (defined in Section 5.2 below)
Substantially Completed (as defined in Exhibit B hereto), Landlord shall not be
---------
subject to any liability nor shall the validity of the Lease be affected (except
as otherwise provided in this Section 2.1); provided, the Lease Term and the
obligation to pay Rent shall commence on the date which is the earlier to occur
of (i) the date on which Tenant has Substantially Completed the Tenant
Improvements (as defined in Exhibit B hereto) plus the number of days due to any
---------
Landlord Delays or Tenant's Force Majeure Delays (as defined in Exhibit B) which
actually cause Tenant a delay in commencing the Tenant Improvements or (ii) the
date which is one hundred twenty (120) days after Landlord has Substantially
Completed the Shell Improvements plus the number of days due to any Landlord
Delays or Tenant Force Majeure Delays. For all purposes in this Lease, the
Substantial Completion of the Shell Improvements being constructed by Landlord
and the Tenant Improvements being completed by Tenant shall be determined
separately. In the event the commencement date and/or the expiration date of
this Lease is other than the Commencement Date and/or Expiration Date specified
herein, Landlord and Tenant shall execute a written amendment to this Lease,
substantially in the form of Exhibit F hereto, wherein the parties shall specify
---------
the actual commencement date, expiration date and the date on which Tenant is to
commence paying Rent. The word "Term" whenever used herein refers to the
initial term of this Lease and any extension thereof. If for any reason the
Shell Improvements have not been Substantially Completed by June 1, 2000, which
date shall be extended one (1) day for each day of Force Majeure Delays (as
defined in Section 8 of Exhibit B hereto) then Tenant may terminate this Lease.
---------
Tenant must exercise such right, if at all, on or before June 7, 2000, or such
right shall be null and void and of no further force or effect. In the event of
the proper termination of this Lease by Tenant, Landlord shall promptly return
the Security Deposit and any prepaid Rent then deposited by Tenant with
Landlord, and neither party shall have any further obligation or liability to
the other.
2.2 Within three (3) business days after the Substantial Completion of the
Shell Improvements, representatives of Landlord and Tenant shall make a joint
inspection of the Shell Improvements and the results of such inspection shall be
set forth in a written list specifying the incomplete items as well as those
items for which corrections need to be made (the "Punchlist Items"). Landlord
and Tenant shall promptly (by no later than three (3) business days thereafter)
and in good faith approve the written list of Punchlist Items. Landlord, at its
sole cost and expense, shall use commercially reasonable efforts to cause the
Punchlist Items to be promptly completed and/or corrected, as applicable, within
a thirty (30) day period after such joint inspection. The performance of the
work associated with the Punchlist Items shall be performed in such a manner so
as not to preclude or substantially prevent Tenant's ability to install and
construct the Tenant Improvements in the Premises. Upon the completion of the
Punchlist Items, to Tenant's reasonable satisfaction, Tenant shall immediately
notify Landlord in writing that such items have been completed to Tenant's
reasonable satisfaction. In addition to the Punchlist Items, Landlord shall
also use commercially reasonable efforts to cause the general contractor to
correct any other patent deficiencies or defects in the Shell Improvements
during the thirty (30) day period following Substantial Completion of the Shell
Improvements. If Tenant fails to timely deliver to Landlord any such written
notice of the aforementioned patent deficiencies or defects within said 30-day
period, Landlord shall have no obligation to perform any such work thereafter.
Landlord shall provide Tenant with a customary warranty equal in scope to that
warranty which shall be provided by the Shell Improvements general contractor to
Landlord for the Shell Improvements for a period of one (1) year following
substantial completion; provided however any claim by Tenant under said warranty
must be made by Tenant in writing within said one (1) year period and must
include the specific nature of the problem.
2.3 Landlord shall permit Tenant to enter and occupy the Premises prior to
the Substantial Completion of the Shell Improvements for the limited purpose of
performing the Tenant's Pre-Occupancy Work (defined in Exhibit B hereto).
---------
Landlord shall consult with its general contractor and shall notify Tenant, in
writing, of the date on which Tenant may commence such limited purpose
occupancy. In no event may Tenant conduct its business or operations from the
Premises until after the Commencement Date. Such occupancy shall be at Tenant's
sole risk and subject to all the provisions of this Lease, including the
requirement to perform all of Tenant's obligations hereunder, including without
limitation, the requirement to pay the Advance Rent, and the Security Deposit,
and to obtain the insurance and deliver insurance certificates as required
pursuant to Section 12 and Exhibit B to this Lease. In addition to the
---------
foregoing and the provisions of Exhibit B hereto regarding such early occupancy,
---------
Landlord shall have the right to impose additional reasonable conditions on
Tenant's early entry and occupancy.
3. Rent
On the date that Tenant executes this Lease, Tenant shall deliver to Landlord
the original executed Lease, the Advance Rent (which shall be applied against
the Rent payable for the first month Tenant is required to pay Rent), the
Security Deposit, and all insurance certificates evidencing the insurance
required to be obtained by Tenant under Section 12 and Exhibit B to this Lease.
---------
Tenant agrees to pay Landlord the Base Rent, without (except as otherwise
provided herein) prior notice or demand, abatement, offset, deduction or claim,
in advance at Landlord's Address on the Commencement Date and thereafter on the
first (1st) day of each month throughout the balance of the Term of the Lease.
In addition to the Base Rent, Tenant shall pay Landlord in advance on the
Commencement Date and thereafter on the first (1st) day of each month throughout
the balance of the Term of this Lease, as Additional Rent, Tenant's Share of
Operating Expenses, Tax Expenses, Common Area Utility Costs, and Utility
Expenses. The term "Rent" whenever used herein refers to the
4
<PAGE>
aggregate of all these amounts. The Rent for any fractional part of a calendar
month at the commencement or termination of the Lease Term shall be a prorated
amount of the Rent for a full calendar month based upon a thirty (30) day month.
The prorated Rent shall be paid on the Commencement Date and the first day of
the calendar month in which the date of expiration or termination occurs, as the
case may be.
4. Security Deposit
Simultaneously with Tenant's execution and delivery of this Lease, Tenant shall
deliver to Landlord, as a Security Deposit for the performance by Tenant of its
obligations under this Lease, the amount specified in the Basic Lease
Information. If Tenant is in default, Landlord may, but without obligation to
do so, use the Security Deposit, or any portion thereof, to cure the default or
to compensate Landlord for all damages sustained by Landlord resulting from
Tenant's default. Tenant shall, immediately on demand, pay to Landlord a sum
equal to the portion of the Security Deposit so applied or used so as to
replenish the amount of the Security Deposit held to increase such deposit to
the amount initially deposited with Landlord. As soon as practicable after the
expiration or earlier termination of this Lease, Landlord shall return the
Security Deposit to Tenant, less such amounts as are reasonably necessary, as
determined by Landlord, to remedy Tenant's default(s) hereunder or to otherwise
restore and repair the Premises to the condition required by this Lease together
with a statement from Landlord outlining the amounts withheld. If the cost to
restore and repair the Premises exceeds the amount of the Security Deposit,
Tenant shall promptly deliver to Landlord any and all of such excess sums as
reasonably determined by Landlord. Landlord shall not be required to keep the
Security Deposit separate from other funds, and, unless otherwise required by
law, Tenant shall not be entitled to interest on the Security Deposit. In no
event or circumstance shall Tenant have the right to any use of the Security
Deposit and, specifically, Tenant may not use the Security Deposit as a credit
or to otherwise offset any payments required hereunder, including, but not
limited to, Rent or any portion thereof.
5. Condition of Premises; Improvements
5.1 Tenant hereby agrees to accept the Premises upon Landlord's
Substantial Completion of the Shell Improvements as suitable for Tenant's
intended use and as then being in good operating order, condition and repair in
its then "AS IS" condition, except as otherwise set forth in Exhibit B attached
---------
hereto. The Tenant Improvements (as such term is defined in Exhibit B hereto)
---------
shall be installed in accordance with the terms, conditions, criteria and
provisions set forth in Exhibit B. By taking possession of the Premises with
---------
only the Shell Improvements Substantially Completed, Tenant shall be deemed to
have accepted the Premises in good, clean and completed condition and state of
repair, except as otherwise provided in Exhibit B herein. Landlord and Tenant
hereby agree to and shall be bound by the terms, conditions and provisions of
Exhibit B. Tenant acknowledges and agrees that neither Landlord nor any of
- ---------
Landlord's agents, representatives or employees has made any representations as
to the suitability, fitness or condition of the Premises for the conduct of
Tenant's business or for any other purpose, including without limitation, any
storage incidental thereto. Any exception to the foregoing provisions must be
made by express written agreement by both parties.
5.2 The term "Shell Improvements" as used herein shall mean and refer to
the following described improvements only: (i) the site work and building
structure, including foundations, slab on grade, roof framing, roofing, exterior
walls of the Building including exterior doors (per original shell design) and
concrete wall panels; (ii) utilities brought to a perimeter electrical room
within the Building, including electrical power with the main meter section
cabinet set and, water and sewer; (iii) gas line stubbed to a location on the
exterior of the Building (iv) fire sprinkler mains and branch lines (per
original shell design) with sprinkler heads (excluding modification required for
Tenant Improvements); and (v) pit core for elevator. Without limiting the
generality of the foregoing, the term "Shell Improvements" shall expressly
exclude all Tenant Improvements and other improvements including, without
limitation, the following: (a) underslab plumbing (excluding the main sewer
lines in the Buildings), (b) finish carpentry, (c) interior doors, windows and
hardware, (d) interior finishes, (e) drywall partitions (including demising
walls separating the Premises from the contiguous space), (f) acoustic ceiling,
(g) floor and window coverings, (h) casework, (i) dock equipment, (j) plumbing,
(k) electrical wiring and distribution, and electrical panels and meters, (l)
heating, ventilation and air conditioning, and any structural improvements or
engineering costs related thereto, (m) roof screens, (n) fire sprinkler finish,
(o) in-rack fire sprinklers, draft curtains, smoke vents, hose racks and pallet
racking, (p) security systems, (q) phone and data lines, (r) insulation, (s)
slab treatment, and (t) additional doors required for Tenant's use or occupancy.
Any deviation from the foregoing may only be made by Landlord in its sole
discretion. Notwithstanding the above, the Shell Improvements for Building B
shall be substantially the same as the improvements for Building A.
6. Additional Rent
It is intended by Landlord and Tenant that this Lease be a "triple net lease."
The costs and expenses described in this Section 6 and all other sums, charges,
costs and expenses specified in this Lease other than Base Rent are to be paid
by Tenant to Landlord as additional rent (collectively, "Additional Rent"),
subject to the exclusions outlined herein.
6.1 Operating Expenses: In addition to the Base Rent set forth in Section
3, Tenant shall pay Tenant's Share of all Operating Expenses as Additional Rent.
The term "Operating Expenses" as used herein shall mean the total amounts paid
or payable by Landlord in connection with the ownership, management,
maintenance, repair and operation of the Premises, the Building, the Lot and the
Park. These Operating Expenses may include, but are not limited to, Landlord's
cost of:
6.1.1 repairs to, and maintenance of, the non-structural portions of
the roof, the roof membrane and the non-structural elements of the perimeter
exterior walls of the Building;
6.1.2 maintaining the outside paved area, landscaping and other
common areas of the Park. The term "Common Areas" shall mean all areas and
facilities within the Park exclusive of the Premises and the other portions of
the Park leasable exclusively to other tenants. The Common Areas include, but
are not limited to, interior lobbies, mezzanines, parking areas, access and
perimeter roads, sidewalks, rail spurs, landscaped areas and similar areas and
facilities;
6.1.3 annual insurance premium(s) for insuring against fire and
extended coverage (including, if Landlord elects, "all risk" or "special
purpose" coverage) and all other insurance, including, but not limited to,
earthquake, flood and/or surface water endorsements for the Building, the Lot
and the Park (including the Common Areas), rental value insurance against loss
of Rent in an amount equal to the amount of Rent for a period of at least nine
(9) months commencing on the date of loss, and subject to the provisions of
Section 27 below, any deductible;
5
<PAGE>
6.1.4 (i) modifications and/or new improvements to the Building, the
Common Areas, and/or the Park occasioned by any rules, laws or regulations
becoming effective subsequent to the date on which the Shell Improvements are
Substantially Completed; (ii) reasonably necessary replacement improvements to
the Building, the Common Areas and the Park after the Commencement Date
(including items of the type referred to in Section 11.2 herein); and (iii) new
improvements to the Building, the Common Areas and/or the Park that reduce
operating costs or improve life/safety conditions, all as reasonably determined
by Landlord, in its sole but reasonable discretion, provided, however if there
are modifications necessitated by any such rules, laws or regulations or there
are replacement or new improvements outlined in (i), (ii) and (iii) above which
are required to be made to the Building, the Common Areas and/or the Park which
are in the nature of capital improvements whether or not required by any such
rules, laws or regulations then the costs of such modifications and new or
replacement improvements shall be amortized over a reasonable period which shall
not be less than the lesser of fifteen (15) years or the reasonably estimated
useful life of the modifications or replacement improvements in question (at an
interest rate as reasonably determined by Landlord) and Tenant shall pay its pro
rata share of the monthly amortized portion of such costs (including interest
charges) as part of the Operating Expenses;
6.1.5 preventative maintenance and repair contracts including, but
not limited to, contracts for elevator systems and heating, ventilation and air
conditioning systems, lifts for disabled persons, and trash or refuse
collection, if Landlord elects to so procure;
6.1.6 security and fire protection services for the Building and/or
the Park, as the case may be, if in Landlord's sole but reasonable discretion
such services are provided;
6.1.7 supplies, equipment, rental equipment and other similar items
used in the operation and/or maintenance of the Park;
6.1.8 the repairs and maintenance items set forth in Section 11.2
below;
6.1.9 any and all levies, charges, fees and/or assessments payable to
any applicable owner's association or similar body; and
6.1.10 the management and administration of all or any portion of the
Premises, the Building, and/or the Park, including a property management fee not
to exceed three percent (3%) of Rent, accounting, auditing, billing, postage,
salaries and benefits for clerical and supervisory employees, whether located on
the Park or off-site, payroll taxes and legal and accounting costs, and all
fees, licenses and permits related to the ownership, operation and management of
the Park.
6.2 Operating Expense Exclusions: Notwithstanding anything to the contrary
contained herein, for purposes of this Lease, the term "Operating Expenses"
shall not include the following: (i) costs (including permit, license, and
inspection fees) incurred in renovating, improving, decorating, painting, or
redecorating vacant space or space for other tenants within the Project; (ii)
costs incurred because Landlord or another tenant actually violated the terms
and conditions of any lease for premises within the Project; (iii) legal and
auditing fees (other than those fees reasonably incurred in connection with the
maintenance and operation of all or any portion the Project), leasing
commissions, advertising expenses, and other costs incurred in connection with
the original leasing of the Project or future re-leasing of any portion of the
Project; (iv) depreciation of the Building or any other improvements or
equipment situated within the Project; (v) any items for which Landlord is
actually reimbursed by insurance or by direct reimbursement by any other tenant
of the Project or other third party; (vi) costs of repairs or other work
necessitated by fire, windstorm or other casualty (excluding any deductibles)
and/or costs of repair or other work necessitated by the exercise of the right
of eminent domain to the extent insurance proceeds or a condemnation award, as
applicable, is actually received by Landlord for such purposes; provided, such
costs of repairs or other work shall be paid by the parties in accordance with
the provisions of Sections 25 and 26, below; (vii) other than any interest
charges for capital improvements referred to in Section 6.1.1(iv) hereinabove,
any interest or payments on any financing for the Building, or the Project
including principal and ground leases, interest and penalties incurred as a
result of Landlord's late payment of any invoice (provided that Tenant pays
Tenant's Share of Operating Expenses and Tax Expenses to Landlord when due as
set forth herein), and any bad debt loss, rent loss or reserves for same; (viii)
costs associated with the investigation and/or remediation of Hazardous
Materials (hereafter defined) present in, on or about any portion of the
Project, unless such costs and expenses are the responsibility of Tenant as
provided in Section 27 hereof, in which event such costs and expenses shall be
paid solely by Tenant in accordance with the provisions of Section 27 hereof;
(ix) Landlord's cost for the repairs and maintenance items set forth in Section
11.3, below; (x) overhead and profit increment paid to Landlord or to
subsidiaries or affiliates of Landlord for goods and/or services in the Project
to the extent the same exceeds the costs of such by unaffiliated third parties
on a competitive basis; or any costs included in Operating Expenses representing
an amount paid to a person, firm, corporation or other entity related to
Landlord which is in excess of the amount which would have been paid in the
absence of such relationship; (xi) any payments under a ground lease or master
lease; and (xii) costs for any work or materials covered under any applicable
contractor or manufacturer warranty or guaranty; and (xiii) costs of correcting
defects in the initial design or construction of the Shell Improvements or the
repair or replacement of any original materials and equipment as a result of
such defects (collectively, "Defect Costs"), as long as such defects are covered
by warranties from the contractors performing such work and Landlord has
actually received compensation therefor; provided, in the event such Defect
Costs (subject to Section 11.3 herein) constitute capital improvements, and are
not covered by warranties and/or Landlord has not received compensation
therefor, such Defect Costs shall be included in Operating Expenses and
amortized on the basis set forth in Section 6.1 of the Lease.
6.3 Tax Expenses: In addition to the Base Rent set forth in Section 3,
Tenant shall pay Tenant's Share of all real property taxes applicable to the
land and improvements included within the Lot on which the Premises are situated
and one hundred percent (100%) of all personal property taxes now or hereafter
assessed or levied against the Premises or Tenant's Property (defined below).
Tenant shall also reimburse and pay Landlord, as Additional Rent, within ten
(10) days after demand therefor, one hundred percent (100%) of (i) any increase
in real property taxes attributable to any and all Alterations (defined below),
Tenant Improvements, fixtures, equipment or other improvements of any kind
whatsoever placed in, on or about the Premises for the benefit of, at the
request of, or by Tenant, and (ii) taxes assessed upon or with respect to the
possession, leasing, operation, management, maintenance, repair, use or
occupancy by Tenant of the Premises or any portion of the Building. The term
"Tax Expenses" shall mean and include, without limitation, any form of tax and
assessment (general, special, supplemental, ordinary or extraordinary),
commercial rental tax, payments under any improvement bond or bonds, license
fees, license tax, business license fee, rental tax, transaction tax or levy
imposed by any authority having the direct or indirect power of tax (including
any city, county, state or federal government, or any school, agricultural,
lighting, drainage or other improvement district thereof) as against any legal
or equitable interest of Landlord in the Premises, the Building, the Lot or the
Park or any other tax, fee,
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or excise, however described, including, but not limited to, any value added
tax, or any tax imposed in substitution (partially or totally) of any tax
previously included within the definition of real property taxes, or any
additional tax the nature of which was previously included within the definition
of real property taxes. The term "Tax Expenses" shall not include any franchise,
estate, inheritance, net income, or excess profits tax imposed upon Landlord, or
a penalty fee imposed as a result of Landlord's failure to pay Tax Expenses when
due.
6.4 Payment of Expenses: Landlord shall estimate Tenant's Share of the
Operating Expenses and Tax Expenses for the calendar year in which the Lease
commences. Commencing on the Commencement Date, one-twelfth (1/12th) of this
estimated amount shall be paid by Tenant to Landlord, as Additional Rent, and
thereafter on the first (1st) day of each month throughout the remaining months
of such calendar year. Thereafter, Landlord may estimate such expenses as of
the beginning of each calendar year during the Term of this Lease and Tenant
shall pay one-twelfth (1/12th) of such estimated amount as Additional Rent
hereunder on the first (1st) day of each month during such calendar year and for
each ensuing calendar year throughout the Term of this Lease. Tenant's
obligation to pay Tenant's Share of Operating Expenses and Tax Expenses shall
survive the expiration or earlier termination of this Lease.
6.5 Annual Reconciliation: By May 30th of each calendar year, or as soon
thereafter as reasonably possible, Landlord shall furnish Tenant with an
accounting of actual and accrued Operating Expenses and Tax Expenses. Within
thirty (30) days of Landlord's delivery of such accounting, Tenant shall pay to
Landlord the amount of any underpayment. Notwithstanding the foregoing, failure
by Landlord to give such accounting by such date shall not constitute a waiver
by Landlord of its right to collect any of Tenant's underpayment at any time.
Landlord shall credit the amount of any overpayment by Tenant toward the next
estimated monthly installment(s) falling due, or where the Term of the Lease has
expired, refund the amount of overpayment to Tenant. If the Term of the Lease
expires prior to the annual reconciliation of expenses Landlord shall have the
right to reasonably estimate Tenant's Share of such expenses, and if Landlord
determines that an underpayment is due, Tenant hereby agrees that Landlord shall
be entitled to deduct such underpayment from Tenant's Security Deposit. If
Landlord reasonably determines that an overpayment has been made by Tenant,
Landlord shall refund said overpayment to Tenant as soon as practicable
thereafter. Notwithstanding the foregoing, failure of Landlord to accurately
estimate Tenant's Share of such expenses or to otherwise perform such
reconciliation of expenses, including without limitation, Landlord's failure to
deduct any portion of any underpayment from Tenant's Security Deposit, shall not
constitute a waiver of Landlord's right to collect any of Tenant's underpayment
at any time during the Term of the Lease or at any time after the expiration or
earlier termination of this Lease.
6.6 Audit: After delivery to Landlord of at least thirty (30) days prior
written notice, Tenant, at its sole cost and expense through any accountant
designated by it, shall have the right to examine and/or audit the books and
records evidencing such costs and expenses for the previous one (1) calendar
year, (unless such audit conducted reveals that Landlord has overstated the
Additional Rent owed by Tenant, then Tenant may audit such item for previous
years) during Landlord's reasonable business hours and not more frequently than
once during any calendar year. Any such accounting firm designated by Tenant may
not be compensated on a contingency fee basis. The results of any such audit
(and any negotiations between the parties related thereto) shall be maintained
strictly confidential by Tenant and its accounting firm and shall not be
disclosed, published or otherwise disseminated to any other party other than to
Landlord and its authorized agents. Landlord and Tenant shall use their best
efforts to cooperate and promptly resolve any discrepancies between Landlord and
Tenant in the accounting of such costs and expenses.
7. Utilities and Services
In addition to the Base Rent set forth in Section 3 hereof, Tenant shall pay the
cost of all (i) water, sewer use, sewer discharge fees and sewer connection
fees, gas, electricity, telephone, telecommunications, cabling and other
utilities billed or metered separately to the Premises; and (ii) refuse pickup
and janitorial service to the Premises. Utility Expenses, Common Area Utility
Costs and all other sums or charges set forth in this Section 7 are considered
part of Additional Rent.
7.1 Utility Expenses: For any such utility fees, use charges or similar
services that are not billed or metered separately to Tenant, including without
limitation, water charges ("Utility Expenses"), Tenant shall pay to Landlord
Tenant's Share of Utility Expenses, as Additional Rent. If Landlord reasonably
determines that Tenant's Share is not commensurate with Tenant's use of such
services, Tenant shall pay to Landlord the amount which is attributable to
Tenant's use of the utilities or similar services, as reasonably estimated and
determined by Landlord based upon factors such as size of the Premises and
intensity of use of such utilities by Tenant such that Tenant shall pay the
portion of such charges reasonably consistent with Tenant's use of such
utilities and similar services. If Tenant disputes any such estimate or
determination, then Tenant shall either pay the estimated amount or cause the
Premises to be separately metered at Tenant's sole expense. Tenant shall also
pay Tenant's Share of any assessments, charges, and fees included within any tax
bill for the Lot on which the Premises are situated, including without
limitation, entitlement fees, allocation unit fees, sewer use fees, and/or any
similar fees or charges, and any penalties related thereto resulting from
Tenant's failure to timely pay such sums.
7.2 Common Area Utility Costs: Tenant shall pay to Landlord Tenant's Share
of any Common Area utility costs, fees, charges or expenses ("Common Area
Utility Costs"). Tenant shall pay to Landlord one-twelfth (1/12th) of the
estimated amount of Tenant's Share of the Common Area Utility Costs on the
Commencement Date and thereafter on the first (1st) day of each month throughout
the balance of the Term of this Lease. Any reconciliation thereof shall be
substantially in the same manner as set forth in Section 6.4 above.
7.3 Miscellaneous: Tenant acknowledges that the Premises may become
subject to the rationing of utility services or restrictions on utility use as
required by a public utility company, governmental agency or other similar
entity having jurisdiction thereof. Notwithstanding any such rationing or
restrictions on use of any such utility services, Tenant acknowledges and agrees
that its tenancy and occupancy hereunder shall be subject to such rationing
restrictions as may be imposed upon Landlord, Tenant, the Premises, the
Building, or the Park, and Tenant shall in no event be excused or relieved from
any covenant or obligation to be kept or performed by Tenant by reason of any
such rationing or restrictions. Tenant further agrees to timely and faithfully
pay, prior to delinquency, any amount, tax, charge, surcharge, assessment or
imposition levied, assessed or imposed upon the Premises, or Tenant's use and
occupancy thereof. Notwithstanding anything to the contrary contained herein, if
permitted by applicable Laws, Landlord shall have the right at any time and from
time to time during the Term of this Lease to either contract for service from a
different company or companies (each such company shall be referred to herein as
an "Alternate Service Provider") other than the company or
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companies presently providing electricity service for the Building or the Park
(the "Electric Service Provider") or continue to contract for service from the
Electric Service Provider, at Landlord's sole discretion. Tenant hereby agrees
to cooperate with Landlord, the Electric Service Provider, and any Alternate
Service Provider at all times and, as reasonably necessary, shall allow
Landlord, the Electric Service Provider, and any Alternate Service Provider
reasonable access to the Building's electric lines, feeders, risers, wiring, and
any other machinery within the Premises.
