-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BbyZgfBjaDgVuD2wqD/eqONgm9+fVoW8K6s7wubXzEqzs6/nA4Y5FWYP6Rq1qRTs RvVh5vekixWuJRechXIsWA== 0000929624-98-001823.txt : 19981111 0000929624-98-001823.hdr.sgml : 19981111 ACCESSION NUMBER: 0000929624-98-001823 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POWER INTEGRATIONS INC CENTRAL INDEX KEY: 0000833640 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 943065014 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23441 FILM NUMBER: 98743246 BUSINESS ADDRESS: STREET 1: 477 NORTH MATHILDA AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4085239210 MAIL ADDRESS: STREET 1: 477 NORTH MATHILDA AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-Q 1 FORM 10-Q FOR POWER INTEGRATIONS, INC. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 ____________________________ FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1998 or [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______________ to ______________ Commission File Number 0-23441 ____________________ POWER INTEGRATIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-3065014 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 477 N. MATHILDA AVENUE, SUNNYVALE, CALIFORNIA 94086 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (408) 523-9200 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED ------------------- ------------------------------------ NONE NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001 PAR VALUE (TITLE OF CLASS) _____________________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 30, 1998 ------------------------------- --------------------------------- Common Stock, $.001 par value 12,444,608 shares ================================================================================ POWER INTEGRATIONS, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements. Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes To Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds 20 Item 3. Defaults upon Senior Securities 20 Item 4. Submission of Matters to Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS POWER INTEGRATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents.................. $ 10,708 $ 25,553 Short-term investments..................... 27,493 3,455 Accounts receivable........................ 5,578 6,243 Inventories................................ 9,017 7,328 Prepaid expenses and other current assets.. 440 349 ------------- ------------ Total current assets.................. 53,236 42,928 ------------- ------------ PROPERTY AND EQUIPMENT, net................... 6,577 5,631 ------------- ------------ $ 59,813 $ 48,559 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of capitalized lease obligations.............................. $ 1,977 $ 1,787 Accounts payable........................... 5,611 6,903 Accrued payroll and related expenses....... 1,935 1,685 Taxes payable and other accrued liabilities.............................. 2,850 1,042 Deferred income on sales to distributors... 2,746 1,380 ------------- ------------ Total current liabilities............. 15,119 12,797 ------------- ------------ CAPITALIZED LEASE OBLIGATIONS, net of current portion.......................... 2,141 2,435 ------------- ------------ STOCKHOLDERS' EQUITY: Common stock............................... 12 12 Additional paid-in capital................. 56,878 56,220 Common stock warrants...................... 12 12 Stockholder notes receivable............... (405) (405) Deferred compensation...................... (356) (461) Cumulative translation adjustment.......... (84) (76) Accumulated deficit........................ (13,504) (21,975) ------------- ------------ Total stockholders' equity............ 42,553 33,327 ------------- ------------ $ 59,813 $ 48,559 ============= ============ The accompanying notes are an integral part of these condensed consolidated balance sheets. 3 POWER INTEGRATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- ----------------------------------- 1998 1997 1998 1997 ----------------- --------------- ----------------- ---------------- NET REVENUES: Product sales............................... $19,907 $12,959 $48,456 $29,668 Royalties................................... 410 384 1,400 790 ----------------- --------------- ----------------- ---------------- Total net revenues....................... 20,317 13,343 49,856 30,458 ----------------- --------------- ----------------- ---------------- COST OF REVENUES.............................. 10,635 7,492 26,865 17,602 ----------------- --------------- ----------------- ---------------- GROSS PROFIT.................................. 9,682 5,851 22,991 12,856 ----------------- --------------- ----------------- ---------------- OPERATING EXPENSES: Research and development.................... 1,947 1,404 5,226 3,696 Sales and marketing......................... 2,376 1,839 5,989 4,408 General and administrative.................. 1,067 620 2,345 1,460 ----------------- --------------- ----------------- ---------------- Total operating expenses................. 5,390 3,863 13,560 9,564 ----------------- --------------- ----------------- ---------------- INCOME FROM OPERATIONS........................ 4,292 1,988 9,431 3,292 ----------------- --------------- ----------------- ---------------- OTHER INCOME (EXPENSE), net................... 399 (196) 775 (549) ----------------- --------------- ----------------- ---------------- INCOME BEFORE PROVISION FOR INCOME TAXES................................. 4,691 1,792 10,206 2,743 PROVISION FOR INCOME TAXES.................... 351 306 1,735 373 ----------------- --------------- ----------------- ---------------- NET INCOME.................................... $ 4,340 $ 1,486 $ 8,471 $ 2,370 ----------------- --------------- ----------------- ---------------- EARNINGS PER SHARE: Basic....................................... $0.35 $0.91 $0.70 $2.09 ----------------- --------------- ----------------- ---------------- Diluted..................................... $0.33 $0.15 $0.65 $0.26 ----------------- --------------- ----------------- ---------------- SHARES USED IN PER SHARE CALCULATION: Basic....................................... 12,229 1,632 12,133 1,134 ----------------- --------------- ----------------- ---------------- Diluted..................................... 13,128 9,875 13,110 9,082 ================= =============== ================= ================