8. Late Charges
Any and all sums or charges set forth in this Section 8 are considered part of
Additional Rent. Tenant acknowledges that late payment (the fourth day of each
month or any time thereafter) by Tenant to Landlord of Base Rent, Tenant's Share
of Operating Expenses, Tax Expenses, Common Area Utility Costs, and Utility
Expenses or other sums due hereunder, will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of such costs being extremely
difficult and impracticable to fix. Such costs include, without limitation,
processing and accounting charges, and late charges that may be imposed on
Landlord by the terms of any note secured by any encumbrance against the
Premises, and late charges and penalties due to the late payment of taxes and
expenses with respect to the Premises. Therefore, if any installment of Rent or
any other sum due from Tenant is not received by Landlord when due, Tenant shall
promptly pay to Landlord an additional sum equal to seven and one half percent
(7.5%) of such delinquent amount. Notwithstanding the foregoing, Landlord waives
the late charge for the first two (2) instances during the Term of this Lease in
which Tenant fails to timely pay Rent. If Tenant delivers to Landlord a check
for which there are not sufficient funds, Landlord may, at its sole option,
require Tenant to replace such check with a cashier's check for the amount of
such check and all other charges payable hereunder. The parties agree that this
late charge and the other charges referenced above represent a fair and
reasonable estimate of the costs that Landlord will incur by reason of late
payment by Tenant. Acceptance of any late charge or other charges shall not
constitute a waiver by Landlord of Tenant's default with respect to the
delinquent amount, nor prevent Landlord from exercising any of the other rights
and remedies available to Landlord for any other breach of Tenant under this
Lease. If a late charge or other charge becomes payable for any three (3)
installments of Rent within any twelve (12) month period, then Landlord, at
Landlord's sole option, can either require the Rent be paid quarterly in
advance, or be paid monthly in advance by cashier's check or by electronic funds
transfer.
9. Use of Premises
9.1 Compliance with Laws, Recorded Matters, and Rules and Regulations:
The Premises are to be used solely for the purposes and uses specified in the
Basic Lease Information and for no other uses or purposes without Landlord's
prior written consent, which consent shall not be unreasonably withheld or
delayed so long as the proposed use (i) does not involve the use of Hazardous
Materials other than as expressly permitted under the provisions of Section 29
below, (ii) does not require any additional parking in excess of the parking
spaces already licensed to Tenant pursuant to the provisions of Section 24 of
this Lease, and (iii) is compatible and consistent with the other uses then
being made in the Park and in other similar types of buildings in the vicinity
of the Park, as reasonably determined by Landlord. The use of the Premises by
Tenant and its employees, representatives, agents, invitees, licensees,
subtenants, customers or contractors (collectively, "Tenant's Representatives")
shall be subject to, and at all times in compliance with, (a) any and all
applicable laws, ordinances, statutes, orders and regulations as same exist from
time to time (collectively, the "Laws"), (b) any and all documents, matters or
instruments, including without limitation, any declarations of covenants,
conditions and restrictions and any amendments or supplements thereto, and any
licenses, restrictions, easements or similar instruments, conveyances or
encumbrances which are at any time, and from time to time, required to be made
by or given by Landlord in any manner relating to the development of the Park,
the construction of the Shell Improvements and/or the construction of the Tenant
Improvements (as such term is defined in Exhibit B hereto) (collectively, the
---------
"Development Documents"), (c) any and all documents, easements, covenants,
conditions and restrictions, and similar instruments, each of which has been or
hereafter is recorded in any official or public records with respect to the
Premises, the Building, the Lot and/or the Park, or any portion thereof
(collectively, the "Recorded Matters"), and (d) any and all rules and
regulations set forth in Exhibit C, attached to and made a part of this Lease,
---------
and any other reasonable rules and regulations promulgated by Landlord now or
hereafter enacted relating to parking and the operation of the Premises, the
Building, and the Park (collectively, the "Rules and Regulations"). Subject to
Landlord's completion of the Shell Improvements, Tenant agrees to, and does
hereby, assume full and complete responsibility to ensure that the Premises,
including without limitation, the Tenant Improvements, are adequate to fully
meet the needs and requirements of Tenant's intended operations of its business
within the Premises, and Tenant's use of the Premises and that same are in
compliance with all applicable Laws throughout the Term of this Lease.
Additionally, Tenant shall be solely responsible for the payment of all costs,
fees and expenses associated with any modifications, improvements or alterations
to the Premises, Building, the Common Areas, and/or the Park occasioned by the
enactment of, or changes to, any Laws arising from Tenant's particular use of
the Premises or alterations, improvements or additions made to the Premises
regardless of when such Laws became effective. Except for the building and other
permits and approvals required in connection with the Tenant Improvements
outlined in Exhibit B, Tenant shall not initiate, submit an application for, or
otherwise request, any land use approvals or entitlements with respect to any
portion of the Park, including without limitation, any variance, conditional use
permit or rezoning, without first obtaining Landlord's prior written consent
thereto, which consent may be given or withheld in Landlord's sole discretion.
9.2 Prohibition on Use: Tenant shall not use the Premises or permit
anything to be done in or about the Premises nor keep or bring anything therein
which will in any way conflict with any of the requirements of the Board of Fire
Underwriters or similar body now or hereafter constituted or in any way increase
the existing rate of or affect any policy of fire or other insurance upon the
Building or any of its contents, or cause a cancellation of any insurance
policy. No auctions may be held or otherwise conducted in, on or about the
Premises, the Building, the Lot or the Park without Landlord's written consent
thereto, which consent may be given or withheld in Landlord's sole discretion.
Tenant shall not do or permit anything to be done in or about the Premises which
will in any way obstruct or interfere with the rights of Landlord, other tenants
or occupants of the Building and/or other buildings in the Park. The Premises
shall not be used for any unlawful purpose, as reasonably determined by
Landlord; nor shall Tenant cause, maintain or permit any private or public
nuisance in, on or about the Premises, Building, Park and/or the Common Areas,
including, but not limited to, any offensive odors, noises, fumes or vibrations.
Tenant shall not damage or deface or otherwise commit or suffer to be committed
any waste in, upon or about the Premises. Tenant shall not place or store, nor
permit any other person or entity to place or store, any property, equipment,
materials, supplies, personal property or any other items or goods outside of
the Premises for any period of time. Tenant shall not permit any animals,
including, but not limited to, any household pets, to be brought or kept in or
about the Premises. Tenant shall not install any radio or television antenna,
satellite dish (except as provided in Section 41 herein), microwave, loudspeaker
or other device on the roof or exterior walls of the Building. Tenant shall not
interfere with radio, telecommunication, or television broadcasting or
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reception from or in the Building or elsewhere. Tenant shall place no loads upon
the floors, walls, or ceilings in excess of the maximum designed load permitted
by the applicable Uniform Building Code or which may damage the Building or
outside areas; nor place any harmful liquids in the drainage systems; nor dump
or store waste materials, refuse or other such materials, or allow such
materials to remain outside the Building area, except for any non-hazardous or
non-harmful materials which may be stored in refuse dumpsters.
10. Alterations; Surrender of Premises
10.1 Alterations: Tenant shall not install any signs, fixtures,
improvements, nor make or permit any other alterations or additions
(individually, an "Alteration", and collectively, the "Alterations") to the
Premises without the prior written consent of Landlord which consent shall not
be unreasonably withheld. However, Tenant shall be permitted to hang pictures
and shelving and perform other similar minor decorating activities and to
perform non-structural alterations not exceeding an aggregate of $25,000 during
any calendar year without securing Landlord's prior consent ("Permitted
Improvements"), provided that Tenant (i) complies with all pertinent building
codes and fire, safety and other such governmental regulations, (ii) does not
take any action which could in any way impact the structural, mechanical,
electrical, maintenance, HVAC or plumbing systems of the Premises and/or
exterior appearance of the Building and (iii) submits its plans for such
Alterations to Landlord at least fifteen (15) business days prior to
commencement of such Alterations (except as to minor decorative items and
installations of furniture for which plans are not required). Within seven (7)
business days following Landlord's receipt of Tenant's written notice with
respect to Tenant's performance of any Permitted Improvements and at such time
as Landlord may approve other Alterations, Landlord shall notify Tenant, in
writing, whether or not Landlord will require Tenant to remove such Permitted
Improvements and Alterations from the Premises upon the expiration or earlier
termination of this Lease. In addition to the Permitted Improvements and
Alterations outlined above, Landlord shall notify Tenant in writing within seven
(7) business days of receipt of the Final Preliminary Plans and Specifications
(as defined in Exhibit B) which improvements are of a specialized nature and
specific to Tenant's use ("Tenant Specific Tenant Improvements") Landlord shall
require Tenant to remove from the Premises upon the expiration or earlier
termination of this Lease. Notwithstanding the above, it is the intention of the
parties that the base improvements constructed as part of the Tenant
Improvements outlined in Exhibit B shall not be required to be removed by
Tenant. If Landlord fails to notify Tenant within the seven (7) business day
period it shall be deemed that Landlord has agreed to such Permitted
Improvements, Alterations or Tenant Specific Tenant Improvements and such shall
not be required to be removed by Tenant at the expiration or earlier termination
of the Lease. If any such Alteration is expressly permitted by Landlord, Tenant
shall deliver at least ten (10) days prior notice to Landlord, from the date
Tenant intends to commence construction, sufficient to enable Landlord to post a
Notice of Non-Responsibility. In all events, Tenant shall obtain all permits or
other governmental approvals prior to commencing any of such work and deliver a
copy of same to Landlord. All Alterations shall be at Tenant's sole cost and
expense, and shall be installed by a licensed contractor (approved by Landlord)
in compliance with all applicable Laws (including, but not limited to, the ADA
as defined herein), Development Documents, Recorded Matters, and Rules and
Regulations. Tenant shall keep the Premises and the property on which the
Premises are situated free from any liens arising out of any work performed,
materials furnished or obligations incurred by or on behalf of Tenant. Tenant
shall, prior to construction of any and all Alterations, provide additional
insurance as required, and also such assurances to Landlord, including without
limitation, waivers of lien, surety company performance bonds as Landlord shall
require to assure payment of the costs thereof to protect Landlord, the
Building, the Lot and the Park from and against any loss from any mechanic's,
materialmen's or other liens. In addition, Tenant shall have the right to
install (i) a covered walkway or enclosed walkway to connect Building A and
Building B and (ii) Tenant's equipment and utility enclosure. Such structures
shall be subject to Landlord's prior written review and approval and shall be
subject to compliance with all applicable building codes, city planning
department review and approval and other applicable governmental agencies. The
design and construction of such structures shall be completed in such a manner
as to meet Landlord's criteria and specifications as to architecture and project
appearance, at Landlord's discretion.
10.2 Surrender of Premises: At the end of the Term or earlier termination
of this Lease, Tenant shall surrender the Premises to Landlord (a) in
substantially the same condition and repair (damage by acts of God,
condemnation, casualty, and normal wear and tear excepted), but with all
interior walls free of any damage and debris, any carpets cleaned (unless
Landlord will remove to complete new improvements), all floors cleaned and
waxed, all non-working light bulbs and ballasts replaced and all roll-up doors
and plumbing fixtures in good condition and working order, and (b) otherwise in
accordance with the provisions of Section 29 hereof. Normal wear and tear shall
not include any damage or deterioration to the floors of the Premises arising
from the use of forklifts in, on or about the Premises (including, without
limitation, any marks or stains on any portion of the floors), and any unusual
damage or deterioration that would have been prevented by proper maintenance by
Tenant, or Tenant otherwise performing all of its obligations under this Lease.
On or before the expiration or earlier termination of this Lease, (i) Tenant
shall remove all of Tenant's Property (as hereinafter defined) and Tenant's
signage from the Premises, the Building and the Park and repair any damage
caused by such removal, and (ii) Landlord may, by notice to Tenant given not
later than ninety (90) days prior to the Expiration Date (except in the event of
a termination of this Lease prior to the scheduled Expiration Date, in which
event no advance notice shall be required), require Tenant, at Tenant's expense,
to remove any or all Alterations, Permitted Improvements, and Tenant Specific
Tenant Improvements of which Landlord has notified Tenant in writing, at the
time set forth in Section 10.1, that Landlord will require such removal, and to
repair any damage caused by such removal. For purposes hereof, the term
"Tenant's Property" shall mean and refer to all equipment, trade fixtures,
furnishings, goods and personal property of Tenant. Any of Tenant's Property not
so removed by Tenant as required herein shall be deemed abandoned and may be
stored, removed, and disposed of by Landlord at Tenant's expense, and Tenant
waives all claims against Landlord for any damages resulting from Landlord's
retention and disposition of such property; provided, however, that Tenant shall
remain liable to Landlord for all costs incurred in storing and disposing of
such abandoned property of Tenant. All Tenant Improvements and Alterations
except those which Landlord requires Tenant to remove shall remain in the
Premises as the property of Landlord. If the Premises are not surrendered at the
end of the Term or earlier termination of this Lease, and in accordance with the
provisions of this Section 10 and Section 29 below, Tenant shall continue to be
responsible for the payment of Rent (as the same may be increased pursuant to
Section 22 below) until the Premises are so surrendered in accordance with said
provisions, and Tenant shall indemnify, defend and hold the Indemnitees
(hereafter defined) harmless from and against any and all damages, expenses,
costs, losses or liabilities arising from any delay by Tenant in so surrendering
the Premises including, without limitation, any damages, expenses, costs, losses
or liabilities arising from any claim against Landlord made by any succeeding
tenant or prospective tenant founded on or resulting from such delay and losses
and damages suffered by Landlord due to lost opportunities to lease any portion
of the Premises to any such succeeding tenant or prospective tenant, together
with, in each case, actual attorneys' fees and costs.
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11. Repairs and Maintenance
11.1 Tenant's Repairs and Maintenance Obligations: Except for those
portions of the Building to be maintained by Landlord, as provided in Sections
11.2 and 11.3 below, Tenant shall, at its sole cost and expense, keep and
maintain all parts of the Premises and such portions of the Building and
improvements as are within the exclusive control of Tenant in good, clean and
safe condition and repair, promptly making all necessary repairs and
replacements, with materials and workmanship of the same character, kind and
quality as the original thereof, all of the foregoing to the reasonable
satisfaction of Landlord including, but not limited to, repairing any damage
caused by Tenant or any of Tenant's Representatives and replacing any property
so damaged by Tenant or any of Tenant's Representatives. Without limiting the
generality of the foregoing, Tenant shall be solely responsible for promptly
maintaining, repairing and replacing (a) all mechanical systems, heating,
ventilation and air conditioning systems serving the Premises, unless maintained
by Landlord, (b) all plumbing work and fixtures, (c) electrical wiring systems,
fixtures and equipment exclusively serving the Premises, (d) all interior
lighting (including, without limitation, light bulbs and/or ballasts) and
exterior lighting exclusively serving the Premises or adjacent to the Premises,
(e) all glass, windows, window frames, window casements, skylights, interior and
exterior doors, door frames and door closers, (f) all roll-up doors, ramps and
dock equipment, including without limitation, dock bumpers, dock plates, dock
seals, dock levelers and dock lights, (g) all tenant signage, (h) lifts for
disabled persons serving the Premises, (i) sprinkler systems, fire protection
systems and security systems, except to the extent maintained by Landlord, and
(j) all partitions, fixtures, equipment, interior painting, interior walls and
floors, and floor coverings of the Premises and every part thereof (including,
without limitation, any demising walls contiguous to any portion of the
Premises). Additionally, Tenant shall be solely responsible for performance of
the regular removal of trash and debris. Notwithstanding the above, the
replacement or repair of equipment that is capital in nature shall be performed
and financed by Landlord and reimbursed by Tenant as outlined in Section 6.1.4.
11.2 Maintenance by Landlord: Subject to Tenant's obligation under Section
6 to reimburse Landlord, in the form of Additional Rent, for Tenant's Share of
the cost and expense of the following described items, Landlord agrees to
repair, maintain and replace as reasonably required the following items: fire
protection services; the roof and roof coverings; the plumbing, electrical and
mechanical systems serving the Building, excluding the plumbing, mechanical and
electrical systems located within and exclusively serving the Premises; any rail
spur and rail crossing; exterior painting of the Building; and the parking
areas, pavement, landscaping, sprinkler systems, sidewalks, driveways, curbs,
and lighting systems in the Common Areas. Notwithstanding anything in this
Section 11 to the contrary, Landlord shall have the right to either repair or to
require Tenant to repair any damage to any portion of the Premises, the
Building, the Common Areas and/or the Park caused by or created due to any act,
omission, negligence or willful misconduct of Tenant or any of Tenant
Representatives and to restore the Premises, the Building, the Common Areas
and/or the Park, as applicable, to the condition existing prior to the
occurrence of such damage; provided, however, that in the event Landlord elects
to perform such repair and restoration work, Tenant shall reimburse Landlord
upon demand for all costs and expenses incurred by Landlord in connection
therewith. Tenant shall promptly report in writing to Landlord any defective
condition known to it which Landlord is required to repair.
11.3 Landlord's Repairs and Maintenance Obligations: Subject to the
provisions of Sections 27 and 28, and except for repairs rendered necessary by
the intentional or negligent acts or omissions of Tenant or any of Tenant's
Representatives, Landlord agrees, at Landlord's sole cost and expense, to (a)
keep in good repair the structural portions of the floors, foundations and
exterior perimeter walls of the Building (exclusive of glass and exterior
doors), and (b) replace the structural portions of the roof of the Building
(excluding the roof membrane). Landlord's obligation hereunder to repair and
maintain such items is subject to the condition precedent that Landlord shall
have received written notice of the need for such repairs and maintenance and a
reasonable time within which to perform such repairs and maintenance.
11.4 Tenant's Failure to Perform Repairs and Maintenance Obligations: Other
than the installation and maintenance of equipment installed pursuant to the
terms and conditions of Exhibit B and Section 41, Tenant shall have no right of
access to or right to install any device on the roof of the Building nor make
any penetrations of the roof of the Building without the express prior written
consent of Landlord. If Tenant refuses or neglects to repair and maintain the
Premises and the other areas properly as required herein Landlord may, but
without obligation to do so, at any time make such repairs and/or maintenance
without Landlord having any liability to Tenant for any loss or damage that may
accrue to Tenant's merchandise, fixtures or other property, or to Tenant's
business by reason thereof, except to the extent any damage is caused by the
willful misconduct or gross negligence of Landlord or its authorized agents and
representatives. In the event Landlord makes such repairs and/or maintenance,
upon completion thereof Tenant shall pay to Landlord, as Additional Rent,
Landlord's reasonable costs for making such repairs and/or maintenance. The
obligations of Tenant hereunder shall survive the expiration of the Term of this
Lease or the earlier termination thereof. Tenant hereby waives any right to
repair at the expense of Landlord under any applicable Laws now or hereafter in
effect respecting the Premises and subject to Section 42 herein.
12. Insurance
12.1 Types of Insurance: Tenant shall maintain in full force and effect at
all times during the Term of this Lease, at Tenant's sole cost and expense, for
the protection of Tenant and Landlord, as their interests may appear, policies
of insurance issued by a carrier or carriers reasonably acceptable to Landlord
and its lender(s) which afford the following coverages: (i) worker's
compensation: statutory limits; (ii) employer's liability, as required by law,
with a minimum limit of $100,000 per employee and $500,000 per occurrence; (iii)
commercial general liability insurance (occurrence form) providing coverage
against any and all claims for bodily injury and property damage occurring in,
on or about the Premises arising out of Tenant's and Tenant's Representatives'
use and/or occupancy of the Premises. Such insurance shall include coverage for
blanket contractual liability, fire damage, premises, personal injury, completed
operations, products liability, personal and advertising. Such insurance shall
have a combined single limit of not less than One Million Dollars ($1,000,000)
per occurrence with a Two Million Dollar ($2,000,000) aggregate limit and
excess/umbrella insurance in the amount of Two Million Dollars ($2,000,000). If
Tenant has other locations which it owns or leases, the policy shall include an
aggregate limit per location endorsement. If necessary, as reasonably
determined by Landlord, Tenant shall provide for restoration of the aggregate
limit; (iv) comprehensive automobile liability insurance: a combined single
limit of not less than $2,000,000 per occurrence and insuring Tenant against
liability for claims arising out of the ownership, maintenance, or use of any
owned, hired or non-owned automobiles; (v) "all risk" or "special purpose"
property insurance, including without limitation, sprinkler leakage, boiler and
machinery comprehensive form, if applicable, covering damage to or loss of any
personal property, trade fixtures, inventory, fixtures and equipment located in,
on or about the Premises, and in addition, coverage for flood, earthquake, and
business interruption of Tenant,
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together with, if the property of Tenant's invitees is to be kept in the
Premises, warehouser's legal liability or bailee customers insurance for the
full replacement cost of the property belonging to invitees and located in the
Premises. Such insurance shall be written on a replacement cost basis (without
deduction for depreciation) in an amount equal to one hundred percent (100%) of
the full replacement value of the aggregate of the items referred to in this
subparagraph (v); (vi) such other insurance as required by the provisions of
Exhibit B hereto; and (vii) such other insurance or higher limits of liability
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as is then customarily required for similar types of buildings within the
general vicinity of the Park or as may be reasonably required by any of
Landlord's.
12.2 Insurance Policies: Insurance required to be maintained by Tenant
shall be written by companies (i) licensed to do business in the State of
California, (ii) domiciled in the United States of America, and (iii) having a
"General Policyholders Rating" of at least A:X (or such higher rating as may be
required by a lender having a lien on the Premises) as set forth in the most
current issue of "A.M. Best's Rating Guides." Any deductible amounts under any
of the insurance policies required hereunder shall not exceed Five Thousand
Dollars ($5,000). Tenant shall deliver to Landlord certificates of insurance and
true and complete copies of any and all endorsements required herein for all
insurance required to be maintained by Tenant hereunder at the time of execution
of this Lease by Tenant. Tenant shall, at least thirty (30) days prior to
expiration of each policy, furnish Landlord with certificates of renewal or
"binders" thereof. Each certificate shall expressly provide that such policies
shall not be cancelable or otherwise subject to modification except after thirty
(30) days prior written notice to the parties named as additional insureds as
required in this Lease (except for cancellation for nonpayment of premium, in
which event cancellation shall not take effect until at least ten (10) days'
notice has been given to Landlord). Tenant shall have the right to provide
insurance coverage which it is obligated to carry pursuant to the terms of this
Lease under a blanket insurance policy, provided such blanket policy expressly
affords coverage for the Premises and for Landlord as required by this Lease.
12.3 Additional Insureds and Coverage: Landlord, Landlord's property
management company or agent, and any of Landlord's lender(s) having a lien
against the Premises, the Building, the Lot or the Park shall be named as
additional insureds under all of the policies required in Section 12.1(iii)
above. Additionally, such policies shall provide for severability of interest.
All insurance to be maintained by Tenant shall, except for workers' compensation
and employer's liability insurance, be primary, without right of contribution
from insurance maintained by Landlord. Any umbrella/excess liability policy
(which shall be in "following form") shall provide that if the underlying
aggregate is exhausted, the excess coverage will drop down as primary insurance.
The limits of insurance maintained by Tenant shall not limit Tenant's liability
under this Lease. It is the parties' intention that the insurance to be procured
and maintained by Tenant as required herein shall provide coverage for any and
all damage or injury arising from or related to Tenant's operations of its
business and/or Tenant's or Tenant's Representatives' use of the Premises and/or
any of the areas within the Park, whether such events occur within the Premises
or in any other areas of the Park. It is not contemplated or anticipated by the
parties that the aforementioned risks of loss be borne by Landlord's insurance
carriers, rather it is contemplated and anticipated by Landlord and Tenant that
such risks of loss be borne by Tenant's insurance carriers pursuant to the
insurance policies procured and maintained by Tenant as required herein.
12.4 Failure of Tenant to Purchase and Maintain Insurance: In the event
Tenant does not purchase the insurance required in this Lease or keep the same
in full force and effect throughout the Term of this Lease and such failure
continues for three (3) days after notice to Tenant, Landlord may, but without
obligation to do so, purchase the necessary insurance and pay the premiums
therefor. If Landlord so elects to purchase such insurance, Tenant shall
promptly pay to Landlord as Additional Rent, the amount so paid by Landlord,
upon Landlord's demand therefor. In addition, Landlord may recover from Tenant
and Tenant agrees to pay, as Additional Rent, any and all losses, damages and
costs which Landlord may sustain by reason of Tenant's failure to obtain and
maintain such insurance.
12.5 Landlord's Insurance: Landlord shall obtain and keep in force during
the term of this Lease a policy of combined single limit bodily injury and
property damage insurance, insuring Landlord, against liability for bodily
injury and property damage with a limit of liability of at least $2,000,000 per
occurrence and in the aggregate. Landlord shall obtain and keep in force during
the term of this Lease a policy or policies of insurance covering loss or damage
to the Building, and the Tenant Improvements to the extent of Landlord's actual
interest therein, but not including Tenant's Property or alterations or
improvements made to the Premises by or on behalf of Tenant (excluding the
Tenant Improvements as limited above), in an amount of eighty percent (80%) of
the full replacement value thereof excluding land costs, excavation costs,
footings and foundations. The foregoing insurance shall provide protection
against all perils within the classification of fire, extended coverage (as such
term is used in the insurance industry), vandalism, malicious mischief, and to
the extent available at commercially reasonable rates with a commercially
reasonable deductible (as reasonably determined by Landlord), flood and/or
earthquake insurance. The foregoing insurance policies may be procured and
carried pursuant to a blanker policy of insurance covering additional properties
other than the Building. Landlord's cost of obtaining and maintaining such
insurance policies are included as one of the items comprising the Operating
Expenses. Notwithstanding the above, while the project is owned by Lincoln-RECP
Hellyer OPCO, LLC, Landlord shall obtain and keep in force insurance as outlined
above in an amount of one hundred percent (100%) of the full replacement value
(excluding flood and earthquake).
13. Waiver of Subrogation
Landlord and Tenant hereby mutually waive their respective rights of recovery
against each other for any loss of, or damage to, either parties' property to
the extent that such loss or damage is insured by an insurance policy required
to be in effect at the time of such loss or damage. Each party shall obtain any
special endorsements, if required by its insurer whereby the insurer waives its
rights of subrogation against the other party. This provision is intended to
waive fully, and for the benefit of the parties hereto, any rights and/or claims
which might give rise to a right of subrogation in favor of any insurance
carrier. The coverage obtained by Tenant pursuant to Section 12 of this Lease
shall include, without limitation, a waiver of subrogation endorsement attached
to the certificate of insurance. The provisions of this Section 13 shall not
apply in those instances in which such waiver of subrogation would invalidate
such insurance coverage or would cause either party's insurance coverage to be
voided or otherwise uncollectible.
14. Limitation of Liability and Indemnity
Except to the extent of damage resulting from the gross negligence or willful
misconduct of Landlord or its authorized representatives, Tenant agrees to
protect, defend (with counsel acceptable to Landlord) and hold Landlord and
Landlord's lenders, partners, members, property management company (if other
than Landlord), agents, directors, officers, employees, representatives,
contractors, shareholders, successors and assigns and each of their respective
partners, members, directors, employees, representatives, agents, contractors,
shareholders, successors and assigns (collectively, the "Indemnitees") harmless
and indemnify the Indemnitees from and against all liabilities, damages, claims,
losses, judgments, charges and expenses (including reasonable attorneys' fees,
costs of court and expenses necessary in the
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prosecution or defense of any litigation including the enforcement of this
provision) arising from or in any way related to, directly or indirectly, (i)
Tenant's or Tenant's Representatives' use of the Premises, Building, and/or the
Park, (ii) the conduct of Tenant's business, (iii) from any activity, work or
thing done, permitted or suffered by Tenant in or about the Premises, (iv) in
any way connected with the Premises, the Tenant Improvements, the Alterations or
with the Tenant's Property therein, including, but not limited to, any liability
for injury to person or property of Tenant, Tenant's Representatives or third
party persons, and/or (v) Tenant's failure to perform any covenant or obligation
of Tenant under this Lease. Tenant agrees that the obligations of Tenant herein
shall survive the expiration or earlier termination of this Lease.
Except to the extent of damage resulting from the gross negligence or willful
misconduct of Landlord or its authorized representatives, to the fullest extent
permitted by law, Tenant agrees that neither Landlord nor any of Landlord's
lender(s), partners, members, employees, representatives, legal representatives,
successors or assigns shall at any time or to any extent whatsoever be liable,
responsible or in any way accountable for any loss, liability, injury, death or
damage to persons or property which at any time may be suffered or sustained by
Tenant or by any person(s) whomsoever who may at any time be using, occupying or
visiting the Premises, the Building or the Park, including, but not limited to,
any acts, errors or omissions by or on behalf of any other tenants or occupants
of the Building and/or the Park. Tenant shall not, in any event or
circumstance, be permitted to offset or otherwise credit against any payments of
Rent required herein for matters for which Landlord may be liable hereunder.
Landlord and its authorized representatives shall not be liable for any
interference with light or air.
15. Assignment and Subleasing
15.1 Prohibition: Tenant shall not, without the prior written consent of
Landlord, assign, mortgage, hypothecate, encumber, grant any license or
concession, pledge or otherwise transfer this Lease or any interest herein,
permit any assignment or other such transfer of this Lease or any interest
hereunder by operation of law, sublet the Premises or any part thereof, or
permit the use of the Premises by any persons other than Tenant and Tenant's
Representatives (all of the foregoing are sometimes referred to collectively as
"Transfers" and any person to whom any Transfer is made or sought to be made is
sometimes referred to as a "Transferee"). No consent to any Transfer shall
constitute a waiver of the provisions of this Section 15, and all subsequent
Transfers may be made only with the prior written consent of Landlord, which
consent shall not be unreasonably withheld, but which consent shall be subject
to the provisions of this Section 15.
15.2 Request for Consent: If Tenant seeks to make a Transfer, Tenant shall
notify Landlord, in writing, and deliver to Landlord at least fifteen (15) days
(but not more than one hundred eighty (180) days) prior to the proposed
commencement date of the Transfer (the "Proposed Effective Date") the following
information and documents (the "Tenant's Notice"): (i) a description of the
portion of the Premises to be transferred (the "Subject Space"); (ii) all of the
terms of the proposed Transfer including without limitation, the Proposed
Effective Date, the name and address of the proposed Transferee, and a copy of
the existing or proposed assignment, sublease or other agreement governing the
proposed Transfer; (iii) current financial statements of the proposed Transferee
certified by an officer, member, partner or owner thereof, and any such other
information as Landlord may then reasonably require, including without
limitation, audited financial statements (to the extent available) for the
previous three (3) most recent consecutive fiscal years; and (iv) the Plans and
Specifications (defined below), if any. Tenant shall give Landlord the Tenant's
Notice by registered or certified mail addressed to Landlord at Landlord's
Address specified in the Basic Lease Information. Within fifteen (15) days after
Landlord's receipt of the Tenant's Notice (the "Landlord Response Period")
Landlord shall notify Tenant, in writing, of its determination with respect to
such requested proposed Transfer and the election to recapture as set forth in
Section 15.5 below and shall provide the basis for such rejection of such
transfer. If Landlord does not elect to recapture pursuant to the provisions of
Section 15.5 hereof and Landlord does consent to the requested proposed
Transfer, Tenant may thereafter assign its interests in and to this Lease or
sublease all or a portion of the Premises to the same party and on the same
terms as set forth in the Tenant's Notice. If Landlord fails to respond to
Tenant's Notice within Landlord's Response Period, then, after Tenant delivers
to Landlord fifteen (15) days written notice (the "Second Response Period") and
Landlord fails to respond thereto prior to the end of the Second Response
Period, the proposed Transfer shall then be deemed approved by Landlord.
15.3 Criteria for Consent: Tenant acknowledges and agrees that, among
other circumstances for which Landlord could reasonably withhold consent to a
proposed Transfer, it shall be reasonable for Landlord to withhold its consent
where (a) Tenant is or has been in material default of its obligations under
this Lease beyond applicable notice and cure periods, (b) the use to be made of
the Premises by the proposed Transferee is prohibited under this Lease or
materially differs from the uses permitted under this Lease, (c) the proposed
Transferee does not intend to occupy a substantial portion of the Premises
assigned or sublet to it, (d) Landlord reasonably disapproves of the proposed
Transferee's business operating ability or history taking into account Tenant's
continuing liability hereunder as provided in Section 15.4 hereof, (e) the
proposed Transferee is a governmental agency or unit, (f) Landlord otherwise
reasonably determines that the proposed Transfer would have the effect of
decreasing the value of the Building or the Project, or increasing the expenses
associated with operating, maintaining and repairing the Project (unless such
increase is paid directly by Tenant or Transferee), (g) either the proposed
Transferee, or any person or entity which directly or indirectly, controls, is
controlled by, or is under common control with, the proposed Transferee, is
negotiating with Landlord to lease space in the Building at such time, (h) the
Transfer occurs during the time period between the Commencement Date and the
date that at least ninety-five percent (95%) of the rentable square feet of the
Project is leased, (i) the rent proposed to be charged by Tenant to the proposed
Transferee during the term of such Transfer, calculated using a present value
analysis, is less than ninety-five percent (95%) of the rent then being quoted
by Landlord, at the proposed time of such Transfer, for comparable space in the
Building or any other Building in the Project for a comparable term, calculated
using a present value system, or (j) the proposed Transferee will use, store or
handle Hazardous Materials (defined below) in or about the Premises of a type,
nature or quantity not then acceptable to Landlord. Notwithstanding the above,
items (h) and (i) as outlined herein, shall not apply to Transfers which are for
a term of thirty six (36) months or less.
15.4 Effectiveness of Transfer and Continuing Obligations: Prior to the
date on which any permitted Transfer becomes effective, Tenant shall deliver to
Landlord (i) a counterpart of the fully executed Transfer document, (ii) an
executed Hazardous Materials Disclosure Certificate substantially in the form of
Exhibit E hereto (the "Transferee HazMat Certificate"), and (iii) Landlord's
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standard form of Consent to Assignment or Consent to Sublease (in substantially
the same form attached as Exhibit J), as applicable, executed by Tenant and the
Transferee in which each of Tenant and the Transferee confirms its obligations
pursuant to this Lease. Failure or refusal of a Transferee to execute any such
consent instrument shall not release or discharge the Transferee from its
obligation to do so or from any liability as provided herein. The voluntary,
involuntary or other surrender of this Lease by Tenant, or a mutual cancellation
by Landlord and Tenant, shall not work a merger, and any such surrender or
cancellation shall, at the option of Landlord,
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either terminate all or any existing subleases or operate as an assignment to
Landlord of any or all of such subleases. Unless otherwise expressly agreed to
in writing by Landlord, each permitted Transferee shall assume and be deemed to
assume this Lease and shall be and remain liable jointly and severally with
Tenant for payment of Rent and for the due performance of, and compliance with
all the terms, covenants, conditions and agreements herein contained on Tenant's
part to be performed or complied with, for the Term of this Lease. Unless
otherwise expressly agreed to in writing by Landlord, no Transfer shall affect
the continuing primary liability of Tenant (which, following assignment, shall
be joint and several with the assignee), and Tenant shall not be released from
performing any of the terms, covenants and conditions of this Lease. An assignee
of Tenant shall become directly liable to Landlord for all obligations of Tenant
hereunder, but no Transfer by Tenant shall relieve Tenant of any obligations or
liability under this Lease whether occurring before or after such consent,
assignment, subletting or other Transfer. The acceptance of any or all of the
Rent by Landlord from any other person (whether or not such person is an
occupant of the Premises) shall not be deemed to be a waiver by Landlord of any
provision of this Lease or to be a consent to any Transfer. For purposes hereof,
if Tenant is a business entity whose stock or other equity securities is not
publicly traded, direct or indirect transfer of fifty percent (50%) or more of
the ownership interest of the entity (whether in a single transaction or in the
aggregate through more than one transaction) shall be deemed a Transfer and
shall be subject to all the provisions hereof. Except for a permissible
assignment in connection with a Permitted Transfer any and all options, first
rights of refusal, tenant improvement allowances and other similar rights
granted to Tenant in this Lease, if any, shall not be assignable by Tenant
unless expressly authorized in writing by Landlord. Any transfer made without
Landlord's prior written consent, shall, at Landlord's option, be null, void and
of no effect, and shall, at Landlord's option, constitute a material default by
Tenant of this Lease unless such transfer is rescinded within five (5) business
days after to Tenant of written notice specifying such default. As Additional
Rent hereunder, Tenant shall pay to Landlord, a fee in the amount of five
hundred dollars ($500) plus Tenant shall promptly reimburse Landlord for actual
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legal and other expenses incurred by Landlord in connection with any actual or
proposed Transfer.
15.5 Recapture: Except for a Permitted Transfer, if the Transfer (i) by
itself or taken together with then existing or pending Transfers covers or
totals, as the case may be, more than twenty-five percent (25%) of the rentable
square feet of the Building A, or (ii) is for a term which by itself or taken
together with then existing or pending Transfers is greater than fifty percent
(50%) of the period then remaining in the Term of this Lease as of the time of
the Proposed Effective Date, then Landlord shall have the right, to be exercised
by giving written notice to Tenant, to recapture the Subject Space described in
the Tenant's Notice. If such recapture notice is given, it shall serve to
terminate this Lease with respect to the proposed Subject Space, or, if the
proposed Subject Space covers all the Premises, it shall serve to terminate the
entire Term of this Lease, in either case, as of the Proposed Effective Date.
However, no termination of this Lease with respect to part or all of the
Premises shall become effective without the prior written consent, where
necessary, of the holder of each deed of trust encumbering the Premises or any
other portion of the Project. If this Lease is terminated pursuant to the
foregoing provisions with respect to less than the entire Premises, the Rent
shall be adjusted on the basis of the proportion of rentable square feet
retained by Tenant to the rentable square feet originally demised and this Lease
as so amended shall continue thereafter in full force and effect.
Notwithstanding the above, Landlord may not recapture the portion of the
Premises consisting of 59,316 square feet in Building B during the initial term
of the Lease except in the event Tenant subleases or assigns the Lease for the
remaining portion of the term of the Lease.
15.6 Transfer Premium: If Landlord consents to a Transfer, as a condition
thereto which the Tenant hereby agrees is reasonable, Tenant shall pay to
Landlord, as Additional Rent any "Transfer Premium" received by Tenant from such
Transferee. The term "Transfer Premium" shall mean all rent, additional rent
and other consideration payable by such Transferee which either initially or
over the term of the Transfer exceeds the Rent or pro rata portion of the Rent,
as the case may be, for such space reserved in the Lease. Tenant shall pay the
Landlord monthly, as Additional Rent, at the same time as the monthly
installments of Rent are payable hereunder, seventy-five percent (75%) of the
Transfer Premium after deduction for reasonable actual commissions paid by
Tenant and in the event of a transfer of this Lease in connection with a sale of
all or substantially all of Tenant's assets at the Premises, the amount, if any,
allocated by Tenant to personal property or other assets of Tenant that are
included in the consideration paid for such property or assets.
15.7 Waiver: Notwithstanding any Transfer, or any indulgences, waivers or
extensions of time granted by Landlord to any Transferee, or failure by Landlord
to take action against any Transferee, Tenant agrees that Landlord may, at its
option, proceed against Tenant without having taken action against or joined
such Transferee, except that Tenant shall have the benefit of any indulgences,
waivers and extensions of time granted to any such Transferee.
15.8 Related Entity: Except for a permissible assignment in connection
with a Permitted Transfer, any and all options, first rights of refusal, tenant
improvement allowances and other similar rights granted to Tenant in this Lease,
if any, shall not be assignable by Tenant unless expressly authorized in writing
by Landlord. Notwithstanding anything to the contrary contained herein, so long
as Tenant delivers to Landlord (1) at least fifteen (15) business days prior
written notice of its intention to assign or sublease the Premises to any
Related Entity, which notice shall set forth the name of the Related Entity, (2)
a copy of the proposed agreement pursuant to which such assignment or sublease
shall be effectuated, and (3) The current financial statements of Tenant and the
Related Entity including, without limitation, the balance sheet, statement of
operations/income and statement of cash flow for the current fiscal year and the
three prior fiscal years, and (4) such other information concerning the Related
Entity as Landlord may reasonably require, including without limitation,
information regarding any change in the proposed use of any portion of the
Premises, and so long as Landlord approves, in writing, of any change in the
proposed use of the subject portion of the Premises, then Tenant may assign this
Lease or sublease any portion of the Premises (X) to any Related Entity, or (Y)
in connection with any merger, consolidation or sale of substantially all of the
assets of Tenant whereby such new entity has an equal or greater net worth of
Tenant as of the date on which any merger, consolidation or sale is effectuated,
without having to obtain the prior written consent of Landlord thereto (the
transactions described in (X) and (Y) above are referred to herein as a
"Permitted Transfers"). For purposes of this Lease the term "Related Entity"
shall mean and refer to any corporation or entity which controls, is controlled
by or is under common control with Tenant, as all of such terms are customarily
used in the industry, and with an equal or greater net worth for the three (3)
past fiscal quarters of operations as Tenant has as of the proposed transfer
date. Any assignment to a Related Entity shall in no way relieve Tenant of any
liability Tenant may have under this Lease and such assignee or sublessee shall
be jointly and severally liable with Tenant hereunder.
16. Ad Valorem Taxes
Prior to delinquency, Tenant shall pay all taxes and assessments levied upon
trade fixtures, alterations, additions, improvements, inventories and personal
property located and/or installed on or in the Premises by, or on behalf of,
Tenant; and if requested by Landlord, Tenant shall promptly deliver to Landlord
copies of receipts for payment of all such taxes and assessments. To the extent
any such taxes are not separately assessed or billed to Tenant, Tenant shall pay
the amount thereof as invoiced by Landlord.
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17. Subordination
Without the necessity of any additional document being executed by Tenant for
the purpose of effecting a subordination, and at the election of Landlord or any
bona fide mortgagee or deed of trust beneficiary with a lien on all or any
portion of the Premises or any ground lessor with respect to the land of which
the Premises are a part, the rights of Tenant under this Lease and this Lease
shall be subject and subordinate at all times to: (i) all ground leases or
underlying leases which may now exist or hereafter be executed affecting the
Building or the land upon which the Building is situated or both, and (ii) the
lien of any mortgage or deed of trust which may now exist or hereafter be
executed in any amount for which the Building, the Lot, ground leases or
underlying leases, or Landlord's interest or estate in any of said items is
specified as security. Notwithstanding the foregoing, Landlord or any such
ground lessor, mortgagee, or any beneficiary shall have the right to subordinate
or cause to be subordinated any such ground leases or underlying leases or any
such liens to this Lease. If any ground lease or underlying lease terminates
for any reason or any mortgage or deed of trust is foreclosed or a conveyance in
lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any
subordination and upon the request of such successor to Landlord, attorn to and
become the Tenant of the successor in interest to Landlord, provided such
successor in interest will not disturb Tenant's use, occupancy or quiet
enjoyment of the Premises so long as Tenant is not in default of the terms and
provisions of this Lease. The successor in interest to Landlord following
foreclosure, sale or deed in lieu thereof shall not be (a) liable for any act or
omission of any prior lessor or with respect to events occurring prior to
acquisition of ownership; (b) subject to any offsets or defenses which Tenant
might have against any prior lessor; (c) bound by prepayment of more than one
(1) month's Rent, except in those instances when Tenant pays Rent quarterly in
advance pursuant to Section 8 hereof, then not more than three months' Rent; or
(d) liable to Tenant for any Security Deposit not actually received by such
successor in interest to the extent any portion or all of such Security Deposit
has not already been forfeited by, or refunded to, Tenant. Landlord shall be
liable to Tenant for all or any portion of the Security Deposit not forfeited
by, or refunded to Tenant, until and unless Landlord transfers such Security
Deposit to the successor in interest. Tenant covenants and agrees to execute
(and acknowledge if required by Landlord, any lender or ground lessor) and
deliver, within five (5) days of a demand or request by Landlord and in the form
requested by Landlord, ground lessor, mortgagee or beneficiary, any additional
documents evidencing the priority or subordination of this Lease with respect to
any such ground leases or underlying leases or the lien of any such mortgage or
deed of trust. Tenant's failure to timely execute and deliver such additional
documents shall, at Landlord's option, constitute a material default hereunder.
It is further agreed that Tenant shall be liable to Landlord, and shall
indemnify Landlord from and against any loss, cost, damage or expense,
incidental, consequential, or otherwise, arising or accruing directly or
indirectly, from any failure of Tenant to execute or deliver to Landlord any
such additional documents. Tenant hereby acknowledges that as of the date on
which Landlord and Tenant execute this Lease there is a deed of trust
encumbering, and in force against the Premises, the Building and the Park in
favor of U. S. Bank (the "Current Lender"). Within thirty (30) days of Tenant's
execution of this Lease, Tenant shall sign, notarize and deliver a
subordination, non-disturbance and attornment agreement substantially in the
form of Exhibit H attached hereto, entitled "Subordination, Non-Disturbance and
Attornment Agreement." Landlord shall (i) execute and notarize such agreement
within thirty (30) days of Landlord's execution of this Lease and (ii) cause
Current Lender to execute and notarize such agreement promptly after Landlord's
and Tenant's execution and notarization of such non-disturbance agreement. If
Landlord at any time during the Term of the Lease causes the Premises, the
Building and the Park to be encumbered by a new deed of trust or mortgage
pursuant to which the beneficiary of such deed of trust or mortgage is a party
or entity other than the Current Lender, the parties acknowledge and agree that
the form of any non-disturbance and attornment agreement that may be requested
to be executed and delivered by Tenant in connection therewith will not be the
"Subordination, Non-Disturbance and Attornment Agreement" attached to the Lease
as Exhibit H. Tenant's agreement to subordinate this Lease to any future ground
or underlying lease or any future deed of trust or mortgage pursuant to the
foregoing provisions of this Section 17 is conditioned upon Landlord delivering
to Tenant from the lessor under such future ground or underlying lease or the
holder of any such deed of trust, a non-disturbance agreement agreeing, among
other things, that Tenant's right to possession of the Premises pursuant to the
terms and conditions of this Lease shall not be disturbed provided Tenant is not
in default under this Lease beyond the applicable notice and cure periods
hereunder.
18. Right of Entry
Landlord and its agents shall have the right, following reasonable prior notice
to Tenant (except in the case of an emergency) , to enter the Premises at all
reasonable times for purposes of inspection, exhibition, posting of notices,
repair, maintenance and alteration. At Landlord's option, Landlord shall at all
times have and retain a key with which to unlock all the doors in, upon and
about the Premises, excluding Tenant's vaults and safes. It is further agreed
that Landlord shall have the right to use any and all means Landlord deems
necessary to enter the Premises in an emergency. During the last nine (9)
months of the Lease Term, Landlord shall have the right to place "for rent" or
"for lease" signs on the outside of the Premises, the Building and in the Common
Areas. Landlord shall also have the right to place "for sale" signs on the
outside of the Building and in the Common Areas. Tenant hereby waives any claim
from damages or for any injury or inconvenience to or interference with Tenant's
business, or any other loss occasioned thereby except for any claim for any of
the foregoing arising out of the gross negligence or willful misconduct of
Landlord or its authorized representatives.
19. Estoppel Certificate
Tenant shall execute (and acknowledge if required by any lender or ground
lessor) and deliver to Landlord, within ten (10) days after Landlord provides
such to Tenant, a statement in writing and in form and substance reasonably
acceptable to Tenant certifying that this Lease is unmodified and in full force
and effect (or, if modified, stating the nature of such modification), the date
to which the Rent and other charges are paid in advance, if any, acknowledging
that there are not, to Tenant's knowledge, any uncured defaults on the part of
Landlord hereunder or specifying such defaults as are claimed, and such other
factual matters as Landlord may reasonably require. Any such statement may be
conclusively relied upon by Landlord and any prospective purchaser or
encumbrancer of the Premises. Tenant's failure to deliver such statement within
such time shall be conclusive upon the Tenant that (a) this Lease is in full
force and effect, without modification except as may be represented by Landlord;
(b) there are no uncured defaults in Landlord's performance; and (c) not more
than one month's Rent has been paid in advance, except in those instances when
Tenant pays Rent quarterly in advance pursuant to Section 8 hereof, then not
more than three month's Rent has been paid in advance. Failure by Tenant to so
deliver such certified estoppel certificate shall be a material default of the
provisions of this Lease.
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20. Tenant's Default
The occurrence of any one or more of the following events shall, at Landlord's
option, constitute a material default (after any applicable grace period or cure
period to the extent provided in this Section 20) by Tenant of the provisions of
this Lease:
20.1 The abandonment of the Premises by Tenant which would cause any
insurance policy to be invalidated or otherwise lapse;
20.2 The failure by Tenant to make any payment of Rent, Additional Rent or
any other payment required hereunder within three (3) days of the date said
payment is due after delivery of notice by Landlord that such payment is due;
20.3 The failure by Tenant to observe, perform or comply with any of the
conditions, covenants or provisions of this Lease (except failure to make any
payment of Rent or Additional Rent) and such failure is not cured within (i)
thirty (30) days of the date on which Landlord delivers written notice of such
failure to Tenant for all failures other than with respect to (a) Hazardous
Materials (defined in Section 29 hereof), (b) Tenant making the repairs,
maintenance and replacements required under the provisions of Section 11.1
hereof, or (c) the timely delivery by Tenant of a subordination, non-disturbance
and attornment agreement, an assignment or sublease agreement, an estoppel
certificate and insurance certificates, (ii) ten (10) business days of the date
on which Landlord delivers written notice of such failure to Tenant for all
failures in any way related to Hazardous Materials or Tenant failing to timely
make the repairs, maintenance or replacements required by Section 11.1 hereof,
and (iii) the time period specified in the applicable sections of this Lease
with respect to subordination, assignment and sublease, estoppel certificates
and insurance. However, Tenant shall not be in default of its obligations
hereunder if such failure (other than any failure of Tenant to timely and
properly make the repairs, maintenance, or replacements required by Section
11.1, or to timely deliver a subordination, non-disturbance and attornment
agreement, an assignment or sublease agreement, an estoppel certificate or
insurance certificates, for which no additional cure period shall be given to
Tenant) cannot reasonably be cured within such thirty (30) or ten (10) business
day period, as applicable, and Tenant promptly commences, and thereafter
diligently proceeds with same to completion, all actions necessary to cure such
failure as soon as is reasonably possible, but in no event shall the completion
of such cure be later than sixty (60) days after the date on which Landlord
delivers to Tenant written notice of such failure, unless Landlord, acting
reasonably and in good faith, otherwise expressly agrees in writing to a longer
period of time based upon the circumstances relating to such failure as well as
the nature of the failure and the nature of the actions necessary to cure such
failure;
20.4 The making of a general assignment by Tenant for the benefit of
creditors, the filing of a voluntary petition by Tenant or the filing of an
involuntary petition by any of Tenant's creditors seeking the rehabilitation,
liquidation, or reorganization of Tenant under any law relating to bankruptcy,
insolvency or other relief of debtors and, in the case of an involuntary action,
the failure to remove or discharge the same within sixty (60) days of such
filing, the appointment of a receiver or other custodian to take possession of
substantially all of Tenant's assets or this leasehold, Tenant's insolvency or
inability to pay Tenant's debts or failure generally to pay Tenant's debts when
due, any court entering a decree or order directing the winding up or
liquidation of Tenant or of substantially all of Tenant's assets, Tenant taking
any action toward the dissolution or winding up of Tenant's affairs, the
cessation or suspension of Tenant's use of the Premises, or the attachment,
execution or other judicial seizure of substantially all of Tenant's assets or
this leasehold;
20.5 Tenant's use or storage of Hazardous Materials in, on or about the
Premises, the Building, the Lot and/or the Park other than as expressly
permitted by the provisions of Section 29 below; or
20.6 The making of any material misrepresentation or intentional omission
by Tenant in any materials delivered by or on behalf of Tenant to Landlord
pursuant to this Lease in circumstances where such misrepresentation or omission
has a material adverse effect upon Landlord.