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 POWER INTEGRATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------- 1998 1997 ------------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................... $ 8,471 $ 2,370 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................... 2,278 1,613 Provision for accounts receivable and other allowances...................... (26) 709 Deferred compensation expense............................................... 105 71 Change in operating assets and liabilities: Accounts receivable...................................................... 691 (4,844) Inventories.............................................................. (1,689) (662) Prepaid expenses and other current assets................................ (91) (83) Accounts payable......................................................... (1,292) 2,846 Accrued liabilities...................................................... 2,050 1,103 Deferred income on sales to distributors................................. 1,366 827 ------------------- ----------------- Net cash provided by operating activities............................. 11,863 3,950 ------------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment......................................... (1,785) (712) Purchases of short-term investments......................................... (38,071) (9,947) Proceeds from sales and maturities of short-term investments................ 14,033 9,895 ------------------- ----------------- Net cash used in investing activities................................. (25,823) (764) ------------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock.................................. 658 577 Principal payments under capitalized lease obligations...................... (1,543) (1,232) ------------------- ----------------- Net cash used in financing activities................................. (885) (655) ------------------- ----------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... (14,845) 2,531 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.............................. 25,553 3,282 ------------------- ----------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................... $ 10,708 $ 5,813 =================== ================= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Capitalized lease obligations incurred for property and equipment........... $ 1,439 $ 1,253 =================== ================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest...................................................... $ 388 $ 626 =================== ================= Cash paid for income taxes.................................................. $ 475 $ 7 =================== =================
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 POWER INTEGRATIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION: The condensed consolidated financial statements include the accounts of Power Integrations, Inc. (the Company), a Delaware corporation, and its wholly-owned subsidiaries. Significant inter-company accounts and transactions have been eliminated. While the financial information furnished is unaudited, the condensed consolidated financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for interim periods are not necessarily indicative of the results for the entire year. The condensed consolidated financial statements should be read in conjunction with the Power Integrations, Inc. consolidated financial statements for the year ended December 31, 1997 included in its Form 10-K/A. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Cash and Cash Equivalents and Short-Term Investments The Company considers cash invested in highly liquid financial instruments with an original maturity of three months or less to be cash equivalents. Cash investments in highly liquid financial instruments with original maturities greater than three months but less than one year are classified as short-term investments. As of September 30, 1998, the Company's short-term investments consist of U.S. Government backed securities and commercial paper, which are classified as held-to-maturity and are valued using the amortized cost method which approximates market. Revenue Recognition Product revenues consist of sales to OEMs and merchant power supply manufacturers and to distributors. Revenues from product sales to OEMs and merchant power supply manufacturers are recognized upon shipment. Sales to distributors are made under terms allowing certain rights of return and protection against subsequent price declines on the Company's products held by the distributors. As a result of the Company's distributor agreements, the Company defers recognition of revenue and the proportionate costs of revenues derived from sales to distributors until such distributors resell the Company's products to their customers. The margin deferred as a result of this policy is reflected as "deferred income on sales to distributors" in the accompanying condensed consolidated balance sheets. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and presentation of comprehensive income. SFAS No. 130 requires companies to report a new measure of income. The Company adopted SFAS No. 130 in the first quarter of 1998. "Comprehensive Income" is to include foreign currency translation gains and losses and other unrealized gains and losses that have historically been excluded from net income and reflected instead in equity. The adoption of SFAS No. 130 did not have a material impact on the Company's financial statements. 6 POWER INTEGRATIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which requires companies to report financial and descriptive information about its reportable operating segments. SFAS No. 131 will be adopted by the Company in its 1998 annual consolidated financial statements. The Company anticipates that SFAS No. 131 will not have a material impact on its financial statements. 3. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------------------------ Raw materials.............................................................. $4,064 $3,323 Work-in-process............................................................ 2,997 2,977 Finished goods............................................................. 1,956 1,028 ------ ------ $9,017 $7,328 ====== ======