21. Remedies for Tenant's Default
21.1 Landlord's Rights: In the event of Tenant's material default under
this Lease, Landlord may terminate Tenant's right to possession of the Premises
by any lawful means in which case upon delivery of written notice by Landlord
this Lease shall terminate on the date specified by Landlord in such notice and
Tenant shall immediately surrender possession of the Premises to Landlord. In
addition, the Landlord shall have the immediate right of re-entry whether or not
this Lease is terminated, and if this right of re-entry is exercised following
abandonment of the Premises by Tenant, Landlord may consider any personal
property belonging to Tenant and left on the Premises to also have been
abandoned. No re-entry or taking possession of the Premises by Landlord
pursuant to this Section 21 shall be construed as an election to terminate this
Lease unless a written notice of such intention is given to Tenant. If Landlord
relets the Premises or any portion thereof, (i) Tenant shall be liable
immediately to Landlord for all reasonable costs Landlord incurs in reletting
the Premises or any part thereof, including, without limitation, broker's
commissions, expenses of cleaning, redecorating, and further improving the
Premises and other similar costs (collectively, the "Reletting Costs"), and (ii)
the rent received by Landlord from such reletting shall be applied to the
payment of, first, any indebtedness from Tenant to Landlord other than Base
Rent, Operating Expenses, Tax Expenses, Common Area Utility Costs, and Utility
Expenses; second, all costs including maintenance, incurred by Landlord in
reletting; and, third, Base Rent, Operating Expenses, Tax Expenses, Common Area
Utility Costs, Utility Expenses, and all other sums due under this Lease. Any
and all of the Reletting Costs shall be fully chargeable to Tenant and shall not
be prorated or otherwise amortized in relation to any new lease for the Premises
or any portion thereof. After deducting the payments referred to above, any sum
remaining from the rental Landlord receives from reletting shall be held by
Landlord and applied in payment of future Rent as Rent becomes due under this
Lease. In no event shall Tenant be entitled to any excess rent received by
Landlord. Reletting may be for a period shorter or longer than the remaining
term of this Lease. No act by Landlord other than giving written notice to
Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the
Premises or the appointment of a receiver on Landlord's initiative to protect
Landlord's interest under this Lease shall not constitute a termination of
Tenant's right to possession. So long as this Lease is not terminated, Landlord
shall have the right to remedy any default of Tenant, to maintain or improve the
Premises, to cause a receiver to be appointed to administer the Premises and new
or existing subleases and to add to the Rent payable hereunder all of Landlord's
reasonable costs in so doing, with interest at the maximum rate permitted by law
from the date of such expenditure.
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21.2 Damages Recoverable: If Tenant breaches this Lease and abandons the
Premises before the end of the Term, or if Tenant's right to possession is
terminated by Landlord because of a breach or default under this Lease, then in
either such case, Landlord may recover from Tenant all damages suffered by
Landlord as a result of Tenant's failure to perform its obligations hereunder,
including but not without limitation, the cost of any unamortized Tenant
Improvements constructed by or on behalf of Tenant pursuant to Exhibit B hereto
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to the extent Landlord has paid for such improvements, the unamortized portion
of any broker's or leasing agent's commission incurred with respect to the
leasing of the Premises to Tenant for the balance of the Term of the Lease
remaining after the date on which Tenant is in default of its obligations
hereunder, and all Reletting Costs, and the worth at the time of the award
(computed in accordance with paragraph (3) of Subdivision (a) of Section 1951.2
of the California Civil Code) of the amount by which the Rent then unpaid
hereunder for the balance of the Lease Term exceeds the amount of such loss of
Rent for the same period which Tenant proves could be reasonably avoided by
Landlord and in such case, Landlord prior to the award, may relet the Premises
for the purpose of mitigating damages suffered by Landlord because of Tenant's
failure to perform its obligations hereunder; provided, however, that even
though Tenant has abandoned the Premises following such breach, this Lease shall
nevertheless continue in full force and effect for as long as Landlord does not
terminate Tenant's right of possession, and until such termination, Landlord
shall have the remedy described in Section 1951.4 of the California Civil Code
(Landlord may continue this Lease in effect after Tenant's breach and
abandonment and recover Rent as it becomes due, if Tenant has the right to
sublet or assign, subject only to reasonable limitations) and may enforce all
its rights and remedies under this Lease, including the right to recover the
Rent from Tenant as it becomes due hereunder. The "worth at the time of the
award" within the meaning of Subparagraphs (a)(1) and (a)(2) of Section 1951.2
of the California Civil Code shall be computed by allowing interest at the rate
of ten percent (10%) per annum. Tenant waives redemption or relief from
forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or
under any other present or future law, in the event Tenant is evicted or
Landlord takes possession of the Premises by reason of any default of Tenant
hereunder.
21.3 Rights and Remedies Cumulative: The foregoing rights and remedies of
Landlord are not exclusive; they are cumulative in addition to any rights and
remedies now or hereafter existing at law, in equity by statute or otherwise, or
to any equitable remedies Landlord may have, and to any remedies Landlord may
have under bankruptcy laws or laws affecting creditor's rights generally. In
addition to all remedies set forth above, if Tenant materially defaults under
this Lease, and such default is uncured at the time Tenant exercises any option,
all options granted to Tenant hereunder shall automatically terminate, unless
otherwise expressly agreed to in writing by Landlord.
21.4 Waiver of a Default: The waiver by Landlord of any default of any
provision of this Lease shall not be deemed or construed a waiver of any other
default by Tenant hereunder or of any subsequent default of this Lease, except
for the default specified in the waiver.
22. Holding Over
If Tenant holds possession of the Premises after the expiration of the Term of
this Lease with Landlord's consent, Tenant shall become a tenant from month-to-
month upon the terms and provisions of this Lease, provided the monthly Base
Rent during such hold over period shall be 150% of the Base Rent due on the last
month of the Lease Term, payable in advance on or before the first day of each
month. Acceptance by Landlord of the monthly Base Rent without the additional
fifty percent (50%) increase of Base Rent shall not be deemed or construed as a
waiver by Landlord of any of its rights to collect the increased amount of the
Base Rent as provided herein at any time. Such month-to-month tenancy shall not
constitute a renewal or extension for any further term. All options, if any,
granted under the terms of this Lease shall be deemed automatically terminated
and be of no force or effect during said month-to-month tenancy. Tenant shall
continue in possession until such tenancy shall be terminated by either Landlord
or Tenant giving written notice of termination to the other party at least
thirty (30) days prior to the effective date of termination. This paragraph
shall not be construed as Landlord's permission for Tenant to hold over.
Acceptance of Base Rent by Landlord following expiration or termination of this
Lease shall not constitute a renewal of this Lease.
23. Landlord's Default
Landlord shall not be deemed in breach or default of this Lease unless Landlord
fails within a reasonable time to perform an obligation required to be performed
by Landlord hereunder. For purposes of this provision, a reasonable time shall
not be less than thirty (30) days after receipt by Landlord of written notice
specifying the nature of the obligation Landlord has not performed (except in
the case of an emergency or the existence of any failure by Landlord that has an
immediate, direct and material adverse effect on Tenant's ability to operate
from the Premises); provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days, after receipt of written
notice, is reasonably necessary for its performance, then Landlord shall not be
in breach or default of this Lease if performance of such obligation is
commenced within such thirty (30) day period and thereafter diligently pursued
to completion.
24. Parking
Tenant may use the number of non-designated and non-exclusive parking spaces
specified in the Basic Lease Information. Landlord shall exercise reasonable
efforts to insure that such spaces are available to Tenant for its use, but
other than the ten (10) spaces designated for Tenant's exclusive use, Landlord
shall not be required to enforce Tenant's right to use the same.
25. Sale of Premises
In the event of any sale of the Premises by Landlord or the cessation otherwise
of Landlord's interest therein, Landlord shall be and is hereby entirely
released from any and all of its obligations to perform or further perform under
this Lease and from all liability hereunder accruing from or after the date of
such sale; and the purchaser, at such sale or any subsequent sale of the
Premises shall be deemed, to have assumed and agreed to carry out any and all of
the covenants and obligations of the Landlord under this Lease. For purposes of
this Section 25, the term "Landlord" means only the owner and/or agent of the
owner as such parties exist as of the date on which Tenant executes this Lease.
A ground lease or similar long term lease by Landlord of the entire Building, of
which the Premises are a part, shall be deemed a sale within the meaning of this
Section 25. Tenant agrees to attorn to such new owner provided such new owner
does not disturb Tenant's use, occupancy or quiet enjoyment of the Premises so
long as Tenant is not in default of any of the provisions of this Lease.
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26. Waiver
No delay or omission in the exercise of any right or remedy of either party on
any default by the other party shall impair such a right or remedy or be
construed as a waiver. The subsequent acceptance of Rent by Landlord after
default by Tenant of any covenant or term of this Lease shall not be deemed a
waiver of such default, other than a waiver of timely payment for the particular
Rent payment involved, and shall not prevent Landlord from maintaining an
unlawful detainer or other action based on such breach. No payment by Tenant or
receipt by Landlord of a lesser amount than the monthly Rent and other sums due
hereunder shall be deemed to be other than on account of the earliest Rent or
other sums due, nor shall any endorsement or statement on any check or
accompanying any check or payment be deemed an accord and satisfaction; and
Landlord may accept such check or payment without prejudice to Landlord's right
to recover the balance of such Rent or other sum or pursue any other remedy
provided in this Lease. No failure, partial exercise or delay on the part of
the Landlord in exercising any right, power or privilege hereunder shall operate
as a waiver thereof.
27. Casualty Damage
27.1 Casualty. If the Premises or any part [excluding any of Tenant's
Property or any Alterations installed by or for the benefit of Tenant
(collectively, the "Tenant's FF&E")] shall be damaged or destroyed by fire or
other casualty, Tenant shall give immediate written notice thereof to Landlord.
Within sixty (60) days after receipt by Landlord of such notice, Landlord shall
notify Tenant, in writing, whether the necessary repairs can reasonably be made,
as reasonably determined by Landlord: (a) in less than two hundred seventy (270)
days; or (b) two hundred seventy (270) days or more, from the date of such
notice.
27.1.1 Insured Damage Requiring Less Than 270 Days To Repair. If the
Premises (other than the Tenant's FF&E) are damaged only to such extent that
repairs, rebuilding and/or restoration can be reasonably completed, as
reasonably determined by Landlord, in less than two hundred seventy (270) days,
this Lease shall not terminate and Landlord shall repair the Premises to
substantially the same condition that existed prior to the occurrence of such
casualty, provided insurance proceeds are available and paid to Landlord and
Tenant otherwise voluntarily contributes any shortfall thereof to Landlord to
fully repair the damage (except that Landlord shall not be required to rebuild,
repair, or replace any of Tenant's FF&E). The Rent payable hereunder shall be
abated proportionately from the date and to the extent Tenant actually vacates
the affected portions of the Premises until any and all repairs required herein
to be made by Landlord are substantially completed but such abatement shall only
be to the extent the portion of the Premises which is actually rendered unusable
and unfit for occupancy and only during the time Tenant is not actually using
same. If Landlord fails to substantially complete such repairs in less than two
hundred seventy (270) days after the date on which Landlord is notified by
Tenant of the occurrence of such casualty [such period to be extended for delays
caused by Tenant or any of Tenant's Representatives ("Tenant Delays") or any
force majeure events, which events shall include, but not be limited to, acts or
events beyond Landlord's and/or its contractors' control, acts of God,
earthquakes, strikes, lockouts, riots, boycotts, casualties not caused by
Landlord or Tenant, discontinuance of any utility or other service required for
performance of the work, moratoriums, governmental delays in issuing permits,
governmental agencies and weather, and the lack of availability or shortage of
materials ("Force Majeure Delays")], Tenant may within ten (10) business days
after expiration of such two hundred seventy (270) day period (as same may be
extended), terminate this Lease by delivering written notice to Landlord as
Tenant's exclusive remedy, whereupon all rights of Tenant hereunder shall cease
and terminate ten (10) business days after Landlord's receipt of such notice and
Tenant shall immediately vacate the Premises and surrender possession thereof to
Landlord.
27.1.2 Major Insured Damage. If the Premises (other than the
Tenant's FF&E) are damaged to such extent that repairs, rebuilding and/or
restoration cannot be reasonably completed, as reasonably determined by
Landlord, in less than two hundred seventy (270) days, then either Landlord or
Tenant may terminate this Lease by giving written notice within twenty (20) days
after notice from Landlord regarding the time period of repair. If either party
notifies the other of its intention to so terminate the Lease, then this Lease
shall terminate and the Rent shall be abated from the date of the occurrence of
such damage, provided Tenant diligently proceeds to and expeditiously vacates
the Premises (but, in all events Tenant must vacate and surrender the Premises
to Landlord by no later than ten (10) business days thereafter or there shall
not be any abatement of Rent until Tenant so vacates the Premises). If neither
party elects to terminate this Lease, Landlord shall promptly commence and
diligently prosecute to completion the repairs to the Premises, provided
insurance proceeds are available and paid to Landlord to fully repair the damage
or Tenant voluntarily contributes any shortfall thereof to Landlord (except that
Landlord shall not be required to rebuild, repair, or replace any of Tenant's
FF&E). During the time when Landlord is prosecuting such repairs to substantial
completion, the Rent payable hereunder shall be abated proportionately from the
date and to the extent Tenant actually vacates the affected portions of the
Premises until any and all repairs required herein to be made by Landlord are
substantially completed but such abatement shall only be to the extent of the
portion of the Premises which is actually rendered unusable and unfit for
occupancy and only during the time Tenant is not actually using same.
27.1.3 Damage Near End of Term. Notwithstanding anything to the
contrary contained in this Lease except for the provisions of Section 27.3
below, if the Premises are substantially damaged or destroyed (which, for
purposes of this Lease, shall mean more than twenty five percent (25%) of the
Premises shall be damaged or destroyed) during the last year of then applicable
term of this Lease, either Landlord or Tenant may, at their option, cancel and
terminate this Lease by giving written notice to the other party of its election
to do so within thirty (30) days after receipt by Landlord of notice from Tenant
of the occurrence of such casualty. If either party so elects to terminate this
Lease, all rights of Tenant hereunder shall cease and terminate ten (10) days
after Tenant's receipt or delivery of such notice, as applicable, and Tenant
shall immediately vacate the Premises and surrender possession thereof to
Landlord.
27.2 Deductible and Uninsured Casualty. Tenant shall be responsible for
and shall pay to Landlord, as Additional Rent, the deductible amounts under the
insurance policies obtained by Landlord and Tenant under this Lease if the
proceeds of which are used to repair the Premises as contemplated in this
Section 25. Notwithstanding the foregoing, if other portions of the Building
are also damaged by said casualty and insurance proceeds are payable therefor,
then Tenant shall only pay its proportionate share of the deductible as
reasonably determined by Landlord. If any portion of the Premises is damaged
and is not fully covered by the aggregate of insurance proceeds received by
Landlord and any applicable deductible, and Tenant does not voluntarily
contribute any shortfall thereof to Landlord, or if the holder of any
indebtedness secured by the Premises requires that the insurance proceeds be
applied to such indebtedness, then Landlord or Tenant shall have the right to
terminate this Lease by delivering written notice of termination to the other
party within thirty (30) days after the date of notice to Tenant of any such
event, whereupon all rights and obligations of Tenant shall cease and terminate
hereunder, except for those obligations expressly provided for in this Lease to
survive such termination of the Lease.
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27.3 Tenant's Fault and Lender's Rights. Notwithstanding anything to the
contrary contained herein, if the Premises (other than Tenant's FF&E) or any
other portion of the Building be damaged by fire or other casualty resulting
from the intentional or negligent acts or omissions of Tenant or any of Tenant's
Representatives, (i) the Rent shall not be diminished during the repair of such
damage except to the extent any portion of the Rent is actually reimbursed to
Landlord from the proceeds of any rental loss insurance procured by Landlord
hereunder, (ii) Tenant shall not have any right to terminate this Lease due to
the occurrence of such casualty or damage, and (iii) Tenant shall be liable to
Landlord for the cost and expense of the repair and restoration of all or any
portion of the Building caused thereby (including, without limitation, any
deductible) to the extent such cost and expense is not covered by insurance
proceeds. Notwithstanding anything to the contrary contained herein, if the
holder of any indebtedness secured by the Premises or any other portion of the
Project requires that the insurance proceeds be applied to such indebtedness,
then Landlord shall have the right to terminate this Lease by delivering written
notice of termination to Tenant within thirty (30) days after the date of notice
to Tenant of any such event, whereupon all rights and obligations of Tenant
shall cease and terminate hereunder, except for those obligations expressly
provided for in this Lease to survive such termination of the Lease.
27.4 Tenant's Waiver. Landlord shall not be liable for any inconvenience
or annoyance to Tenant, injury to the business of Tenant, loss of use of any
part of the Premises by Tenant or loss of Tenant's Property, resulting in any
way from such damage, destruction or the repair thereof, except to the extent of
Landlord's gross negligence or willful misconduct and except that, Landlord
shall allow Tenant a fair diminution of Rent during the time and to the extent
the Premises are actually unusable and unfit for occupancy and Tenant is not
using or otherwise occupying same as specifically provided above in this Section
27. With respect to any damage or destruction which Landlord is obligated to
repair or may elect to repair, Tenant hereby waives all rights to terminate this
Lease or offset any amounts against Rent pursuant to rights accorded Tenant by
any law currently existing or hereafter enacted, including but not limited to,
all rights pursuant to the provisions of Sections 1932(2.), 1933(4.), 1941 and
1942 of the California Civil Code, as the same may be amended or supplemented
from time to time.
28. Condemnation
If twenty-five percent (25%) or more of the Premises is condemned by eminent
domain, inversely condemned or sold in lieu of condemnation for any public or
quasi-public use or purpose ("Condemned"), then Tenant or Landlord may terminate
this Lease as of the date when physical possession of the Premises is taken and
title vests in such condemning authority, and Rent shall be adjusted to the date
of termination. Tenant shall not because of such condemnation assert any claim
against Landlord or the condemning authority for any compensation because of
such condemnation, and Landlord shall be entitled to receive the entire amount
of any award without deduction for any estate of interest or other interest of
Tenant. If neither party elects to terminate this Lease, Landlord shall, if
necessary, promptly proceed to restore the Premises or the Building to
substantially its same condition prior to such partial condemnation, allowing
for the reasonable effects of such partial condemnation, and a proportionate
allowance shall be made to Tenant, as solely determined by Landlord, for the
Rent corresponding to the time during which, and to the part of the Premises of
which, Tenant is deprived on account of such partial condemnation and
restoration. Landlord shall not be required to spend funds for restoration in
excess of the amount received by Landlord as compensation awarded.
29. Environmental Matters/Hazardous Materials
29.1 Hazardous Materials Disclosure Certificate: Prior to executing this
Lease, Tenant has completed, executed and delivered to Landlord Tenant's initial
Hazardous Materials Disclosure Certificate (the "Initial HazMat Certificate"), a
copy of which is attached hereto as Exhibit E and incorporated herein by this
---------
reference. Tenant covenants, represents and warrants to Landlord that the
information on the Initial HazMat Certificate is true and correct and accurately
describes the use(s) of Hazardous Materials which will be made and/or used on
the Premises by Tenant. Tenant shall commencing with the date which is one year
from the Commencement Date and continuing every year thereafter, complete,
execute, and deliver to Landlord, a Hazardous Materials Disclosure Certificate
("the "HazMat Certificate") describing Tenant's present use of Hazardous
Materials on the Premises, and any other reasonably necessary documents as
requested by Landlord. The HazMat Certificate required hereunder shall be in
substantially the form as that which is attached hereto as Exhibit E.
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29.2 Definition of Hazardous Materials: As used in this Lease, the term
Hazardous Materials shall mean and include (a) any hazardous or toxic wastes,
materials or substances, and other pollutants or contaminants, which are or
become regulated by any Environmental Laws; (b) petroleum, petroleum by
products, gasoline, diesel fuel, crude oil or any fraction thereof; (c) asbestos
and asbestos containing material, in any form, whether friable or non-friable;
(d) polychlorinated biphenyls; (e) radioactive materials; (f) lead and lead-
containing materials; (g) any other material, waste or substance displaying
toxic, reactive, ignitable or corrosive characteristics, as all such terms are
used in their broadest sense, and are defined or become defined by any
Environmental Law (defined below); or (h) any materials which cause or threatens
to cause a nuisance upon or waste to any portion of the Premises, the Building,
the Lot, the Park or any surrounding property; or poses or threatens to pose a
hazard to the health and safety of persons on the Premises or any surrounding
property.
29.3 Prohibition; Environmental Laws: Tenant shall not be entitled to use
nor store any Hazardous Materials on, in, or about the Premises, the Building,
the Lot and the Park, or any portion of the foregoing, without, in each
instance, obtaining Landlord's prior written consent thereto other than
customary and usual cleaning products, office products and other non-hazardous
products used, stored or otherwise handled by Tenant in the ordinary course of
its business. If Landlord consents to any such usage or storage, then Tenant
shall be permitted to use and/or store only those Hazardous Materials that are
necessary for Tenant's business and to the extent disclosed in the HazMat
Certificate and as expressly approved by Landlord in writing, provided that such
usage and storage is only to the extent of the quantities of Hazardous Materials
as specified in the then applicable HazMat Certificate as expressly approved by
Landlord and provided further that such usage and storage is in full compliance
with any and all local, state and federal environmental, health and/or safety-
related laws, statutes, orders, standards, courts' decisions, ordinances, rules
and regulations (as interpreted by judicial and administrative decisions),
decrees, directives, guidelines, permits or permit conditions, currently
existing and as amended, enacted, issued or adopted in the future which are or
become applicable to Tenant or all or any portion of the Premises (collectively,
the "Environmental Laws"). Tenant agrees that any changes to the type and/or
quantities of Hazardous Materials specified in the most recent HazMat
Certificate may be implemented only with the prior written consent of Landlord,
which consent may be given or withheld in Landlord's sole discretion. Tenant
shall not be entitled nor permitted to install any tanks under, on or about the
Premises for the storage of Hazardous Materials without the express written
consent of Landlord, which may be given or withheld in Landlord's sole
discretion. Landlord shall have the right at all times, with reasonable prior
notice during the Term of this Lease to (i)
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inspect the Premises, (ii) conduct tests and investigations to determine whether
Tenant is in compliance with the provisions of this Section 29, and (iii)
request lists of all Hazardous Materials used, stored or otherwise located on,
under or about any portion of the Premises and/or the Common Areas. The cost of
all such inspections, tests and investigations shall be borne solely by Tenant,
if Landlord reasonably determines that Tenant or any of Tenant's Representatives
are directly or indirectly responsible in any manner for any contamination
revealed by such inspections, tests and investigations. The aforementioned
rights granted herein to Landlord and its representatives shall not create (a) a
duty on Landlord's part to inspect, test, investigate, monitor or otherwise
observe the Premises or the activities of Tenant and Tenant's Representatives
with respect to Hazardous Materials, including without limitation, Tenant's
operation, use and any remediation related thereto, or (b) liability on the part
of Landlord and its representatives for Tenant's use, storage, disposal or
remediation of Hazardous Materials, it being understood that Tenant shall be
solely responsible for all liability in connection therewith. Any such
inspections, entries or tests shall be conducted to minimize disruption of
Tenant's business and operations.
29.4 Tenant's Environmental Obligations: Tenant shall give to Landlord
immediate verbal and follow-up written notice of any spills, releases,
discharges, disposals, emissions, migrations, removals or transportation of
Hazardous Materials on, under or about any portion of the Premises or in any
Common Areas. Tenant, at its sole cost and expense, covenants and warrants to
promptly investigate, clean up, remove, restore and otherwise remediate
(including, without limitation, preparation of any feasibility studies or
reports and the performance of any and all closures) any spill, release,
discharge, disposal, emission, migration or transportation of Hazardous
Materials arising from or related to the intentional or negligent acts or
omissions of Tenant or Tenant's Representatives such that the affected portions
of the Park and any adjacent property are returned to the condition existing
prior to the appearance of such Hazardous Materials. Any such investigation,
clean up, removal, restoration and other remediation shall only be performed
after Tenant has obtained Landlord's prior written consent, which consent shall
not be unreasonably withheld so long as such actions would not potentially have
a material adverse long-term or short-term effect on any portion of the
Premises, the Building, the Lot or the Park. Notwithstanding the foregoing,
Tenant shall be entitled to respond immediately to an emergency without first
obtaining Landlord's prior written consent. Tenant, at its sole cost and
expense, shall conduct and perform, or cause to be conducted and performed, all
closures as required by any Environmental Laws or any agencies or other
governmental authorities having jurisdiction thereof. If Tenant fails to so
promptly investigate, clean up, remove, restore, provide closure or otherwise so
remediate, Landlord may, but without obligation to do so, take any and all steps
necessary to rectify the same and Tenant shall promptly reimburse Landlord, upon
demand, for all costs and expenses to Landlord of performing investigation,
clean up, removal, restoration, closure and remediation work. All such work
undertaken by Tenant, as required herein, shall be performed in such a manner so
as to enable Landlord to make full economic use of the Premises, the Building,
the Lot and the Park after the satisfactory completion of such work.
29.5 Environmental Indemnity: In addition to Tenant's obligations as set
forth hereinabove, Tenant agrees to, and shall, protect, indemnify, defend (with
counsel acceptable to Landlord) and hold Landlord and the other Indemnitees
harmless from and against any and all claims, judgments, damages, penalties,
fines, liabilities, losses (including, without limitation, diminution in value
of any portion of the Premises, the Building, the Lot or the Park, damages for
the loss of or restriction on the use of rentable or usable space, and from any
adverse impact of Landlord's marketing of any space within the Building and/or
Park), suits, administrative proceedings and costs (including, but not limited
to, attorneys' and consultant fees and court costs) arising at any time during
or after the Term of this Lease in connection with or related to, directly or
indirectly, the use, presence, transportation, storage, disposal, migration,
removal, spill, release or discharge of Hazardous Materials on, in or about any
portion of the Premises, the Common Areas, the Building, the Lot or the Park as
a result (directly or indirectly) of the intentional or negligent acts or
omissions of Tenant or any of Tenant's Representatives. Neither the written
consent of Landlord to the presence, use or storage of Hazardous Materials in,
on, under or about any portion of the Premises, the Building, the Lot and/or the
Park, nor the strict compliance by Tenant with all Environmental Laws shall
excuse Tenant from its obligations of indemnification pursuant hereto. Tenant
shall not be relieved of its indemnification obligations under the provisions of
this Section 29.5 due to Landlord's status as either an "owner" or "operator"
under any Environmental Laws.
29.6 Survival: Tenant's rights, obligations and liabilities pursuant to
the provisions of this Section 29 shall survive the expiration or earlier
termination of this Lease if Tenant has defaulted under the provisions of this
Section or the Lease. If it is determined by Landlord that the condition of
all or any portion of the Premises, the Building, the Lot and/or the Park is not
in compliance with the provisions of this Lease with respect to Hazardous
Materials, including without limitation all Environmental Laws at the expiration
or earlier termination of this Lease, then in Landlord's sole discretion,
Landlord may require Tenant to hold over possession of the Premises until Tenant
can surrender the Premises to Landlord in the condition in which the Premises
existed as of the Commencement Date and prior to the appearance of such
Hazardous Materials except for reasonable wear and tear, including without
limitation, the conduct or performance of any closures as required by any
Environmental Laws. The burden of proof hereunder shall be upon Tenant. For
purposes hereof, the term "reasonable wear and tear" shall not include any
deterioration in the condition or diminution of the value of any portion of the
Premises, the Building, the Lot and/or the Park in any manner whatsoever related
to directly, or indirectly, Hazardous Materials. Any such holdover by Tenant
will be with Landlord's consent, will not be terminable by Tenant in any event
or circumstance and will otherwise be subject to the provisions of Section 22 of
this Lease.
29.7 Tenant's Exculpation: Tenant shall not be liable for nor otherwise
obligated to Landlord under any provision of the lease with respect to (i) any
claim, remediation obligation, investigation obligation, liability, cause of
action, attorney's fees, consultants' cost, expense or damage resulting from any
Hazardous Material present in, on or about the premises or any of the Buildings
in the Park to the extent not caused nor otherwise permitted, directly or
indirectly, by Tenant or Tenant's Representatives; or (ii) the removal,
investigation, monitoring or remediation of any Hazardous Material present in,
on or about the Premises, the Building or the Park caused by any source,
including third parties other than Tenant and Tenant's Representatives, as a
result of or in connection with the acts or omissions of persons other than
Tenant or Tenant's Representatives; provided, however, Tenant shall be fully
liable for and otherwise obligated to Landlord under the provisions of this
Lease for all liabilities, costs, damages, penalties, claims judgments, expenses
(including without limitation, attorneys' and experts' fees and costs) and
losses to the extent (a) Tenant or any of Tenant's Representatives contributes
to the presence of such Hazardous Materials or Tenant and/or any of Tenant's
Representatives exacerbates the conditions caused by such Hazardous Materials,
or (b) Tenant and/or Tenant's Representatives allows or permits persons over
which Tenant or any of Tenant's Representatives has control and/or for which
Tenant or any of Tenant's Representatives are legally responsible for, to cause
such Hazardous Materials to be present in, on, under, through or about any
portion of the Premises, the Building or the Park, or does not take a reasonably
appropriate actions to prevent such persons over which Tenant or any of Tenant's
Representatives has control and/or for which Tenant or any of Tenant's
Representatives are legally responsible from causing the presence of Hazardous
Materials in, on, under, through or about any portion of the Premises, the
Building or the Park.
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30. Financial Statements
Tenant, for the reliance of Landlord, any lender holding or anticipated to
acquire a lien upon any portion of the Premises, the Building or the Park, or
any prospective purchaser of any portion of the Building or the Park, within ten
(10) days after Landlord's request therefor, but not more often than once
annually so long as Tenant is not in default of this Lease, shall deliver to
Landlord the then current audited financial statements of Tenant (including
interim periods following the end of the last fiscal year for which annual
statements are available) which statements shall be prepared or compiled by a
certified public accountant and shall present fairly the financial condition of
Tenant at such dates and the result of its operations and changes in its
financial positions for the periods ended on such dates. If an audited
financial statement has not been prepared, Tenant shall provide Landlord with an
unaudited financial statement and/or such other information, the type and form
of which are acceptable to Landlord in Landlord's reasonable discretion, which
reflects the financial condition of Tenant. If Landlord so requests, Tenant
shall deliver to Landlord an opinion of a certified public accountant, including
a balance sheet and profit and loss statement for the most recent prior year,
all prepared in accordance with generally accepted accounting principles
consistently applied. Any and all options granted to Tenant hereunder shall be
subject to and conditioned upon Landlord's reasonable approval of Tenant's
financial condition at the time of Tenant's exercise of any such option.
31. General Provisions
31.1 Time. Time is of the essence in this Lease and with respect to each
and all of its provisions in which performance is a factor.
31.2 Successors and Assigns. The covenants and conditions herein
contained, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
31.3 Recordation. Tenant shall not record this Lease or a short form
memorandum hereof.
31.4 Landlord's Personal Liability. The liability of Landlord to Tenant
for any default by Landlord under the terms of this Lease shall be limited to
the actual interest of Landlord and its present or future partners or members in
the Premises or the Building, and Tenant agrees to look solely to the Premises
for satisfaction of any liability and shall not look to other assets of Landlord
nor seek any recourse against the assets of the individual partners, members,
directors, officers, shareholders, agents or employees of Landlord (including
without limitation, any property management company of Landlord); it being
intended that Landlord and the individual partners, members, directors,
officers, shareholders, agents and employees of Landlord (including without
limitation, any property management company of Landlord) shall not be personally
liable in any manner whatsoever for any judgment or deficiency. The liability
of Landlord under this Lease is limited to its actual period of ownership of
title to the Building.
31.5 Separability. Any provisions of this Lease which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate any other
provisions hereof and such other provision shall remain in full force and
effect.
31.6 Choice of Law. This Lease shall be governed by, and construed in
accordance with, the laws of the State of California.
31.7 Attorneys' Fees. In the event any dispute between the parties results
in litigation or other proceeding, the prevailing party shall be reimbursed by
the party not prevailing for all reasonable costs and expenses, including,
without limitation, reasonable attorneys' and experts' fees and costs incurred
by the prevailing party in connection with such litigation or other proceeding,
and any appeal thereof. Such costs, expenses and fees shall be included in and
made a part of the judgment recovered by the prevailing party, if any.
31.8 Entire Agreement. This Lease supersedes any prior agreements,
representations, negotiations or correspondence between the parties, and
contains the entire agreement of the parties on matters covered. No other
agreement, statement or promise made by any party, that is not in writing and
signed by all parties to this Lease, shall be binding.
31.9 Warranty of Authority. On the date that Tenant executes this Lease,
Tenant shall deliver to Landlord an original certificate of status for Tenant
issued by the California Secretary of State or statement of partnership for
Tenant recorded in the county in which the Premises are located, as applicable.
Each person executing this Lease on behalf of a party represents and warrants
that (1) such person is duly and validly authorized to do so on behalf of the
entity it purports to so bind, and (2) if such party is a partnership,
corporation or trustee, that such partnership, corporation or trustee has full
right and authority to enter into this Lease and perform all of its obligations
hereunder. Tenant hereby warrants that this Lease is valid and binding upon
Tenant and enforceable against Tenant in accordance with its terms.
31.10 Notices. Any and all notices and demands required or permitted to
be given hereunder to Landlord shall be in writing and shall be sent: (a) by
United States mail, certified and postage prepaid; or (b) by personal delivery;
or (c) by overnight courier, addressed to Landlord at 101 Lincoln Centre Drive,
Fourth Floor, Foster City, California 94404-1167. Any and all notices and
demands required or permitted to be given hereunder to Tenant shall be in
writing and shall be sent: (i) by United States mail, certified and postage
prepaid; or (ii) by personal delivery to any employee or agent of Tenant over
the age of eighteen (18) years of age; or (iii) by overnight courier, all of
which shall be addressed to Tenant at the Premises. Notice and/or demand shall
be deemed given upon the earlier of actual receipt or refusal of delivery. Any
notice or requirement of service required by any statute or law now or hereafter
in effect, including, but not limited to, California Code of Civil Procedure
Sections 1161, 1161.1, and 1162 (including any amendments, supplements or
substitutions thereof), is hereby waived by Tenant.
31.11 Joint and Several. If Tenant consists of more than one person or
entity, the obligations of all such persons or entities shall be joint and
several.
31.12 Covenants and Conditions. Each provision to be performed by Tenant
hereunder shall be deemed to be both a covenant and a condition.
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31.13 Waiver of Jury Trial. The parties hereto shall and they hereby do
waive trial by jury in any action, proceeding or counterclaim brought by either
of the parties hereto against the other on any matters whatsoever arising out of
or in any way related to this Lease, the relationship of Landlord and Tenant,
Tenant's use or occupancy of the Premises, the Building or the Park, and/or any
claim of injury, loss or damage.
31.14 Merger. The voluntary or other surrender of this Lease by Tenant,
the mutual termination or cancellation hereof by Landlord and Tenant, or a
termination of this Lease by Landlord for a material default by Tenant
hereunder, shall not work a merger, and, at the sole option of Landlord, (i)
shall terminate all or any existing subleases or subtenancies, or (ii) may
operate as an assignment to Landlord of any or all of such subleases or
subtenancies. Landlord's election of either or both of the foregoing options
shall be exercised by delivery by Landlord of written notice thereof to Tenant
and all known subtenants under any sublease.
32. Signs
All signs and graphics of every kind visible in or from public view or corridors
or the exterior of the Premises shall be subject to Landlord's prior written
approval and shall be subject to any applicable governmental laws, ordinances,
and regulations and in compliance with Landlord's sign criteria as same may
exist from time to time or as set forth in Exhibit G hereto and made a part
---------
hereof. Notwithstanding the above, Tenant shall have the right to building,
monument, door and lobby signage in accordance with Landlord's standard signage
program which shall be subject to all applicable governmental agencies. Tenant
shall remove all such signs and graphics prior to the termination of this Lease.
Such installations and removals shall be made in a manner as to avoid damage or
defacement of the Premises; and Tenant shall repair any damage or defacement,
including without limitation, discoloration caused by such installation or
removal. Landlord shall have the right, at its option, to deduct from the
Security Deposit such sums as are reasonably necessary to remove such signs,
including, but not limited to, the costs and expenses associated with any
repairs necessitated by such removal. Notwithstanding the foregoing, in no
event shall any: (a) neon, flashing or moving sign(s) or (b) sign(s) which shall
interfere with the visibility of any sign, awning, canopy, advertising matter,
or decoration of any kind of any other business or occupant of the Building or
the Park be permitted hereunder. Tenant further agrees to maintain any such
sign, awning, canopy, advertising matter, lettering, decoration or other thing
as may be approved in good condition and repair at all times.
33. Mortgagee Protection
Upon any default on the part of Landlord, Tenant will give written notice by
registered or certified mail to any beneficiary of a deed of trust or mortgagee
of a mortgage covering the Premises who has provided Tenant with notice of their
interest together with an address for receiving notice, and shall offer such
beneficiary or mortgagee a reasonable opportunity to cure the default (which, in
no event shall be less than sixty (60) days), including time to obtain
possession of the Premises by power of sale or a judicial foreclosure, if such
should prove necessary to effect a cure. If such default cannot be cured within
such time period, then such additional time as may be necessary will be given to
such beneficiary or mortgagee to effect such cure so long as such beneficiary or
mortgagee has commenced the cure within the original time period and thereafter
diligently pursues such cure to completion, in which event this Lease shall not
be terminated while such cure is being diligently pursued. Tenant agrees that
each lender to whom this Lease has been assigned by Landlord is an express third
party beneficiary hereof. Tenant shall not make any prepayment of Rent more
than one (1) month in advance without the prior written consent of each such
lender, except if Tenant is required to make quarterly payments of Rent in
advance pursuant to the provisions of Section 8 above. Tenant waives the
collection of any deposit from such lender(s) or any purchaser at a foreclosure
sale of such lender(s)' deed of trust unless the lender(s) or such purchaser
shall have actually received and not refunded the deposit. So long as any
subordination agreement or other agreement between the applicable lender so
provides, Tenant agrees to make all payments under this Lease to the lender with
the most senior encumbrance upon receiving a direction, in writing, to pay said
amounts to such lender. Tenant shall comply with such written direction to pay
without determining whether an event of default exists under such lender's loan
to Landlord, and Landlord acknowledges that Tenant may rely on such notices or
directions from Landlord's lender.
34. Quitclaim
Upon any termination of this Lease, Tenant shall, at Landlord's request,
execute, have acknowledged and deliver to Landlord a quitclaim deed of Tenant's
interest in and to the Premises.
35. Modifications for Lender
If, in connection with obtaining financing for the Premises or any portion
thereof, Landlord's lender shall request reasonable modification(s) to this
Lease as a condition to such financing, Tenant shall not unreasonably withhold,
delay or defer its consent thereto, provided such modifications do not
materially and adversely affect Tenant's rights hereunder or the use, occupancy
or quiet enjoyment of Tenant hereunder and as long as Landlord reimburses Tenant
for reasonable legal costs actually incurred.
36. Warranties of Tenant
Tenant hereby warrants and represents to Landlord, for the express benefit of
Landlord, that Tenant has undertaken a complete and independent evaluation of
the risks inherent in the execution of this Lease and the operation of the
Premises for the use permitted hereby, and that, based upon said independent
evaluation, Tenant has elected to enter into this Lease and hereby assumes all
risks with respect thereto. Tenant hereby further warrants and represents to
Landlord, for the express benefit of Landlord, that in entering into this Lease,
Tenant has not relied upon any statement, fact, promise or representation
(whether express or implied, written or oral) not specifically set forth herein
in writing and that any statement, fact, promise or representation (whether
express or implied, written or oral) made at any time to Tenant, which is not
expressly incorporated herein in writing, is hereby waived by Tenant.
37. Compliance with Americans with Disabilities Act
Landlord and Tenant hereby agree and acknowledge that the Premises, the Building
and/or the Park may be subject to the requirements of the Americans with
Disabilities Act, a federal law codified at 42 U.S.C. 12101 et seq, including,
but not limited to Title III thereof, all regulations and guidelines related
thereto, together with any and all laws, rules, regulations, ordinances, codes
and statutes now or hereafter enacted by local or state agencies having
jurisdiction thereof, including all requirements of Title 24 of the State of
California, as the same may be in effect on the date of this Lease and may be
hereafter modified, amended or supplemented (collectively, the "ADA"). Any
Tenant Improvements to be constructed hereunder shall be in compliance with the
requirements of the ADA, and all costs incurred for purposes of compliance
therewith shall be a part of and included in the costs of the Tenant
Improvements. Tenant shall be solely
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responsible for conducting its own independent investigation of this matter and
for ensuring that the design of all Tenant Improvements strictly comply with all
requirements of the ADA. Subject to reimbursement pursuant to Section 6 of the
Lease, if any barrier removal work or other work is required to the Building,
the Common Areas or the Park under the ADA, then such work shall be the
responsibility of Landlord; provided, if such work is required under the ADA as
a result of Tenant's use of the Premises or any work or alteration made to the
Premises by or on behalf of Tenant, then such work shall be performed by
Landlord at the sole cost and expense of Tenant. Except as otherwise expressly
provided in this provision, Tenant shall be responsible at its sole cost and
expense for fully and faithfully complying with all applicable requirements of
the ADA, including without limitation, not discriminating against any disabled
persons in the operation of Tenant's business in or about the Premises, and
offering or otherwise providing auxiliary aids and services as, and when,
required by the ADA. Within ten (10) days after receipt, Landlord and Tenant
shall advise the other party in writing, and provide the other with copies of
(as applicable), any notices alleging violation of the ADA relating to any
portion of the Premises or the Building; any claims made or threatened in
writing regarding noncompliance with the ADA and relating to any portion of the
Premises or the Building; or any governmental or regulatory actions or
investigations instituted or threatened regarding noncompliance with the ADA and
relating to any portion of the Premises or the Building. Tenant shall and hereby
agrees to protect, defend (with counsel acceptable to Landlord) and hold
Landlord and the other Indemnitees harmless and indemnify the Indemnitees from
and against all liabilities, damages, claims, losses, penalties, judgments,
charges and expenses (including reasonable attorneys' fees, costs of court and
expenses necessary in the prosecution or defense of any litigation including the
enforcement of this provision) arising from or in any way related to, directly
or indirectly, Tenant's or Tenant's Representatives' violation or alleged
violation of the ADA. Tenant agrees that the obligations of Tenant herein shall
survive the expiration or earlier termination of this Lease. Notwithstanding the
foregoing or anything to the contrary contained in this Lease, Landlord hereby
represents to Tenant that each Building, at the time Landlord obtains the permit
for the initial construction thereof and the Shell Improvements, shall be in
compliance with the ADA. Landlord will be fully responsible for making all
alterations and repairs to each such Building, at Landlord's cost (which shall
not be included in Operating Expenses) resulting from or necessitated by the
failure of Landlord or Landlord's contractors to comply with the foregoing ADA
representation.
38. Brokerage Commission
Landlord and Tenant each represents and warrants for the benefit of the other
that it has had no dealings with any real estate broker, agent or finder in
connection with the Premises and/or the negotiation of this Lease, except for
the Broker(s) (as set forth on Page 1), and that it knows of no other real
estate broker, agent or finder who is or might be entitled to a real estate
brokerage commission or finder's fee in connection with this Lease or otherwise
based upon contacts between the claimant and Tenant. Each party shall indemnify
and hold harmless the other from and against any and all liabilities or expenses
arising out of claims made for a fee or commission by any real estate broker,
agent or finder in connection with the Premises and this Lease other than
Broker(s), if any, resulting from the actions of the indemnifying party. Any
real estate brokerage commission or finder's fee payable to the Broker(s) in
connection with this Lease shall only be payable and applicable to the extent of
the initial Term of the Lease and to the extent of the Premises as same exist as
of the date on which Tenant executes this Lease. Unless expressly agreed to in
writing by Landlord and Broker(s), no real estate brokerage commission or
finder's fee shall be owed to, or otherwise payable to, the Broker(s) for any
renewals or other extensions of the initial Term of this Lease or for any
additional space leased by Tenant other than the Premises as same exists as of
the date on which Tenant executes this Lease. Tenant further represents and
warrants to Landlord that Tenant will not receive (i) any portion of any
brokerage commission or finder's fee payable to the Broker(s) in connection with
this Lease or (ii) any other form of compensation or incentive from the
Broker(s) with respect to this Lease.
39. Quiet Enjoyment
Landlord covenants with Tenant, upon the paying of Rent and observing and
keeping the covenants, agreements and conditions of this Lease on its part to be
kept, and during the periods that Tenant is not otherwise in default of any of
the terms or provisions of this Lease, and subject to the rights of any of
Landlord's lenders, (i) that Tenant shall and may peaceably and quietly hold,
occupy and enjoy the Premises and the Common Areas during the Term of this
Lease, and (ii) neither Landlord, nor any successor or assign of Landlord, shall
disturb Tenant's occupancy or enjoyment of the Premises and the Common Areas.
40. Landlord's Ability to Perform Tenant's Unperformed Obligations
Notwithstanding anything to the contrary contained in this Lease, if Tenant
shall fail to perform any of the terms, provisions, covenants or conditions to
be performed or complied with by Tenant pursuant to this Lease, and/or if the
failure of Tenant relates to a matter which in Landlord's judgment reasonably
exercised is of an emergency nature and such failure shall remain uncured for a
period of time commensurate with such emergency, then Landlord may, at
Landlord's option without any obligation to do so, and in its sole discretion as
to the necessity therefor, perform any such term, provision, covenant, or
condition, or make any such payment and Landlord by reason of so doing shall not
be liable or responsible for any loss or damage thereby sustained by Tenant or
anyone holding under or through Tenant. If Landlord so performs any of Tenant's
obligations hereunder, the full amount of the cost and expense entailed or the
payment so made or the amount of the loss so sustained shall immediately be
owing by Tenant to Landlord, and Tenant shall promptly pay to Landlord upon
demand, as Additional Rent, the full amount thereof with interest thereon from
the date of payment at the greater of (i) ten percent (10%) per annum, or (ii)
the highest rate permitted by applicable law.
41. Satellite Dish
Tenant shall have the right (but only to the extent permitted by the City of San
Jose and all agencies and governmental authorities having jurisdiction thereof),
at Tenant's sole cost and expense, to install and operate a satellite or
microwave dish or dishes ("Satellite Dishes") along with any necessary cables
("Cables") on a portion of the roof of the Building to be designated by Landlord
("Roof Space") for the Term of the Lease (the Satellite Dishes and Cables are
hereinafter collectively referred to as the "Equipment"). The location and size
of the Equipment shall be subject to Landlord's approval, not to unreasonably
withheld and which best promotes the safety, aesthetics and efficiency of the
Equipment; provided, all of the Equipment and any modifications thereto or
placement thereof shall be (i) at Tenant's sole cost and expense, (ii) contained
visually within the roof screen, (iii) installed and operated to Landlord's
reasonable specifications, and (iv) installed, maintained, operated and removed
in accordance with all Recorded Matters and applicable Laws. Landlord shall
cooperate reasonably with Tenant to modify the roof screen placement (subject to
all applicable Laws and Recorded Matters) if required for signal quality,
reconfiguration due to the installation of any HVAC systems and other reasonable
considerations; provided, the cost of all such modifications shall be the
responsibility of Tenant. All modifications to the Building, including the Roof
Space, if any, shall be reasonably approved by Landlord prior to commencement of
any work with respect to the Equipment. No additional rent shall be paid by
Tenant for use of the Roof Space and operation of the Equipment. The Equipment
shall remain the property of Tenant and Tenant shall remove the Equipment upon
the expiration or earlier termination of the Lease. Tenant shall restore the
Roof Space and any other portion of the Buildings affected by the Equipment to
its original condition, excepting ordinary wear and tear
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and/or damage or destruction due to fire or other casualty not caused directly
or indirectly by Tenant, its agents, employees, contractors or the Equipment or
any part thereof. Tenant may not assign, lease, rent, sublet or otherwise
transfer any of its interest in the Roof Space or the Equipment except together
with the remainder of all of the Premises as more particularly set forth in
Section 15. Each of the other provisions of this Lease shall be applicable to
the Equipment and the use of the Roof Space by Tenant, including without
limitation, Sections 12 and 14 of this Lease. The Equipment shall comply with
all-non-interference rules of the Federal Communications Commission. If
applicable, Tenant shall provide to Landlord a copy of (i) the Federal
Communications Commission (or other agency) grant which has awarded frequencies
to Tenant and (ii) a list of Tenant's frequencies. Anything to the contrary
contained herein notwithstanding, if, during the Lease Term, as such Term may be
extended, Landlord, in its reasonable judgment, believes that the Equipment
poses a human health or environmental hazard that cannot be remediated or has
not been remediated within ten (10) days after Tenant has been notified thereof,
then Tenant shall immediately cease all operations of the Equipment and Tenant
shall remove all of the Equipment within thirty (30) days thereafter. To the
best of Tenant's knowledge, Tenant represents to Landlord that the Equipment
shall not emit or project any electro-magnetic fields which pose a human health
or environmental hazard. In addition, Tenant shall be responsible for insuring
the Equipment and Landlord shall have no responsibility therefor. Tenant shall
indemnify, defend (by counsel reasonably acceptable to Landlord) and hold
harmless Landlord from any and all claims, demands, liabilities, damages,
judgments, costs and expenses (including reasonable attorneys' fees) Landlord
may suffer or incur arising out of or related to the installation, use,
operation, maintenance, replacement and/or removal of the Equipment or any
portion thereof.
42. Tenant's Ability to Perform Landlord's Unperformed Obligations
Notwithstanding anything to the contrary contained in this Lease, if Landlord
shall fail to perform any of the terms, provisions, covenants or conditions to
be performed or complied with by Landlord under Section 11.2 of this Lease (the
"Landlord Repair Obligations") after expiration of all applicable notice and
cure periods for Landlord's and any mortgagee's benefit as set forth in Sections
23 and 33, respectively, then Tenant may, at Tenant's option and risk, but
without any obligation to do so, after delivery of an additional 20-day prior
written notice to Landlord, perform any such Landlord Repair Obligation. If
Tenant so performs any such Landlord Repair Obligation hereunder, the full
amount of the fair and reasonable costs and expenses incurred by Tenant to
perform such Landlord Repair Obligation on Landlord's behalf shall be owing by
Landlord to Tenant, and Landlord shall pay to Tenant the full undisputed amount
thereof within sixty (60) days of Landlord's receipt of Tenant's written demand
therefor together with reasonable evidence verifying the amount of such costs
and expenses. Tenant agrees that if Tenant exercises any right hereunder to
perform any Landlord Repair Obligation on behalf of Landlord, then Tenant will
perform such Landlord Repair Obligation (1) in compliance with all applicable
Laws to which Landlord would be subject under this Lease (if Landlord were
performing such Landlord Repair Obligation), (2) in a good workmanlike manner
using materials of a quality and grade at least equal to that in place as of the
date of delivery of the Premises to Tenant, if applicable, (3) without
interfering with the rights of other tenants in the Park, and (4) in compliance
with the terms and provisions of Section 10.1 hereof, as applicable. Tenant
will promptly assign to Landlord any warranties or guaranties in respect of any
Landlord Repair Obligation which involves repair or maintenance work to the
Premises, Building or any portion of the Park.