4. SIGNIFICANT CUSTOMERS AND EXPORT SALES: Customer Concentration The Company's end user base is highly concentrated and a relatively small number of OEMs and distributors accounted for a significant portion of the Company's net revenues. For the nine months ended September 30, 1998 and 1997, ten customers accounted for approximately 67% of total net revenues in each such period. The following customers accounted for more than 10% of total net revenues:
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- Customer 1998 1997 -------- ------------ ----------- A.......................................................................... 22% 23% B.......................................................................... 13% * C.......................................................................... * 16%
- ------------------------ * less than 10% or no sales Export Sales The Company markets its products in North America and in foreign countries through its sales personnel and a worldwide network of independent sales representatives and distributors. As a percentage of total net revenues, export sales, which consist of domestic sales to customers in foreign countries, are comprised of the following:
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1998 1997 ------------ ----------- Japan...................................................................... 3% 5% Taiwan..................................................................... 28% 29% Hong Kong.................................................................. 23% 27% Western Europe............................................................. 16% 11% Other...................................................................... 12% 9% ----- ----- Total foreign.............................................. 82% 81% ===== =====
7 POWER INTEGRATIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. EARNINGS PER SHARE: In December 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share." SFAS No. 128 requires companies to compute earnings per share under two different methods (basic and diluted). Basic earnings per share is calculated by dividing net income by the weighted average shares of common stock outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average shares of outstanding common stock and common stock equivalents during the period. Common stock equivalents included in the diluted calculation consist of dilutive shares issuable upon the exercise of outstanding common stock options and warrants computed using the treasury stock method. The following table sets forth the calculation of basic and diluted earnings per share (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ----------------------- 1998 1997 1998 1997 ------------ ----------- ----------- ---------- Basic earnings per share: Net income................................................... $ 4,340 $1,486 $ 8,471 $2,370 ------------ ----------- ----------- ---------- Weighted average common shares............................... 12,229 1,632 12,133 1,134 ------------ ----------- ----------- ---------- Basic earnings per share.................................. $ 0.35 $ 0.91 $ 0.70 $ 2.09 ============ =========== =========== ========== Diluted earnings per share: Net income................................................... $ 4,340 $1,486 $ 8,471 $2,370 ------------ ----------- ----------- ---------- Weighted average common shares............................... 12,229 1,632 12,133 1,134 Weighted average common share equivalents: Convertible preferred stock............................... -- 7,447 -- 7,447 Options................................................... 647 574 672 398 Warrants.................................................. 252 222 305 103 ------------ ----------- ----------- ---------- Diluted weighted average common shares....................... 13,128 9,875 13,110 9,082 ------------ ----------- ----------- ---------- Diluted earnings per share............................. $ 0.33 $ 0.15 $ 0.65 $ 0.26 ============ =========== =========== ==========
6. PROVISION FOR INCOME TAXES: Income tax expense for the nine month periods ended September 30, 1998 and 1997 includes a provision for Federal, state and foreign taxes based on the annual estimated effective tax rate applicable to the Company and its subsidiaries for the year. 7. LEGAL PROCEEDINGS: In July 1998, the Company filed a complaint for patent infringement in the U.S. District Court, Northern District of California against its largest end user, Motorola, Inc. ("Motorola"). In August 1998, the Company voluntarily dismissed that complaint, and filed a new complaint in the U.S. District Court, District of Delaware, alleging that Motorola has infringed and continues to infringe on two of the Company's circuit patents. The Company seeks, among other things, an order enjoining Motorola from infringing on the Company's patents and an award for damages resulting from the alleged infringement. In October 1998, Motorola asserted various counterclaims against the Company alleging that the Company is infringing on certain of Motorola's patents. The Company believes that Motorola's counterclaims are without merit and intends to vigorously defend itself against such claims. Litigation may be necessary to resolve the claims asserted by the Company against Motorola, and any claims which Motorola may assert in the future against the Company, and to defend, enforce and protect the Company's 8 POWER INTEGRATIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) intellectual property rights. There can be no assurance that the Company will prevail in any litigation with Motorola, or any other party. Any such litigation, whether or not determined in the Company's favor or settled by the Company, would be costly and would divert the efforts and attention of the Company's management and technical personnel from normal business operations, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any litigation between the Company and Motorola could delay the Company's ability to have its products incorporated into a customer's products at the design stage. Delays in customers' decisions to use the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. Adverse determinations in any litigation could result in the loss of certain of the Company's proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties, or prevent the Company from manufacturing and selling certain of its products or licensing its technology, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed in the "Factors That May Affect Future Results of Operations" and elsewhere in this Form 10-Q that could cause actual results to differ materially from historical results or those anticipated. In this report, the words "anticipates," "believes," "expects," "future," "intends," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with management's discussion and analysis of financial condition and results of operations included in the Company's Form 10-K/A for the year ended December 31, 1997. OVERVIEW Power Integrations, Inc. (the "Company") designs, develops and markets proprietary, high-voltage analog integrated circuits ("ICs") for use in AC to DC power conversion. The Company has targeted high-volume power supply markets, including the cellular telephone, personal computer, cable and direct broadcast satellite and various consumer and industrial electronics markets. The Company initially focuses on those markets that are sensitive to size, portability, energy efficiency and time-to-market. The Company believes its patented TOPSwitch ICs, introduced in 1994, are the first highly integrated power conversion ICs to achieve widespread market acceptance. The Company introduced an enhanced family of ICs, TOPSwitch-II, in April 1997. In September 1998, the Company announced the TinySwitch family of integrated circuits for power supplies in a broad range of electronic products. TinySwitch ICs incorporating the Company's new EcoSmart technology enable a new class of light, compact, energy-efficient power supplies. This new family of ICs is designed to reduce energy leakage from power supplies. RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of total net revenues for the periods indicated.
PERCENTAGE OF PERCENTAGE OF TOTAL NET REVENUES FOR TOTAL NET REVENUES FOR THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ---------------------------- 1998 1997 1998 1997 ----------- ----------- ------------- ------------- Net revenues: Product sales........................................ 98.0% 97.1% 97.2% 97.4% Royalties............................................ 2.0 2.9 2.8 2.6 ----------- ----------- ------------- ------------- Total net revenues................................ 100.0 100.0 100.0 100.0 ----------- ----------- ------------- ------------- Cost of revenues....................................... 52.3 56.1 53.8 57.8 ----------- ----------- ------------- ------------- Gross profit........................................... 47.7 43.9 46.2 42.2 ----------- ----------- ------------- ------------- Operating expenses: Research and development............................. 9.6 10.5 10.5 12.1 Sales and marketing.................................. 11.7 13.8 12.0 14.5 General and administrative........................... 5.3 4.7 4.7 4.8 ----------- ----------- ------------- ------------- Total operating expenses.......................... 26.6 29.0 27.2 31.4 ----------- ----------- ------------- ------------- Income from operations................................. 21.1 14.9 19.0 10.8 Other income (expense), net............................ 1.9 (1.5) 1.5 (1.8) ----------- ----------- ------------- ------------- Income before provision for income taxes............... 23.0 13.4 20.5 9.0 ----------- ----------- ------------- ------------- Provision for income taxes............................. 1.7 2.3 3.5 1.2 ----------- ----------- ------------- ------------- Net income............................................. 21.3% 11.1% 17.0% 7.8% =========== =========== ============= =============
10 COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 Net revenues. Net revenues consist of revenues from product sales, which are calculated net of returns and allowances, plus royalties paid by licensees of the Company's technology. Net revenues for the third quarter ended September 30, 1998 were $20.3 million compared to $13.3 million for the third quarter of 1997, an increase of $7.0 million, or 53%. Net revenues for the nine months ended September 30, 1998 were $49.9 million compared to $30.5 million for the comparable period of 1997, an increase of $19.4 million, or 64%. Net revenues from product sales represented $19.9 million and $13.0 million in the third quarter of 1998 and 1997, respectively. Net revenues from product sales represented $48.5 million and $29.7 million in the first nine months of 1998 and 1997, respectively. The increase in net revenues from product sales for the three months and nine months ended September 30, 1998 was due primarily to higher sales volume of the Company's TOPSwitch family of products across a larger customer base. Net revenues also grew because of an increase in royalty revenues. Royalties were $410,000 for the third quarter of 1998, an increase of $26,000, or 7%, from the third quarter of 1997. Royalties were $1.4 million for the nine months ended September 30, 1998, an increase of $610,000, or 77%, from the nine months ended September 30, 1997. International sales were $16.7 million in the third quarter of 1998 compared to $10.8 