IN WITNESS WHEREOF, this Lease is executed by the parties as of the Lease
Date referenced on Page 1 of this Lease.
Tenant:
POWER INTEGRATIONS, INC.,
a Delaware corporation
By: /s/ Clifford J. Walker
-------------------------------------
Its:____________________________________
Date:___________________________________
By:_____________________________________
Its:____________________________________
Date:___________________________________
Landlord:
LINCOLN-RECP HELLYER OPCO, LLC,
a Delaware limited liability company
By: LEGACY PARTNERS COMMERCIAL, INC.,
as manager and agent for Lincoln-RECP Hellyer OPCO, LLC
By: /s/ Barry Diraimondo
--------------------------------
Senior Vice President
Date:___________________________________
If Tenant is a CORPORATION, the authorized officers must sign on behalf of the
-----------
corporation and indicate the capacity in which they are signing. The Lease must
be executed by the president or vice-president and the secretary or assistant
---
secretary, unless the bylaws or a resolution of the board of directors shall
------
otherwise provide, in which event, the bylaws or a certified copy of the
resolution, as the case may be, must be attached to this Lease.
23
<PAGE>
Exhibit A
Premises
This exhibit, entitled "Premises", is and shall constitute Exhibit A to that
---------
certain Lease Agreement dated December 29, 1999 (the "Lease"), by and between
LINCOLN-RECP HELLYER OPCO, LLC, a Delaware limited liability company
("Landlord") and POWER INTEGRATIONS, INC., a Delaware corporation ("Tenant") for
the leasing of certain premises located at 5245 and 5265 Hellyer Avenue, San
Jose, California (the "Premises").
The Premises consist of the rentable square footage of space specified in the
Basic Lease Information and has the address specified in the Basic Lease
Information. The Premises are a part of and are contained in the Building(s)
specified in the Basic Lease Information. The cross-hatched area depicts the
Premises within the Project:
1
<PAGE>
Exhibit A
Premises
2
<PAGE>
Exhibit A
Premises
3
<PAGE>
Exhibit B to Lease Agreement
Tenant Improvements and Shell Improvements
This exhibit, entitled "Tenant Improvements and Shell Improvements", is and
shall constitute Exhibit B to that certain Lease Agreement, dated for reference
---------
purposes as of December 29, 1999 (the "Lease"), by and between LINCOLN-RECP
HELLYER OPCO, LLC, a Delaware limited liability company ("Landlord"), and POWER
INTEGRATIONS, INC., a Delaware corporation ("Tenant"), for the leasing of
certain premises located at 5245 and 5265 Hellyer Avenue, San Jose, California
(the "Premises"). The terms, conditions and provisions of this Exhibit B are
---------
hereby incorporated into and are made a part of the Lease. Any capitalized
terms used herein and not otherwise defined herein shall have the meaning
ascribed to such terms as set forth in the Lease.
1. Tenant To Construct Tenant Improvements. Subject to the provisions below,
---------------------------------------
Tenant shall be solely responsible for the planning, construction and completion
of the interior tenant improvements ("Tenant Improvements") to the Premises in
accordance with the terms and conditions of this Exhibit B. The Tenant
----------
Improvements shall not include any of Tenant's personal property, trade
fixtures, furnishings, equipment, data and telecommunications equipment, cabling
or similar items.
2. Tenant Improvement Plans.
------------------------
A. Preliminary Plans and Specifications. Promptly after execution of the
------------------------------------
Lease, Tenant shall retain Landlord's licensed and insured architect
("Architect") to prepare preliminary working architectural and engineering plans
and specifications ("Preliminary Plans and Specifications") for the Tenant
Improvements. Tenant shall deliver the Preliminary Plans and Specifications to
Landlord. The Preliminary Plans and Specifications shall be in sufficient
detail to show locations, types and requirements for all heat loads, people
loads, floor loads, power and plumbing, regular and special HVAC needs,
telephone communications, telephone and electrical outlets, lighting, lighting
fixtures and related power, and electrical and telephone switches. Landlord
shall reasonably approve or disapprove the Preliminary Plans and Specifications
within five (5) business days after Landlord receives the Preliminary Plans and
Specifications and, if disapproved, Landlord shall return the Preliminary Plans
and Specifications to Tenant along with detailed comments describing the changes
being required, who shall make all necessary revisions within fifteen (15) days
after Tenant's receipt thereof. This procedure shall be repeated until Landlord
approves the Preliminary Plans and Specifications. The approved Preliminary
Plans and Specifications, as modified, shall be deemed the "Final Preliminary
Plans and Specifications".
B. Final Plans and Specifications. After the Final Preliminary Plans and
------------------------------
Specifications are approved by Landlord and are deemed to be the Final
Preliminary Plans and Specifications, Tenant shall cause the Architect to
prepare in twenty (20) days following Landlord's approval of the Final
Preliminary Plans and Specifications the final working architectural and
engineering plans, specifications and drawings ("Final Plans and
Specifications") for the Tenant Improvements. Tenant shall then deliver the
Final Plans and Specifications to Landlord. Landlord shall reasonably approve
or disapprove the Final Plans and Specifications within five (5) business days
after Landlord receives the Final Plans and Specifications and, if disapproved,
Landlord shall return the Final Plans and Specifications to Tenant who shall
make all necessary revisions within fifteen (15) days after Tenant's receipt
thereof. This procedure shall be repeated until Landlord approves, in writing,
the Final Plans and Specifications. The approved Final Plans and
Specifications, as modified, shall be deemed the "Construction Documents".
C. Miscellaneous. All deliveries of the Preliminary Plans and
-------------
Specifications, the Final Preliminary Plans and Specifications, the Final Plans
and Specifications, and the Construction Documents shall be delivered by
messenger service, by personal hand delivery or by overnight parcel service.
While Landlord has the right to approve the Preliminary Plans and
Specifications, the Final Preliminary Plans and Specifications, the Final Plans
and Specifications, and the Construction Documents, Landlord's interest in doing
so is to protect the Premises, the Building and Landlord's interest.
Accordingly, Tenant shall not rely upon Landlord's approvals and Landlord shall
not be the guarantor of, nor responsible for, the adequacy and correctness or
accuracy of the Preliminary Plans and Specifications, the Final Preliminary
Plans and Specifications, the Final Plans and Specifications, and the
Construction Documents, or the compliance thereof with applicable laws, and
Landlord shall incur no liability of any kind by reason of granting such
approvals.
D. Building Standard Work. The Construction Documents shall provide that
----------------------
the Tenant Improvements to be constructed in accordance therewith must be at
least equal, in quality, to Landlord's building standard materials, quantities
and procedures then in use by Landlord ("Building Standards") attached hereto as
Exhibit B-2, and shall consist of improvements which are generic in nature
- -----------
subject to Section 10 herein; provided however Tenant may install Tenant
Specific Tenant Improvements subject to the removal obligations set forth in
Sections 10.1 and 10.2 of the Lease.
E. Construction Agreements. Tenant hereby covenants and agrees that a
-----------------------
provision shall be included in each and every agreement made with the Architect
and the Contractor with respect to the Tenant Improvements specifying that
Landlord shall be a third party beneficiary thereof, including without
limitation, a third party beneficiary of all covenants, representations,
indemnities and warranties made by the Architect and Contractor, as applicable.
3. Permits. Tenant, at its sole cost and expense (subject to the provisions
-------
of Paragraph 5 below), shall (i) obtain all governmental approvals of the
Construction Documents to the full extent necessary for the issuance of a
building permit for the Tenant Improvements based upon such Construction
Documents, (ii) cause to be obtained all other necessary approvals and permits
from all governmental agencies having jurisdiction or authority for the
construction and installation of the Tenant Improvements in accordance with the
approved Construction Documents, and (iii) undertake all steps necessary to
ensure that the construction of the Tenant Improvements is accomplished in
strict compliance with all statutes, laws, ordinances, codes, rules, and
regulations applicable to the construction of the Tenant Improvements and the
requirements and standards of any insurance underwriting board, inspection
bureau or insurance carrier insuring the Premises and/or the Building.
4. Construction.
------------
A. Tenant shall be solely responsible for the construction, installation
and completion of the Tenant Improvements in accordance with the Construction
Documents approved by Landlord and is solely responsible for the payment of all
amounts when payable in connection therewith without any cost or expense to
Landlord, except for
1
<PAGE>
Landlord's obligation to contribute the Tenant Improvement Allowance in
accordance with the provisions of Paragraph 5 below. Tenant shall diligently
proceed with the construction, installation and completion of the Tenant
Improvements in accordance with the Construction Documents and the completion
schedule reasonably approved by Landlord. No material changes shall be made to
the Construction Documents and the completion schedule approved by Landlord
without Landlord's prior written consent, which consent shall not be
unreasonably withheld or delayed.
B. Tenant at its sole cost and expense (subject to the provisions of
Paragraph 5 below) shall employ a licensed, insured and bonded general
contractor ("Contractor") to construct the Tenant Improvements in accordance
with the Construction Documents. The construction contracts between Tenant and
the Contractor and between the Contractor and subcontractors shall be subject to
Landlord's prior written approval, which approval shall not be unreasonably
withheld or delayed and any comments or modifications shall be provided to
Tenant within five (5) business days. Proof that the Contractor is licensed in
California, is bonded as required under California law, and has the insurance
specified in Exhibit B-1, attached hereto and incorporated herein by this
-----------
reference, shall be provided to Landlord at the time that Tenant requests
approval of the Contractor from Landlord. Tenant shall comply with or cause the
Contractor to comply with all other terms and provisions of Exhibit B-1.
-----------
C. Prior to the commencement of the construction and installation of the
Tenant Improvements, Tenant shall provide the following to Landlord, all of
which shall be to Landlord's reasonable satisfaction and which shall be approved
within seven (7) days after receipt thereof by Landlord:
(i) An estimated budget and cost breakdown for the Tenant
Improvements.
(ii) Estimated completion schedule for the Tenant Improvements.
(iii) Copies of all required approvals and permits from governmental
agencies having jurisdiction or authority required for the commencement of
construction and installation of the Tenant Improvements; provided, however, if
prior to commencement of the construction and installation of Tenant
Improvements Tenant has not received the electrical, plumbing or mechanical
permits, Tenant shall only be required to provide Landlord with evidence that
Tenant has made application therefor, and, upon receipt by Tenant of such
permits, Tenant shall promptly provide Landlord with copies thereof.
(iv) Evidence of Tenant's procurement of insurance required to be
obtained pursuant to the provisions of Paragraphs 4.B and 4.G.
D. Landlord shall at all reasonable times have a right to inspect the
Tenant Improvements (provided Landlord does not materially interfere with the
work being performed by the Contractor or its subcontractors) and Tenant shall
immediately cease work upon written notice from Landlord if the Tenant
Improvements are not in compliance with the Construction Documents approved by
Landlord. If Landlord shall give notice of faulty construction or any other
material deviation from the Construction Documents, Tenant shall cause the
Contractor to make corrections promptly. However, neither the privilege herein
granted to Landlord to make such inspections, nor the making of such inspections
by Landlord, shall operate as a waiver of any rights of Landlord to require good
and workmanlike construction and improvements constructed in accordance with the
Construction Documents.
E. Subject to Landlord complying with its obligations in Paragraph 5
below, Tenant shall pay and discharge promptly and fully all claims for labor
done and materials and services furnished in connection with the Tenant
Improvements. The Tenant Improvements shall not be commenced until five (5)
business days after Landlord has received notice from Tenant stating the date
the construction of the Tenant Improvements is to commence so that Landlord can
post and record any appropriate Notice of Non-Responsibility.
F. Tenant acknowledges and agrees that the agreements and covenants of
Tenant in Sections 10 and 37 of the Lease shall be fully applicable to Tenant's
construction of the Tenant Improvements.
G. Tenant shall maintain, and cause to be maintained, during the
construction of the Tenant Improvements, at its sole cost and expense, insurance
of the types and in the amounts specified in Exhibit B-1 and in Section 12 of
-----------
the Lease, together with builders' risk insurance for the amount of the
completed value of the Tenant Improvements on an all-risk non-reporting form
covering all improvements under construction, including building materials, and
other insurance in amounts and against such risks as the Landlord shall
reasonably require in connection with the Tenant Improvements.
H. No materials, equipment or fixtures (exclusive of Tenant's equipment
or trade fixtures) shall be delivered to or installed upon the Premises pursuant
to any agreement by which another party has a security interest or rights to
remove or repossess such items, without the prior written consent of Landlord,
which consent shall not be unreasonably withheld.
I. Landlord reserves the right to establish reasonable rules and
regulations for the use of the Building during the course of construction of the
Tenant Improvements, including, but not limited to, construction parking,
storage of materials, hours of work, use of elevators, and clean-up of
construction related debris.
J. Upon completion of the Tenant Improvements, Tenant shall deliver to
Landlord the following, all of which shall be to Landlord's reasonable
satisfaction:
(i) Any certificates required for occupancy, including a permanent
and complete Certificate of Occupancy issued by the City of San Jose.
(ii) A Certificate of Completion signed by the Architect who
prepared the Construction Documents, reasonably approved by Landlord.
(iii) A cost breakdown itemizing all expenses for the Tenant
Improvements, together with invoices and receipts for the same or other evidence
of payment.
(iv) Final and unconditional mechanic's lien waivers for all the
Tenant Improvements.
2
<PAGE>
(v) A Notice of Completion for execution by Landlord, which
certificate once executed by Landlord shall be recorded by Tenant in the
official records of the county of Santa Clara, and Tenant shall then deliver to
Landlord a true and correct copy of the recorded Notice of Completion.
(vi) A true and complete copy of all as-built plans and drawings for
the Tenant Improvements.
5. Tenant Improvement Allowance.
----------------------------
A. Subject to Tenant's compliance with the provisions of this Exhibit B,
---------
Landlord shall provide to Tenant an allowance in the approximate amount of Two
Million Nine Hundred Sixty Five Thousand Eight Hundred and 00/100 Dollars
($2,965,800.00) based upon a rate of Twenty-Five Dollars ($25.00) per rentable
square foot of the Premises (the "Tenant Improvement Allowance") to construct
and install only the Tenant Improvements. The actual amount of the Tenant
Improvement Allowance shall be adjusted commensurately based upon the actual
rentable square feet of the Premises after Landlord's Substantial Completion of
the Shell Improvements. The Tenant Improvement Allowance shall be used to
design, prepare, plan, obtain the approval of, construct and install the Tenant
Improvements and for no other purpose. Except as otherwise expressly provided
herein, Landlord shall have no obligation to contribute the Tenant Improvement
Allowance unless and until the Construction Documents have been approved by
Landlord and Tenant has complied with all requirements set forth in Paragraph
4.C. of this Exhibit B. The costs to be paid out of the Tenant Improvement
---------
Allowance shall include all reasonable costs and expenses associated with the
design, preparation, approval, planning, construction and installation of the
Tenant Improvements (the "Tenant Improvement Costs"), including all of the
following:
(i) All costs of the Preliminary Plans and Specifications, the
Final Plans and Specifications, and the Construction Documents, and engineering
costs associated with completion of the State of California energy utilization
calculations under Title 24 legislation:
(ii) All costs of obtaining building permits and other necessary
authorizations from local governmental authorities;
(iii) All costs of interior design and finish schedule plans and
specifications including as-built drawings, if applicable;
(iv) All direct and indirect costs of procuring, constructing and
installing the Tenant Improvements in the Premises, including, but not limited
to, the construction fee for overhead and profit and the cost of all on-site
supervisory and administrative staff, office, equipment and temporary services
rendered by the Contractor in connection with the construction of the Tenant
Improvements; provided, however, that the construction fee for overhead and
profit, the cost of all on-site supervisory and administrative staff, office,
equipment and temporary services shall not exceed amounts which are reasonable
and customary for such items in the local construction industry;
(v) All fees payable to the Architect and any engineer if they are
required to redesign any portion of the Tenant Improvements following Tenant's
and Landlord's approval of the Construction Documents;
(vi) Utility connection fees;
(vii) Inspection fees and filing fees payable to local governmental
authorities, if any;
(viii) All costs of all permanently affixed equipment and non-trade
fixtures provided for in the Construction Documents, including the cost of
installation; and,
(ix) A construction management fee payable to Landlord in the amount
of percent (3.5%) of the aggregate of the principal amount of the Tenant
Improvement Allowance (the "CM Fee") which shall be paid in prorated
installments at the time payments of the Tenant Improvement are made to Tenant.
The Tenant Improvement Allowance shall be the maximum contribution by Landlord
for the Tenant Improvement Costs, and the disbursement of the Tenant Improvement
Allowance is subject to the provisions contained hereinbelow. Except for
payment of the CM Fee, Landlord will make payments to Tenant from the Tenant
Improvement Allowance to reimburse Tenant for Tenant Improvement Costs paid or
incurred by Tenant. Payment of the CM Fee shall be the first payment from the
Tenant Improvement Allowance and shall be made by means of a deduction or credit
against the Tenant Improvement Allowance. All other payments of the Tenant
Improvement Allowance shall be by progress payments not more frequently than
once per month and only after satisfaction of the following conditions
precedent: (a) receipt by Landlord of conditional mechanics' lien releases for
the work completed and to be paid by said progress payment, conditioned only on
the payment of the sums set forth in the mechanics' lien release, executed by
the Contractor and all subcontractors, labor suppliers and materialmen; (b)
receipt by Landlord of unconditional mechanics' lien releases from the
Contractor and all subcontractors, labor suppliers and materialmen for all work
other than that being paid by the current progress payment previously completed
by the Contractor, subcontractors, labor suppliers and materialmen and for which
Tenant has received funds from the Tenant Improvement Allowance to pay for such
work; (c) receipt by Landlord of any and all documentation reasonably required
by Landlord detailing the work that has been completed and the materials and
supplies used as of the date of Tenant's request for the progress payment,
including, without limitation, invoices, bills, or statements for the work
completed and the materials and supplies used; and (d) completion by Landlord or
Landlord's agents of any inspections of the work completed and materials and
supplies used as deemed reasonably necessary by Landlord. Except for the CM Fee
payment (credit), Tenant Improvement Allowance progress payments shall be paid
to Tenant within fourteen (14) days from the satisfaction of the conditions set
forth in the immediately preceding sentence. The preceding notwithstanding, all
Tenant Improvement Costs paid or incurred by Tenant prior to Landlord's approval
of the Construction Documents in connection with the design and planning of the
Tenant Improvements by Architect shall be paid from the Tenant Improvement
Allowance, without any retention, within fourteen (14) days following Landlord's
receipt of invoices, bills or statements from Architect evidencing such costs.
Notwithstanding the foregoing to the contrary, Landlord shall be entitled to
withhold and retain five percent (5%) of the Tenant Improvement Allowance or of
any Tenant Improvement Allowance progress payment until the lien-free expiration
of the time for filing of any mechanics' liens claimed or which might be filed
on account of any work ordered by Tenant or the Contractor or any subcontractor
in connection with the construction and installation of the Tenant Improvements.
3
<PAGE>
B. Landlord shall not be obligated to pay any Tenant Improvement
Allowance progress payment or the Tenant Improvement Allowance retention if on
the date Tenant is entitled to receive the Tenant Improvement Allowance progress
payment or the Tenant Improvement Allowance retention Tenant is in material
default of this Lease. Such payments shall resume upon Tenant curing any such
default within the time periods which may be provided for in the Lease.
C. If the total cost of constructing the Tenant Improvements is less than
the Tenant Improvement Allowance, the Tenant Improvement Allowance shall be
automatically reduced to the amount equal to said actual cost.
6. Termination. If the Lease is terminated prior to the date on which the
-----------
Tenant Improvements are completed, for any reason due to the material default of
Tenant hereunder, in addition to any other remedies available to Landlord under
the Lease, Tenant shall pay to Landlord as Additional Rent under the Lease,
within five (5) days of receipt of a statement therefor, any and all costs
incurred by Landlord and not reimbursed or otherwise paid by Tenant through the
date of termination in connection with the Tenant Improvements to the extent
planned, installed and/or constructed as of such date of termination, including,
but not limited to, any costs related to the demolition and/or removal of all or
any portion of the Tenant Improvements and restoration costs related thereto.
Subject to the provisions of Section 10.2 of the Lease, upon the expiration or
earlier termination of the Lease, Tenant shall not remove any portion of the
Tenant Improvements unless otherwise notified by Landlord, in writing.
7. Tenant Access. Landlord will grant Tenant a license to have access to the
-------------
Premises prior to the Shell Improvements being Substantially Completed (defined
below) to allow Tenant to do other work required by Tenant to install a portion
of the Tenant's Property and to otherwise make the Premises ready for Tenant's
use and occupancy (the "Tenant's Pre-Occupancy Work"). It shall be a condition
to the grant by Landlord and continued effectiveness of such license that:
(a) Tenant shall give to Landlord a written request to have such access not
less than seven (7) business days prior to the date on which such proposed
access will commence (the "Access Notice"). The Access Notice shall contain or
be accompanied by each of the following items, all in form and substance
reasonably acceptable to Landlord: (i) a detailed description of and schedule
for Tenant's Pre-Occupancy Work; (ii) the names and addresses of all
contractors, subcontractors and material suppliers and all other representatives
of Tenant who or which will be entering the Premises on behalf of Tenant to
perform Tenant's Pre-Occupancy Work or will be supplying materials for such
work, and the approximate number of individuals, itemized by trade, who will be
present in the Premises; (iii) copies of all contracts, subcontracts, material
purchase orders, plans and specifications pertaining to Tenant's Pre-Occupancy
Work; (iv) copies of all licenses and permits required in connection with the
performance of Tenant's Pre-Occupancy Work; and (v) certificates of insurance
(in amounts satisfactory to Landlord and with the parties identified in, or
required by, the Lease named as additional insureds).
(b) Tenant shall indemnify, defend and hold the Indemnitees harmless from
and against any and all claims, liens, actions, costs, expenses (including
without limitation, attorneys' fees and costs), penalties, fines, and damages
arising from or related to, in any manner whatsoever, the Tenant's Pre-Occupancy
Work.
(c) Such pre-term access by Tenant and Tenant's employees, agents,
contractors, consultants, workmen, mechanics, suppliers and invitees shall be
subject to the reasonable scheduling requirements by Landlord.
(d) Tenant's employees, agents, contractors, consultants, workmen,
mechanics, suppliers and invitees shall fully cooperate, work in harmony and
not, in any manner, interfere with Landlord or Landlord's agents or
representatives in performing the work related to Substantial Completion of the
Shell Improvements (the "Work") and any additional work pursuant to approved
change orders for the Shell Improvements, Landlord's work in other areas of the
Park, or the general operation of the Park. If at any time any such person
representing Tenant shall not be cooperative or shall otherwise cause or
threaten to cause any such disharmony or interference, including, without
limitation, labor disharmony, and Tenant fails to immediately institute and
maintain corrective actions as directed by Landlord, then Landlord may revoke
such license upon twenty-four (24) hours' prior written notice to Tenant.
(e) Any such entry into and limited occupancy of any portion of the
Premises by Tenant or any person or entity working for or on behalf of Tenant
shall be deemed to be subject to all of the terms, covenants, conditions and
provisions of the Lease, excluding only the covenant to pay Rent. Landlord
shall not be liable for any injury, loss or damage that may occur to any of
Tenant's Pre-Occupancy Work made in or about the Premises or to any property
placed therein prior to the commencement of the Term of the Lease, the same
being at Tenant's sole risk and liability. Tenant shall be liable to Landlord
for any damage to any portion of the Premises, the Work or the additional work
related to any approved change orders caused by Tenant or any of Tenant's
employees, agents, contractors, consultants, workmen, mechanics, suppliers and
invitees. In the event that the performance of Tenant's Pre-Occupancy Work
causes extra costs to be incurred by Landlord or requires the use of other
Building services, after delivery to Tenant of prior notice that such extra
costs are reasonably anticipated by Landlord to be incurred, Tenant shall
promptly reimburse Landlord for such extra costs and/or shall pay Landlord for
such other Building services at Landlord's standard rates then in effect.
8. Shell Improvements. Subject to the conditions set forth herein, Landlord,
------------------
at its sole cost and expense, agrees to construct and install the Shell
Improvements (which shall include the relocation and reconstruction of the
mechanical storage area located on the west side of Building A) on the Lot in
substantial compliance with the plans and specifications attached hereto as
Exhibit I (the "Shell Improvements Plans"). In constructing and installing the
Shell Improvements, Tenant shall not have any approval or consensual rights (and
Landlord shall not be required to obtain Tenant's consent therefor) concerning
the Shell Improvements, except to the extent of any material deviations from the
Shell Improvements Plans. Notwithstanding anything to the contrary contained
herein or in the Lease, Landlord hereby represents to Tenant that the
construction of the Shell Improvements shall be performed substantially in
accordance with the Shell Improvements Plans in a good and workmanlike manner,
free of material defects, and in compliance with all applicable building codes,
ordinances, statutes and other lawful governmental or quasi-governmental
authority, and that all materials and equipment furnished shall conform to said
plans and be new and otherwise of good quality. The Shell Improvements shall
not include the Tenant Improvements nor any of Tenant's personal property,
equipment, furnishings, trade fixtures or fixtures. Landlord shall use
commercially reasonable efforts to cause its general contractor to Substantially
Complete (defined below) the Shell Improvements by the scheduled Commencement
Date specified in the Basic Lease Information (the "Completion Date"), subject
to delays due to (a) acts or events beyond its reasonable control including, but
not limited to, acts of God, earthquakes, strikes, lockouts, boycotts,
casualties, discontinuance of
4
<PAGE>
any utility or other service required for performance of the Work, moratoriums,
governmental agencies and inclement weather (including, but not limited to, rain
delays), (b) the lack of availability or shortage of specialized materials used
in the construction of the Shell Improvements, (c) any matters beyond the
control of Landlord, the general contractor or any subcontractors, (d) any
changes required by the fire department, building and/or planning department,
building inspectors or any other agency having jurisdiction over the Building,
the Work and/or the Shell Improvements (except to the extent such changes are
directly attributable to Tenant's use or the Tenant Improvements, in which event
such delays are considered Tenant Delays) (the events and matters set forth in
Subsections (a), (b), (c) and (d) are collectively referred to as "Force Majeure
Delays"), or (e) any delay attributable to Tenant and/or any of Tenant's
Representatives or Tenant's intended use of the Premises (collectively, "Tenant
Delays"). Tenant Delays shall include, but not be limited to, all of the
following described events or occurrences, but only to the extent such events or
occurrences directly cause a delay in the completion of the Shell Improvements
(it being understood that any such events or occurrences that result in delays
only to the completion of the Tenant Improvements shall not constitute Tenant
Delays): (i) delays related to changes made or requested by Tenant to the
Construction Documents with respect to the Tenant Improvements; (ii) the failure
of Tenant to furnish all or any plans, drawings, specifications, finish details
or other information required herein; (iii) the failure of Tenant to comply with
the requirements of this Exhibit B; (iv) Tenant's requirements for special work
---------
or materials, finishes, or installations other than the Building Standards or
Tenant's requirements for special construction or phasing; (v) any changes
required by the fire department, building or planning department, building
inspectors or any other agency having jurisdiction over the Building, the Work
and/or the Tenant Improvements if such changes are directly attributable to
Tenant's particular use or Tenant's specialized tenant improvements which do not
conform to Landlord's Building Standards; (vi) the performance of any additional
work pursuant to a change order which is requested by Tenant; (vii) the
performance of work in or about the Premises by any person, firm or corporation
employed by or on behalf of Tenant, including, without limitation, any failure
to complete or any delay in the completion of such work; or (viii) any and all
delays caused by or arising from acts or omissions of Tenant and/or Tenant's
Representatives, in any manner whatsoever. Any delays in the construction of the
Shell Improvements due to any of the events described above and designated as
"Tenant Delays", shall in no way extend or affect the date on which Tenant is
required to commence paying Rent under the terms of the Lease. It is the
intention of the parties that all of such delays will be considered Tenant
Delays for which Tenant shall be wholly and completely responsible for any and
all consequences related to such delays, including without limitation, any costs
and expenses attributable to increases in labor or materials.
9. Substantial Completion of Shell Improvements. The Shell Improvements shall
--------------------------------------------
be deemed substantially complete on the earlier to occur of (i) the date that
the building officials of the applicable governmental agency(s) issues its final
approval of the construction of the Shell Improvements whether in the form of
the issuance of a final permit, conditional final permit or the written approval
evidencing its final inspection on the building permits and Landlord's general
contractor and architect issue written verification that the Shell Improvements
have been substantially complete, or (ii) the date on which Tenant first
utilizes the Premises for purposes of performing the Tenant's Pre-Occupancy Work
or commencing the Tenant Improvements ("Substantial Completion", or
"Substantially Completed", or "Substantially Complete"). Subject to the
provisions set forth below, if the Work with respect to the Shell Improvements
is not deemed to be Substantially Completed on or before the scheduled
Completion Date, (A) Landlord agrees to use reasonable efforts to Substantially
Complete the Work as soon as practicable thereafter, (B) subject to Tenant's
termination right as set forth in Section 2 of the Lease, the Lease shall remain
in full force and effect, and (C) Landlord shall not be deemed to be in breach
or default of the Lease or this Exhibit B as a result thereof and, Landlord
---------
shall have no liability to Tenant as a result of any delay in occupancy (whether
for damages, abatement of all or any portion of the Rent, or otherwise). The
Commencement Date and the Expiration Date of the Term of the Lease (as defined
in Section 2 of the Lease) shall be extended commensurately by the amount of
time attributable to any Force Majeure Delays which delay the Substantial
Completion of the Shell Improvements. In the event Landlord will incur a delay
in the Substantial Completion of the Shell Improvements, Landlord shall deliver
notice to Tenant of such delay and notice of the anticipated delivery date.
10. Substantial Completion of Tenant Improvements. The Commencement Date and
---------------------------------------------
the Expiration Date of the Term of the Lease (as defined in Section 2 of the
Lease) shall be extended commensurately by the amount of time attributable to
any Tenant's Force Majeure Delays or Landlord's Delays (as those terms are
hereinafter defined) which delay the Substantial Completion of the Tenant
Improvements. As used herein, the term "Tenant's Force Majeure Delays" means
delays due to acts or events beyond Tenant's reasonable control including, but
not limited to, acts of God, earthquakes, strikes, lockouts, boycotts,
casualties, discontinuance of any utility or other service required for
performance of the work. The term "Landlord Delays" shall mean any delay
attributable to Landlord and/or any of Landlord's agents, employees or
representatives (collectively, "Landlord's Representatives") including: (i) the
failure of Landlord to furnish all or any plans, drawings, specifications,
finish details or other information required herein; (ii) the failure of
Landlord to comply with the requirements of this Exhibit B; (iii) any delays
caused by delay in delivery of the Shell Improvements Substantially Complete
(only to the extent such delay actually causes Tenant the inability to commence
or complete the Tenant Improvements); or (iv) delays associated with Landlord
completing any corrective work of the Shell Improvements (only to the extent
such corrective work causes and a delay in Tenant having the ability to commence
or complete the Tenant Improvements).
11. Lease Provisions; Conflict. The terms and provisions of the Lease, insofar
--------------------------
as they are applicable, in whole or in part, to this Exhibit B, are hereby
---------
incorporated herein by reference, and specifically including all of the
provisions of Section 31 of the Lease. In the event of any conflict between the
terms of the Lease and this Exhibit B, the terms of this Exhibit B shall
--------- ---------
prevail. Any amounts payable by Tenant to Landlord hereunder shall be deemed to
be Additional Rent under the Lease and, upon any default in the payment of same,
Landlord shall have all rights and remedies available to it as provided for in
the Lease.
5
<PAGE>
Exhibit B-1
Construction Insurance Requirements
Before commencing work, the contractor shall procure and maintain at its sole
cost and expense until completion and final acceptance of the work, at least the
following minimum levels of insurance.
A. Workers' Compensation in statutory amounts and Employers Liability
Insurance in the minimum amounts of $100,000 each accident for bodily injury by
accident and $100,000 each employee for bodily injury by disease with a $500,000
policy limit, covering each and every worker used in connection with the
contract work.
B. Comprehensive General Liability Insurance on an occurrence basis including,
but not limited to, protection for Premises/Operations Liability, Broad Form
Contractual Liability, Owner's and Contractor's Protective, and
Products/Completed Operations Liability*, in the following minimum limits of
liability.
Bodily Injury, Property Damage, and
Personal Injury Liability $2,000,000/each occurrence
$3,000,000/aggregate
*Products/Completed Operations Liability Insurance is to be provided for a
period of at least one (1) year after completion of work.
Coverage should include protection for Explosion, Collapse and Underground
Damage.
C. Comprehensive Automobile Liability Insurance with the following minimum
limits of liability.
Bodily Injury and Property $1,000,000/each occurrence
Damage Liability $2,000,000/aggregate
This insurance will apply to all owned, non-owned or hired automobiles to
be used by the Contractor in the completion of the work.
D. Umbrella Liability Insurance in a minimum amount of five million dollars
($5,000,000), providing excess coverage on a following-form basis over the
Employer's Liability limit in Paragraph A and the liability coverages outlined
in Paragraphs B and C.
E. Equipment and Installation coverages in the broadest form available
covering Contractor's tools and equipment and material not accepted by Tenant.
Tenant will provide Builders Risk Insurance on all accepted and installed
materials.
All policies of insurance, duplicates thereof or certificates evidencing
coverage shall be delivered to Landlord prior to commencement of any work and
shall name Landlord, and its partners and lenders as additional insureds as
their interests may appear. All insurance policies shall (1) be issued by a
company or companies licensed to be business in the state of California, (2)
provide that no cancellation, non-renewal or material modification shall be
effective without thirty (30) days prior written notice provided to Landlord,
(3) provide no deductible greater than $15,000 per occurrence, (4) contain a
waiver to subrogation clause in favor of Landlord, and its partners and lenders,
and (5) comply with the requirements of Sections 12.2, 12.3 and 12.4 of the
Lease to the extent such requirements are applicable.
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EXHIBIT B-2
OUTLINE SPECIFICATION
FOR
Hellyer Oaks Technology Park II
San Jose, California
DEMISING PARTITION AND CORRIDOR WALLS: (USG Interiors Gypsum Board)
Note: All partitions to be paint finished on smooth surfaces GA-214, level 4
(except with respect to areas which are more industrial in nature which would
not require such level of finish as determined between Landlord and Tenant).
One hour rated walls where required based on occupancy group.
All interior corridors to be tunnel construction.
A. 3 5/8" 20-gauge metal studs at 16" O.C. (or as required by code based on
partition height) framed full height from finish floor to structure above.
B. One (1) layer 5/8" drywall Type "X" both sides full height, full height,
fire taped smooth ready to paint. Contact name: Monte Fowles 714.978.0901
Ext. 8442
C. Cost of demising partition to be equally divided between tenant improvement
allowance for adjoining tenant.
INTERIOR PARTITIONS: (USG Interiors gypsum board)
Note: Partitions must connect to building mullions.
A. 3 5/8" 20 gauge metal studs at 24" O.C. to underside of T-Bar ceiling grid
at 9'0" A.F.F.; tegular ceiling tiles must be scribed.
B. One (1) layer 5/8" drywall both sides of wall.
d. 3 5/8" metal studs including all lateral bracing as required by code.
e. One (1) layer 5/8" drywall both sides full height, smooth ready to paint.
Contact name: Monte Fowles, voice mail 800-964-4874
PERIMETER DRYWALL (AT OFFICE AREAS):
A. 2 1/2" metal studs @ 24" O.C.
B. One (1) layer 5/8" Type "X" smooth and ready for paint.
COLUMN FURRING:
A. 2 1/2" metal studs all around column floor to 2" above ceiling grid.
B. One (1) layer 5/8" smooth and ready for paint.
c. Columns within walls shall be furred-out.
INSULATION:
A. Insulation as required by Title 24 for building envelope.
B. Partitions surrounding conference rooms, lunch rooms and copy rooms to
receive R-11 within wall cavity and four foot on either side of partitions
over suspended ceiling and over ceiling at demising wall ( if not full
height).
PAINTING:
A. All gypsum wall boards to receive a prime coat (hi-build PVA sealer) and
two (2) coats of carefree eggshell paint to cover as manufactured by Kelly
Moore, Dunn-Edwards, or equal. The colors to be verified and approved by
owner.
B. Semi-gloss paint at all Break Rooms and Storage Rooms.
WINDOW COVERING:
A. Exterior window covering: 1" mini-blinds as manufactured by Levelor,
series: Riveria, Dustguard 1" Blind, Finish: satin aluminum.
B. Blinds to be sized to fit within window module.
C. Mini-blinds to be installed with building shell costs but costs allocated
to tenant improvement allowance.
SUSPENDED ACOUSTICAL CEILINGS: (USG Interiors)
Note: Tenant ceiling height at 10'-0" above finished floor at first floor and
9'-0" AFF at second floor.
Gyp. Board ceiling at all restrooms typical.
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A. 2' X 2' USG Interiors Inc. grid system, Fineline, Donn narrow 9/16" face
with 1/4" reveal, intermediate duty, DXF2924,DXF229,DXF429N, with M9 wall
molding detail; finish: matte white, steel T-bar grid system with wire
suspension per code.
B. 24" X 24" X 3/4" USG Interiors, Inc. acoustical tile; Acoustone, Pattern:
Frost w/FLB tegular edge; NRC: .65-.75, CAC:40-44.
VCT:
A. Armstrong Standard Excelon, Imperial texture, 1/8" x 12" x 12" or equal.
B. Slabs on first floor shall be water proofed per flooring manufacturer's
recommendations, at sheet vinyl or VCT areas.
C. Provide vinyl transition strip between carpet and VCT.
LIGHT FIXTURES:
A. Office space: 2" X 4" T-bar lay in 3-tube energy efficient fixture, 277
volt, T-8 tubes with electronic ballasts, cool white fluorescent tubes with
18 cell silver reflective parabolic lens as manufactured by Lithonia 2PM3N
2'x4' or equivalent. (Approximately 50 F.C. at desk height)
B. Corridor, tunnel construction: 2" X 4" recessed 3-tube energy efficient
fixture, 277 volt, T-8 tubes with electronic ballasts, cool white
fluorescent tubes with 18 cell silver reflective parabolic lens as
manufactured by Lithonia 2PM3N 2'x4' or equal. Provide one-hour fire rated
gypsum board enclosure around exterior of fixture housing.
C. Provide all exit lights, night lights, directional and emergency lights per
code.
LIGHT SWITCHES
A. Switching as required by lighting management system and by Title 24.
B. Switch assembly to be Levinton or equivalent, Finish: White. Multiple
switches in same location shall be ganged and finished with one-piece
coverplates.
C. Light switches to be installed at 48" AFF maximum to center of operating
control.
D. No soft wiring at lighting is allowed.
ELECTRICAL OUTLET
A. 110V duplex outlet as manufactured by Leviton or equivalent, coverplate
finish to be white recessed in interior partition, at 18" AFF, unless
otherwise noted.
B. Maximum eight (8) outlets per 20 amp 3 phase 4 wire circuit, spacing to
meet code requirements. (20 amp circuit per 200SF of open area for
workstations)
C. Transformers to be a minimum of 20% or over required capacity.
D. Contractors to inspect electric room, and base building electrical drawings
to include all necessary connections.
E. No aluminum wiring is acceptable.
F. All workstation hardwire connections to building power by tenant.
G. Provide separate neutrals for each circuit. Use stranded wire for each
circuit. Use copper conductors only, no exception.
EXIT LIGHT
A. Edge lighted exit light with recessed ceiling mount. Floating letters on a
clear panel with LED technology, by Alkco or equvalent within all corridors
and common lobbies.
B. Ceiling mouned exit light, factory assembled self powered, sealed lead
calcium, 277 volt AC, White baked enamel finish with stencil face with
green letters, by Emergi-Lite # W-SMX--G or equivalent within tenant space.
C. Provide exit lights with battery back up at all exits required by code.
D. All life safety items including horns & strobes and speaker shall have
white covers typ.
TELEPHONE /DATA OUTLET
A. One (1) single box to house telephone/data jack with pull string from
outlet box to area above T-bar ceiling with cover plates by telephone/data
vendors, per office; tow (20 boxes to house telephone/data, as above, per
large open area. Cover plate to be Satin aluminum finish. Mount boxes at
18" AFF unless otherwise noted.
B. One six foot wide by four foot high plywood backboard installed as
telephone backboard, brace and secure to wall. Paint to match wall color.
Provide one duplex 20 amp dedicated outlet for telephone service per above
electrical specifications. Provide 2" conduit from floor main phone room to
six" below ceiling at telephone backboard.
2
<PAGE>
C. Telephone panel board to be located within tenant space electrical room and
to be surface mounted.
D. Cable, service installation for telephone and data outlets by tenant's
vendor at tenant's cost. Additional outlets and coverplates to be provided
by tenant's vendor at tenant's cost. In speculative office suites,
contractor to provide and install coverplates in white.
FIRE SPRINKLERS:
A. As required by fire code, all sprinkler heads shall be semi-concealed with
white finish escutcheon and chrome head.
B. As require by fire code, provide fire extinguishers with recessed cabinet
painted to match adjacent wall.
C. As required by life safety code and install as Design Build, provide fire
protective signaling systems. Install height of manual stations to be
center of fire alarm initiating devices at 48" AFF maximum.
TOPSET BASE:
A. Office, Corridor, and Elevator Lobby: 2 1/2" rubber base top set as
manufactured by Burke or equivalent, standard colors only.
B. VCT area: 2 1/2" rubber coved base at VCT areas.
CARPET:
A. Shaw: T.I. Factor tufted cut pile, 30 ounces per sq. yard or Supply and
Demand patterned graphic loop, 28 oz. per sq. yard; glue down installation
WOOD DOORS:
A. Interior doors: Shall be 3'0" W. x 9'0"H. x 1 3/4"T Western Oregon Door
Inc. solid core, a veneer grade, select white maple flat cut,/plain sliced,
bookmatched or whole piece, clear sealer finish.
B. Corridor doors: same as above except 20-minute fire rated for corridor
tunnel construction
DOOR FRAMES:
A. Shall be Timely, 3 3/4" or 4 7/8" throat prefinished satin aluminum with
clear coat with squared edge.
B. Corridor frames to be 20-minute fire rated for corridor tunnel construction
HARDWARE:
A. Butts: two pair per door, Stanley #F179-US32D630; Door hardware: Schlage
"D" series "Sparta" style lever. Latchset # SPA-D10S-626 and Lockset # SPA-
D53PD-626; Door stop: Glynn Johnson FB13-626, floor dome type; Closer
(where required): LCN #4110 powder coat finish US 26D. Typical hardware
finish: US 26D Satin chrome plated or US32D Satin stainless steel
throughout, which ever is applicable.
B. Closer at entry doors: LCN 4110 Series, 4111 cylinder for accessibility.
Note:Hardware for corridor doors to be 20 minute fire rated for corridor
construction; non-rated for tenant interior doors.
MILLWORK / CABINETRY: ( Shall comply with, but is not provided as a standard
specification.)
A. Casework to comply with W.I.C. Custom standards. Casework construction to
be particle board clad with plastic laminate on all exposed edges. Casework
interiors to be melamine with matching material on backside of doors as
exterior.
B. Plastic laminate veneers by Wilsonart or equivalent, for counters or
cabinet to be single or double color and texture to coordinate with
building standard color palette.
3
<PAGE>
Exhibit C to Lease Agreement
Rules & Regulations
This exhibit, entitled "Rules & Regulations", is and shall constitute Exhibit C
---------
to that certain Lease Agreement dated December 29, 1999 (the "Lease"), by and
between LINCOLN-RECP HELLYER OPCO, LLC, a Delaware limited liability company
("Landlord") and POWER INTEGRATIONS, INC., a Delaware corporation ("Tenant") for
the leasing of certain premises located at 5245 and 5265 Hellyer Avenue, San
Jose, California (the "Premises"). The terms, conditions and provisions of this
Exhibit C are hereby incorporated into and are made a part of the Lease. Any
- ---------
capitalized terms used herein and not otherwise defined herein shall have the
meaning ascribed to such terms as set forth in the Lease:
1. No advertisement, picture or sign of any sort shall be displayed on or
outside the Premises or the Building without the prior written consent of
Landlord. Landlord shall have the right to remove any such unapproved item
without notice and at Tenant's expense.
2. Tenant shall not regularly park motor vehicles in designated parking areas
after the conclusion of normal daily business activity.
3. Tenant shall not use any method of heating or air conditioning other than
that supplied by Landlord without the prior written consent of Landlord.
4. All window coverings installed by Tenant and visible from the outside of
the Building require the prior written approval of Landlord.
5. Tenant shall not use, keep or permit to be used or kept any foul or noxious
gas or substance or any flammable or combustible materials on or around the
Premises, the Building or the Park.
6. Tenant shall park motor vehicles in those general parking areas as
designated by Landlord except for loading and unloading. During those periods
of loading and unloading, Tenant shall not unreasonably interfere with traffic
flow within the Park and loading and unloading areas of other Tenants.
7. Tenant shall not disturb, solicit or canvas any occupant of the Building or
Park and shall cooperate to prevent same.
8. No person shall go on the roof without Landlord's permission.
9. Business machines and mechanical equipment belonging to Tenant which cause
noise or vibration that may be transmitted to the structure of the Building, to
such a degree as to be objectionable to Landlord or other Tenants, shall be
placed and maintained by Tenant, at Tenant's expense, on vibration eliminators
or other devices sufficient to eliminate noise or vibration.
10. All goods, including material used to store goods, delivered to the
Premises of Tenant shall be immediately moved into the Premises and shall not be
left in parking or receiving areas overnight.
11. Tractor trailers which must be unhooked or parked with dolly wheels beyond
the concrete loading areas must use steel plates or wood blocks under the dolly
wheels to prevent damage to the asphalt paving surfaces. No parking or storing
of such trailers will be permitted in the auto parking areas of the Park or on
streets adjacent thereto.
12. Forklifts which operate on asphalt paving areas shall not have solid rubber
tires and shall only use tires that do not damage the asphalt.
13. Tenant is responsible for the storage and removal of all trash and refuse.
All such trash and refuse shall be contained in suitable receptacles stored
behind screened enclosures at locations approved by Landlord.
14. Tenant shall not store or permit the storage or placement of goods, or
merchandise or pallets or equipment of any sort in or around the Premises, the
Building, the Park or any of the Common Areas of the foregoing. No displays or
sales of merchandise shall be allowed in the parking lots or other Common Areas.
15. Tenant shall not permit any animals, including, but not limited to, any
household pets, to be brought or kept in or about the Premises, the Building,
the Park or any of the Common Areas of the foregoing.
16. Tenant shall not permit any motor vehicles to be washed on any portion of
the Premises or in the Common Areas of the Park, nor shall Tenant permit
mechanical work or maintenance of motor vehicles to be performed on any portion
of the Premises or in the Common Areas of the Park.
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Exhibit E
Hazardous Materials Disclosure Certificate
Your cooperation in this matter is appreciated. Initially, the information
provided by you in this Hazardous Materials Disclosure Certificate is necessary
for the Landlord (identified below) to evaluate and finalize a lease agreement
with you as Tenant. After a lease agreement is signed by you and the Landlord
(the "Lease Agreement"), on an annual basis in accordance with the provisions of
Section 29 of the signed Lease Agreement, you are to provide an update to the
information initially provided by you in this certificate. The information
contained in the initial Hazardous Materials Disclosure Certificate and each
annual certificate provided by you thereafter will be maintained in
confidentiality by Landlord subject to release and disclosure as required by (i)
any lenders and owners and their respective environmental consultants, (ii) any
prospective purchaser(s) of all or any portion of the property on which the
Premises are located, (iii) Landlord to defend itself or its lenders, partners
or representatives against any claim or demand, and (iv) any laws, rules,
regulations, orders, decrees, or ordinances, including, without limitation,
court orders or subpoenas. Any and all capitalized terms used herein, which are
not otherwise defined herein, shall have the same meaning ascribed to such term
in the signed Lease Agreement. Any questions regarding this certificate should
be directed to, and when completed, the certificate should be delivered to:
Landlord: ______________________________________________________________________
______________________________________________________________________
c/o Legacy Partners Commercial, Inc.
101 Lincoln Centre Drive, Fourth Floor
Foster City, California 94404
Attn: _____________________________________
Phone: (650) 571-2200
Name of (Prospective) Tenant: __________________________________________________
Mailing Address: _______________________________________________________________
________________________________________________________________________________
Contact Person, Title and Telephone Number(s): _________________________________
Contact Person for Hazardous Waste Materials Management and Manifests and
Telephone Number(s):
________________________________________________________________________________
________________________________________________________________________________
Address of (Prospective) Premises: _____________________________________________
Length of (Prospective) Initial Term: __________________________________________
________________________________________________________________________________
1. General Information:
Describe the initial proposed operations to take place in, on, or about the
Premises, including, without limitation, principal products processed,
manufactured or assembled services and activities to be provided or
otherwise conducted. Existing Tenants should describe any proposed changes
to on-going operations.
___________________________________________________________________________
___________________________________________________________________________
2. Use, Storage and Disposal of Hazardous Materials
2.1 Will any Hazardous Materials be used, generated, stored or disposed of
in, on or about the Premises? Existing Tenants should describe any
Hazardous Materials which continue to be used, generated, stored or
disposed of in, on or about the Premises.
Wastes Yes [_] No [_]
Chemical Products Yes [_] No [_]
Other Yes [_] No [_]
If Yes is marked, please explain: ____________________________________
______________________________________________________________________
______________________________________________________________________
2.2 If Yes is marked in Section 2.1, attach a list of any Hazardous
Materials to be used, generated, stored or disposed of in, on or about
the Premises, including the applicable hazard class and an estimate of
the quantities of such Hazardous Materials at any given time;
estimated annual throughput; the proposed location(s) and method of
storage (excluding nominal amounts of ordinary household cleaners and
janitorial supplies which are not regulated by any Environmental
Laws); and the proposed location(s) and method of disposal for each
Hazardous Material, including, the estimated frequency, and the
proposed contractors or subcontractors. Existing Tenants should
attach a list setting forth the information requested above and such
list should include actual data from on-going operations and the
identification of any variations in such information from the prior
year's certificate.
3. Storage Tanks and Sumps
3.1 Is any above or below ground storage of gasoline, diesel, petroleum,
or other Hazardous Materials in tanks or sumps proposed in, on or
about the Premises? Existing Tenants should describe any such actual
or proposed activities.
Yes [_] No [_]
If yes, please explain: ______________________________________________
______________________________________________________________________
______________________________________________________________________
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4. Waste Management
4.1 Has your company been issued an EPA Hazardous Waste Generator I.D.
Number? Existing Tenants should describe any additional
identification numbers issued since the previous certificate.
Yes [_] No [_]
4.2 Has your company filed a biennial or quarterly reports as a hazardous
waste generator? Existing Tenants should describe any new reports
filed.
Yes [_] No [_]
If yes, attach a copy of the most recent report filed.
5. Wastewater Treatment and Discharge
5.1 Will your company discharge wastewater or other wastes to:
_________ storm drain? __________ sewer?
_________ surface water? __________ no wastewater or other wastes
discharged.
Existing Tenants should indicate any actual discharges. If so,
describe the nature of any proposed or actual discharge(s).
______________________________________________________________________
______________________________________________________________________
5.2 Will any such wastewater or waste be treated before discharge?
Yes [_] No [_]
If yes, describe the type of treatment proposed to be conducted.
Existing Tenants should describe the actual treatment conducted.
______________________________________________________________________
______________________________________________________________________
6. Air Discharges
6.1 Do you plan for any air filtration systems or stacks to be used in
your company's operations in, on or about the Premises that will
discharge into the air; and will such air emissions be monitored?
Existing Tenants should indicate whether or not there are any such air
filtration systems or stacks in use in, on or about the Premises which
discharge into the air and whether such air emissions are being
monitored.
Yes [_] No [_]
If yes, please describe: _____________________________________________
______________________________________________________________________
______________________________________________________________________
6.2 Do you propose to operate any of the following types of equipment, or
any other equipment requiring an air emissions permit? Existing
Tenants should specify any such equipment being operated in, on or
about the Premises.
_________ Spray booth(s) __________ Incinerator(s)
_________ Dip tank(s) __________ Other (Please describe)
_________ Drying oven(s) __________ No Equipment Requiring Air
Permits
If yes, please describe: _____________________________________________
______________________________________________________________________
______________________________________________________________________
7. Hazardous Materials Disclosures
7.1 Has your company prepared or will it be required to prepare a
Hazardous Materials management plan ("Management Plan") pursuant to
Fire Department or other governmental or regulatory agencies'
requirements? Existing Tenants should indicate whether or not a
Management Plan is required and has been prepared.
Yes [_] No [_]
If yes, attach a copy of the Management Plan. Existing Tenants should
attach a copy of any required updates to the Management Plan.
7.2 Are any of the Hazardous Materials, and in particular chemicals,
proposed to be used in your operations in, on or about the Premises
regulated under Proposition 65? Existing Tenants should indicate
whether or not there are any new Hazardous Materials being so used
which are regulated under Proposition 65.
Yes [_] No [_]
If yes, please explain: ______________________________________________
______________________________________________________________________
______________________________________________________________________
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8. Enforcement Actions and Complaints
8.1 With respect to Hazardous Materials or Environmental Laws, has your
company ever been subject to any agency enforcement actions,
administrative orders, or consent decrees or has your company received
requests for information, notice or demand letters, or any other
inquiries regarding its operations? Existing Tenants should indicate
whether or not any such actions, orders or decrees have been, or are
in the process of being, undertaken or if any such requests have been
received.
Yes [_] No [_]
If yes, describe the actions, orders or decrees and any continuing
compliance obligations imposed as a result of these actions, orders or
decrees and also describe any requests, notices or demands, and attach
a copy of all such documents. Existing Tenants should describe and
attach a copy of any new actions, orders, decrees, requests, notices
or demands not already delivered to Landlord pursuant to the
provisions of Section 29 of the signed Lease Agreement.
______________________________________________________________________
______________________________________________________________________
8.2 Have there ever been, or are there now pending, any lawsuits against
your company regarding any environmental or health and safety
concerns?
Yes [_] No [_]
If yes, describe any such lawsuits and attach copies of the
complaint(s), cross-complaint(s), pleadings and all other documents
related thereto as requested by Landlord. Existing Tenants should
describe and attach a copy of any new complaint(s), cross-
complaint(s), pleadings and other related documents not already
delivered to Landlord pursuant to the provisions of Section 29 of the
signed Lease Agreement.
______________________________________________________________________
______________________________________________________________________
8.3 Have there been any problems or complaints from adjacent Tenants,
owners or other neighbors at your company's current facility with
regard to environmental or health and safety concerns? Existing
Tenants should indicate whether or not there have been any such
problems or complaints from adjacent Tenants, owners or other
neighbors at, about or near the Premises.
Yes [_] No [_]
If yes, please describe. Existing Tenants should describe any such
problems or complaints not already disclosed to Landlord under the
provisions of the signed Lease Agreement.
______________________________________________________________________
______________________________________________________________________
9. Permits and Licenses
9.1 Attach copies of all Hazardous Materials permits and licenses
including a Transporter Permit number issued to your company with
respect to its proposed operations in, on or about the Premises,
including, without limitation, any wastewater discharge permits, air
emissions permits, and use permits or approvals. Existing Tenants
should attach copies of any new permits and licenses as well as any
renewals of permits or licenses previously issued.
The undersigned hereby acknowledges and agrees that (A) this Hazardous Materials
Disclosure Certificate is being delivered in connection with, and as required
by, Landlord in connection with the evaluation and finalization of a Lease
Agreement and will be attached thereto as an exhibit; (B) that this Hazardous
Materials Disclosure Certificate is being delivered in accordance with, and as
required by, the provisions of Section 29 of the Lease Agreement; and (C) that
Tenant shall have and retain full and complete responsibility and liability with
respect to any of the Hazardous Materials disclosed in the HazMat Certificate
notwithstanding Landlord's/Tenant's receipt and/or approval of such certificate.
Tenant further agrees that none of the following described acts or events shall
be construed or otherwise interpreted as either (a) excusing, diminishing or
otherwise limiting Tenant from the requirement to fully and faithfully perform
its obligations under the Lease with respect to Hazardous Materials, including,
without limitation, Tenant's indemnification of the Indemnitees and compliance
with all Environmental Laws, or (b) imposing upon Landlord, directly or
indirectly, any duty or liability with respect to any such Hazardous Materials,
including, without limitation, any duty on Landlord to investigate or otherwise
verify the accuracy of the representations and statements made therein or to
ensure that Tenant is in compliance with all Environmental Laws; (i) the
delivery of such certificate to Landlord and/or Landlord's acceptance of such
certificate, (ii) Landlord's review and approval of such certificate, (iii)
Landlord's failure to obtain such certificate from Tenant at any time, or (iv)
Landlord's actual or constructive knowledge of the types and quantities of
Hazardous Materials being used, stored, generated, disposed of or transported on
or about the Premises by Tenant or Tenant's Representatives. Notwithstanding
the foregoing or anything to the contrary contained herein, the undersigned
acknowledges and agrees that Landlord and its partners, lenders and
representatives may, and will, rely upon the statements, representations,
warranties, and certifications made herein and the truthfulness thereof in
entering into the Lease Agreement and the continuance thereof throughout the
term, and any renewals thereof, of the Lease Agreement.
I (print name) __________, acting with full authority to bind the (proposed)
Tenant and on behalf of the (proposed) Tenant, certify, represent and warrant
that the information contained in this certificate is true and correct.
(Prospective) Tenant:
By: __________________________
Title: _______________________
Date: ________________________
3
<PAGE>
Exhibit F
First Amendment to Lease Agreement
Change of Commencement Date
This First Amendment to Lease Agreement (the "Amendment") is made and entered
into to be effective as of _________________________, by and between
_____________________________ ("Landlord"), and ________________________
("Tenant"), with reference to the following facts:
Recitals
A. Landlord and Tenant have entered into that certain Lease Agreement dated
___________ (the "Lease"), for the leasing of certain premises containing
approximately __________ rentable square feet of space located at
____________________________, California (the "Premises") as such Premises are
more fully described in the Lease.
B. Landlord and Tenant wish to amend the Commencement Date of the Lease.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1. Recitals: Landlord and Tenant agree that the above recitals are true
--------
and correct.
2. The Commencement Date of the Lease shall be ________________________.
3. The last day of the Term of the Lease (the "Expiration Date") shall be
______________.
4. The dates on which the Base Rent will be adjusted are:
for the period ________ to _______ the monthly Base Rent shall be
$___________;
for the period ________ to _______ the monthly Base Rent shall be
$__________; and
for the period ________ to _______ the monthly Base Rent shall be
$___________.
5. Effect of Amendment: Except as modified herein, the terms and
-------------------
conditions of the Lease shall remain unmodified and continue in full force and
effect. In the event of any conflict between the terms and conditions of the
Lease and this Amendment, the terms and conditions of this Amendment shall
prevail.
6. Definitions: Unless otherwise defined in this Amendment, all terms
-----------
not defined in this Amendment shall have the meaning set forth in the Lease.
7. Authority: Subject to the provisions of the Lease, this Amendment
---------
shall be binding upon and inure to the benefit of the parties hereto, their
respective heirs, legal representatives, successors and assigns. Each party
hereto and the persons signing below warrant that the person signing below on
such party's behalf is authorized to do so and to bind such party to the terms
of this Amendment.
8. The terms and provisions of the Lease are hereby incorporated in this
Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and
year first above written.
[PROPERTY MANAGER: Please provide Tenant information and Word Processing will
complete the signature block]
1
<PAGE>
Exhibit G
Sign Criteria
1
<PAGE>
Exhibit H
Subordination, Non-Disturbance and Attornment Agreement
When recorded mail to:
U. S. Bank National Association
2890 North Main Street
Walnut Creek, CA 94596
ATTN:
Date: *
From: *
("Tenant")
*
("Landlord")
To: U.S. BANK NATIONAL ASSOCIATION ("Lender")
Commercial Real Estate Loan Administration
* (Address)
* (City, State, Zip)
Attn:*
Lease Dated: *
Lease Term: *
W i t n e s s e t h:
WHEREAS, the Tenant has entered into a lease dated *, 199 (the "Lease") ,
whose interest is held by Landlord, covering premises (the "Premises") described
in Exhibit "A" attached hereto and incorporated herein by reference; and
WHEREAS, the Lender has agreed to make a loan of * ($*) to the Landlord
- -
secured by a Deed of Trust, hereinafter referred to as "mortgage" (which
mortgage also secures any future advances made by Lender); provided, however,
that said Lease is subordinate to the lien of the mortgage; and
WHEREAS, Lender has been requested by Tenant and by Landlord to enter into
a non-disturbance agreement with Tenant;
NOW, THEREFORE, in consideration of the promises and mutual covenants
hereinafter contained, the parties hereto mutually covenant and agree as
follows:
1. The Lease and any extensions, renewals, replacements or modifications
thereof, and all of the right, title and interest of the Tenant in and to said
Premises, including but not limited to any option or right of first refusal to
purchase Premises, or any acquisition of title to the Premises by Tenant during
the term of the mortgage, are and shall be subject and subordinate to the
mortgage and to all of the terms and conditions contained herein, and to any
renewals, modifications, replacements, consolidations and extensions thereof.
2. Lender consents to the Lease and, in the event of foreclosure of said
mortgage, or in the event Lender comes into possession or acquires title to the
premises as a result of the enforcement or foreclosure of the mortgage or
mortgage note, or as a result of any other means, Lender agrees to recognize
Tenant and further agrees that Tenant shall not be disturbed in its possession
of the Premises for any reason other than one which would entitle the Landlord
to terminate the Lease under its terms or would cause, without further action by
such Landlord, the termination of the Lease or would entitle such Landlord to
dispossess the Tenant from the Premises.
3. Tenant agrees with Lender that if the interest of Landlord in the
Premises shall be transferred to and owned by Lender by reason of foreclosure or
other proceedings brought by it, or by any other manner, Tenant shall be bound
to Lender under all of the terms, covenants and conditions of the Lease for the
balance of the term thereof remaining and any extensions or renewals thereof
which may be affected in accordance with any option therefor in the Lease, with
the same force and effect as if Lender were the Landlord under the Lease, and
Tenant does hereby attorn to Lender as its Landlord, said attornment to be
effective and self-operative without the execution of any further instruments on
the part of any of the parties hereto immediately upon Lender succeeding to the
interest of the Landlord in the Premises. Tenant agrees, however, upon the
election of and written demand by Lender after Lender receives title to the
Premises, to promptly execute an instrument in confirmation of the foregoing
provisions, satisfactory to Lender, in which Tenant shall acknowledge such
attornment and shall set forth the terms and conditions of its tenancy.
4. Tenant agrees with Lender that if Lender shall succeed to the interest
of Landlord under the Lease, Lender shall not be (a) liable for any action or
omission of any prior landlord under the Lease, or (b) subject to any offsets or
defenses which Tenant might have against any prior landlord, or (c) bound by any
rent or additional rent which Tenant might have paid for more than the current
month to any prior landlord, or (d) bound by any security deposit which Tenant
may have paid to any prior landlord, unless such deposit is in an escrow fund
available to Lender, or (e) bound by any amendment or modification of the Lease
made without Lender's consent, or (f) bound by any provision in the Lease which
obligates the Landlord to erect or complete any building or to perform any
construction work or to make any improvements to the Premises. Tenant further
agrees with Lender that Tenant will not voluntarily subordinate the Lease to any
lien or encumbrance without Lender's consent.
1
<PAGE>
5. Tenant shall provide Lender with a copy of any written notice that
Tenant sends to or receives from Landlord no later than 10 days after
transmission or receipt. In the event that the Landlord shall default in the
performance or observance of any of the terms, conditions or agreements in the
Lease, Tenant shall give written notice thereof to the Lender and the Lender
shall have the right (but not the obligation) to cure such default. Tenant
shall not take any action with respect to such default under the Lease,
including and without limitation, any action in order to terminate, rescind or
void the Lease or to withhold any rental thereunder for a period of ten (10)
days after receipt of such written notice thereof by the Lender with respect to
any such default capable of being cured by the payment of money and for a period
of thirty (30) days after receipt of such written notice thereof by the Lender
with respect to any other such default (provided, that in the case of any
default which cannot be cured by the payment of money and cannot with diligence
by cured within such thirty (30) day period because of the nature of such
default or because Lender requires time to obtain possession of the Premises in
order to cure the default, if Lender shall proceed promptly to attempt to obtain
possession of the Premises, where possession is required, and to cure the same
and thereafter shall prosecute the curing of such default with diligence and
continuity, then the time within which such default may be cured shall be
extended for such period as may be necessary to complete the curing of the same
with diligence and continuity).
6. Tenant agrees with Lender that Tenant's estate in the Premises shall
not be conveyed or encumbered without the written consent of the Lender so long
as the Lease is in effect.
7. This Agreement shall bind and inure to the benefit of all parties
hereto, their successors and assigns. As used herein the term "Tenant" shall
include the Tenant, its successors and assigns; the words "foreclosure and
"foreclosure sale: as used herein shall be deemed to include the acquisition of
Landlords' estate in the Premises by voluntary deed (or assignment) in lieu of
foreclosure, and the word "Lender" shall include the Lender herein specifically
named and any of its successors and assigns, including anyone who shall succeed
to Landlord' interest in the Premises by, through or under foreclosure of the
mortgage.
8. This Agreement shall not be modified or amended except in writing
signed by the parties hereto.
9. The use of the neuter gender in this Agreement shall be deemed to
include any other gender, and words in the singular number shall be held to
include the plural, when the sense requires.
10. Notwithstanding any of the other provisions hereof, this Agreement is
not intended to create and shall not be deemed to create any personal liability
on the part of tenant for repayment of the loan secured by the mortgage.
IN WITNESS WHEREOF the parties hereto have placed their hands and seals the
day and year first above written.
Landlord: Tenant:
* *
- -------------------------------- ----------------------------------
By: * By: *
---------------------------- ------------------------------
Its: * Its: *
--------------------------- -----------------------------
By: ____________________________ By: ______________________________
Its: ___________________________ Its: _____________________________
Lender:
U.S. BANK NATIONAL ASSOCIATION
By: *
----------------------------
Its: *
---------------------------
2
<PAGE>
State of California )
) ss.
County of Contra Costa )
On ___________, before me, ________________________________________, personally
appeared ________________________________________________________, personally
known to me - OR - proved to me on the basis of satisfactory evidence to be the
person whose name is subscribed to the within instrument and acknowledged to me
that he/she executed the same in his/her authorized capacity, and that by
his/her signature on the instrument the person, or the entity upon behalf of
which the person acted, executed the instrument.
WITNESS my hand and official seal.
____________________________________
SIGNATURE OF NOTARY
State of California )
) ss.
County of Contra Costa )
On ___________, before me, _______________________________________, personally
appeared ________________________________________________________, personally
known to me - OR - proved to me on the basis of satisfactory evidence to be the
person whose name is subscribed to the within instrument and acknowledged to me
that he/she executed the same in his/her authorized capacity, and that by
his/her signature on the instrument the person, or the entity upon behalf of
which the person acted, executed the instrument.
WITNESS my hand and official seal.
____________________________________
SIGNATURE OF NOTARY
State of California )
) ss.
County of Contra Costa )
On ___________, before me, ________________________________________, personally
appeared ________________________________________________________, personally
known to me - OR - proved to me on the basis of satisfactory evidence to be the
person whose name is subscribed to the within instrument and acknowledged to me
that he/she executed the same in his/her authorized capacity, and that by
his/her signature on the instrument the person, or the entity upon behalf of
which the person acted, executed the instrument.
WITNESS my hand and official seal.
____________________________________
SIGNATURE OF NOTARY
3
<PAGE>
Addendum 1
Options to Extend the Lease
This Addendum 1 ("Addendum") is incorporated as part of that certain Lease
Agreement dated for reference purposes as of December 29, 1999 (the "Lease"), by
and between LINCOLN-RECP HELLYER OPCO, LLC, a Delaware limited liability company
("Landlord") and POWER INTEGRATIONS, INC., a Delaware corporation ("Tenant") for
the leasing of certain premises located at 5245 and 5265 Hellyer Avenue, San
Jose, California (the "Premises"). Any capitalized terms used herein and not
otherwise defined herein shall have the meaning ascribed to such terms as set
forth in the Lease.
1. Grant of Extension Options. Subject to the provisions, limitations and
--------------------------
conditions set forth in Paragraph 5 below, Tenant shall have an option
(individually, an "Option" and collectively, the "Options") to extend the
initial term of the Lease for two (2) successive five (5) year periods
(individually, the "First Extended Term" and the "Second Extended Term",
respectively, and collectively, the "Extended Terms").
2. Tenant's Option Notice. Tenant shall have the right to deliver written
----------------------
notice to Landlord of its intent to exercise these Options (the "Option
Notice"). With respect to the First Extended Term, if Landlord does not receive
the Option Notice from Tenant on a date which is neither more than three hundred
sixty-five (365) days nor less than two hundred forty (240) days prior to the
end of the initial term of the Lease, all rights to both Options shall
automatically terminate and be of no further force or effect. With respect to
the Second Extended Term, if Landlord does not receive the Option Notice from
Tenant on a date which is neither more than three hundred sixty-five (365) days
nor less than two hundred forty (240) days prior to the end of the First
Extended Term of the Lease, all rights to the Option for the Second Extended
Term shall automatically terminate and be of no further force or effect.
3. Establishing the Initial Monthly Base Rent for the Extended Terms. The
-----------------------------------------------------------------
initial monthly Base Rent for each of the First Extended Term and the Second
Extended Term shall be the then current market rent for the highest and best use
for similar space within the competitive market area of the Premises (the "Fair
Rental Value"). "Fair Rental Value" of the Premises means the current market
rental value of the Premises as of the commencement of the First Extended Term
or the Second Extended Term, as applicable, taking into consideration all
relevant factors, including length of term, the uses permitted under the Lease,
the quality, size, design and location of the Premises, including the condition
and value of existing tenant improvements, and the monthly base rent paid by
tenants for premises comparable to the Premises, and located within the
competitive market area of the Premises, as reasonably determined by Landlord.
If Landlord and Tenant are unable to agree on the Fair Rental Value for either
the First Extended Term or the Second Extended Term, as the case may be, within
ten (10) days after receipt by Landlord of the Option Notice for the then
applicable Extended Term, Landlord and Tenant each, at its cost and by giving
notice to the other party, shall appoint a competent and impartial commercial
real estate broker (hereinafter "broker") with at least five (5) years' full-
time commercial real estate brokerage experience in the geographical area of the
Premises to set the Fair Rental Value for the First Extended Term or the Second
Extended Term, as the case may be. If either Landlord or Tenant does not
appoint a broker within ten (10) days after the other party has given notice of
the name of its broker, the single broker appointed shall be the sole broker and
shall set the Fair Rental Value for the First Extended Term or the Second
Extended Term, as the case may be. If two (2) brokers are appointed by Landlord
and Tenant as stated in this paragraph, they shall meet promptly and attempt to
set the Fair Rental Value. In addition, if either of the first two (2) brokers
fails to submit their opinion of the Fair Rental Value within the time frames
set forth below, then the single Fair Rental Value submitted shall automatically
be the initial monthly Base Rent for the First Extended Term, or Second Extended
Term, as the case may be, and shall be binding upon Landlord and Tenant. If the
two (2) brokers are unable to agree within ten (10) days after the second broker
has been appointed, they shall attempt to select a third broker, meeting the
qualifications stated in this paragraph within ten (10) days after the last day
the two (2) brokers are given to set the Fair Rental Value. If the two (2)
brokers are unable to agree on the third broker, either Landlord or Tenant by
giving ten (10) days' written notice to the other party, can apply to the
Presiding Judge of the Superior Court of the county in which the Premises is
located for the selection of a third broker who meets the qualifications stated
in this paragraph. Landlord and Tenant each shall bear one-half (1/2) of the
cost of appointing the third broker and of paying the third broker's fee. The
third broker, however selected, shall be a person who has not previously acted
in any capacity for either Landlord or Tenant. Within fifteen (15) days after
the selection of the third broker, the third broker shall select one of the two
Fair Rental Values submitted by the first two brokers as the Fair Rental Value
for the First Extended Term or the Second Extended Term, as the case may be.
The determination of the Fair Rental Value by the third broker shall be binding
upon Landlord and Tenant.
In no event shall the monthly Base Rent for any period of the First Extended
Term, as determined pursuant to this Addendum, be less than the highest monthly
Base Rent charged during the initial term of the Lease. In no event shall the
monthly Base Rent for any period of the Second Extended Term as determined
pursuant to this Addendum, be less than the highest monthly Base Rent charged
during the First Extended Term of the Lease. Upon determination of the initial
monthly Base Rent for the First Extended Term and the Second Extended Term, as
applicable, pursuant to the terms outlined above, Landlord and Tenant shall
immediately execute an amendment to the Lease. Such amendment shall set forth
the initial monthly Base Rent for the First Extended Term or the Second Extended
Term, as applicable, and the actual commencement date and expiration date of the
First Extended Term or the Second Extended Term, as the case may be, and any
applicable increase to Tenant Security Deposit as required. Tenant shall have
no other right to further extend the initial term or the First Extended Term, as
the case may be, of the Lease under this Addendum unless Landlord and Tenant
otherwise expressly agree in writing.
4. Condition of Premises and Brokerage Commissions for the Extended Terms. If
----------------------------------------------------------------------
Tenant timely and properly exercises this Option, in strict accordance with the
terms contained herein: (1) Tenant shall accept the Premises in its then "As-Is"
condition and, accordingly, Landlord shall not be required to perform any
additional improvements to the Premises; and (2) Tenant hereby agrees that it
will solely be responsible for any and all brokerage commissions and finder's
fees payable to any broker now or hereafter procured or hired by Tenant or who
otherwise claims a commission based on any act or statement of Tenant ("Tenant's
Broker") in connection with the Options. Tenant hereby further agrees that
Landlord shall in no event or circumstance be responsible for the payment of any
such commissions and fees to Tenant's Broker.
1
<PAGE>
5. Limitations On, and Conditions To, Extension Options. Except for Permitted
----------------------------------------------------
Transfers, the Options described in this Addendum are personal to Tenant and may
not be assigned, voluntarily or involuntarily, separate from or as part of the
Lease. At Landlord's option, all rights of Tenant under the Options described
in this Addendum shall terminate and be of no force or effect if any of the
following individual events occur or any combination thereof occur: (1) Tenant
is in material default of any provision of the lease on the date Landlord
receives the Option Notice for either the First or Second Extended Term as the
case may be; and/or (2) Tenant has assigned its rights and obligations under all
or part of the Lease or Tenant has subleased all or part of the Premises; and/or
(3) Tenant shall have a minimum net worth of at least fifty (50) million dollars
at the time of Tenant's delivery to Landlord of the then applicable Option
Notice; and/or (4) Tenant has failed to exercise properly the Options described
in this Addendum in a timely manner in strict accordance with the provisions of
this Addendum; and/or (5) Tenant no longer has possession of all or any part of
the Premises under the Lease, or if the Lease has been terminated earlier,
pursuant to the terms and provisions of the Lease.
6. Time is of the Essence. Time is of the essence with respect to each and
----------------------
every time period set forth in this Addendum.
2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form10-K into the Company's previously filed
Registration Statements No. 333-56381, No. 333-69871 and No. 333-83083 on
Form S-8.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 27,883
<SECURITIES> 33,789
<RECEIVABLES> 10,672
<ALLOWANCES> 990
<INVENTORY> 11,406
<CURRENT-ASSETS> 88,099
<PP&E> 23,026
<DEPRECIATION> 12,554
<TOTAL-ASSETS> 98,571
<CURRENT-LIABILITIES> 16,930
<BONDS> 0
0
0
<COMMON> 26
<OTHER-SE> 80,222
<TOTAL-LIABILITY-AND-EQUITY> 98,571
<SALES> 102,655
<TOTAL-REVENUES> 104,067
<CGS> 46,794
<TOTAL-COSTS> 46,794
<OTHER-EXPENSES> 30,609
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 302
<INCOME-PRETAX> 28,811
<INCOME-TAX> 4,334
<INCOME-CONTINUING> 24,477
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,477
<EPS-BASIC> 0.94
<EPS-DILUTED> 0.87
</TABLE>