million for the same period in 1997, an increase of $5.9 million, or 55%, representing 82% of net revenues compared to 81% in the comparable period of 1997. International sales were $40.7 million for the nine months ended September 30, 1998 compared to $23.9 million for the same period in 1997, an increase of $16.8 million, or 70%, representing 82% of net revenues compared to 81% in the comparable period of 1997. Although the power supplies using the Company's products are designed and distributed worldwide, most of such power supplies are manufactured in Asia. As a result, sales to this region were 66% and 70% of product sales for the three months ended September 30, 1998 and 1997, respectively, and 65% and 64% of product sales for the nine months ended September 30, 1998 and 1997, respectively. The Company expects international sales to continue to account for a large portion of the Company's net revenues. The Company's direct sales are divided approximately 50% to distributors and 50% to OEMs and merchants. For the quarter ended September 30, 1998, sales to two customers accounted for 24% and 13% of net revenues, and for the quarter ended September 30, 1997, one of those same customers accounted for 28% of net revenues and another customer accounted for 16% of net revenues. For the nine months ended September 30, 1998, sales to two customers accounted for 22% and 13% of net revenues, and for the comparable period ended September 30, 1997, one of those same customers accounted for 22% of net revenues and another customer accounted for 15% of net revenues. The exact dollar amounts and percentages of sales to end customers are difficult to ascertain because most of such sales occur through distributors or indirectly through sales to merchant power supply manufacturers which, in turn, sell power supplies to OEMs. However, the Company estimates that direct and indirect sales to Motorola, who is the Company's largest end user, accounted for approximately 15% and 22% of the Company's net revenues for the quarters ended September 30, 1998 and 1997, respectively, and approximately 12% and 21% of the Company's net revenues for the nine months ended September 30, 1998 and 1997, respectively. Direct sales to Motorola were approximately 6% and 3% of the Company's net revenues for the quarters ended September 30, 1998 and 1997, respectively, and approximately 5% and 4% of the Company's net revenues for the nine months ended September 30, 1998 and 1997, respectively. Cost of revenues; Gross profit. Gross profit is equal to net revenues less cost of revenues. The Company's cost of revenues consists primarily of costs associated with the purchase of wafers, the assembly and packaging of its products, and internal labor and overhead associated with the testing of both wafers and packaged components. Gross profit for the third quarter of 1998 was $9.7 million, or 47.7%, of net revenues, compared to $5.9 million, or 43.9%, of net revenues for the same period in 1997. Gross profit for the nine months ended September 30, 1998 was $23.0 million, or 46.2%, of net revenues, compared to $12.9 million, or 42.2%, of net revenues for the same period 11 in 1997. The increase in gross profit for the three months and nine months ended September 30, 1998 was primarily due to the combined effects of the absorption of certain fixed costs over the increased sales volume, lower prices for wafers, favorable Japanese Yen exchange rates and better manufacturing yields due to improved test equipment. There can be no assurance that these or other factors will have a favorable impact on gross profit in future periods. Research and development expenses. Research and development expenses consist primarily of employee-related expenses, expensed material and facility costs associated with the development of new processes and new products. The Company also expenses prototype wafers and mask sets related to new products as research and development costs until new products are released to production. Research and development expenses for the third quarter of 1998 were $1.9 million compared to $1.4 million for the same period in 1997, an increase of $500,000, or 36%, representing 9.6% and 10.5% of net revenues, respectively. Research and development expenses for the first nine months of 1998 were $5.2 million compared to $3.7 million for the same period in 1997, an increase of $1.5 million, or 40%, representing 10.5% and 12.1% of net revenues, respectively. The increase for the three months and nine months ended September 30, 1998 was primarily due to increased salaries and other costs related to the hiring of additional engineering personnel, outside consulting fees and expensed prototype materials resulting from the transition of foundry manufacturing processes. The Company expects that research and development expenses will continue to increase in absolute dollars but will fluctuate as a percentage of net revenues. Sales and marketing expenses. Sales and marketing expenses consist primarily of employee-related expenses, commissions to sales representatives and facilities expenses, including expenses associated with the Company's regional sales and support offices. Sales and marketing expenses for the third quarter of 1998 were $2.4 million compared to $1.8 million for the same period in 1997, an increase of $600,000, or 33%, representing 11.7% and 13.8% of net revenues, respectively. Sales and marketing expenses for the first nine months of 1998 were $6.0 million compared to $4.4 million for the same period in 1997, an increase of $1.6 million, or 36%, representing 12.0% and 14.5% of net revenues, respectively. The increase for the three months and nine months ended September 30, 1998 was primarily a result of the addition of personnel to support international sales and field application engineers and to staff two new sales offices in Asia which opened in June 1997. The Company expects that sales and marketing expenses will continue to increase in absolute dollars but will fluctuate as a percentage of net revenues. General and administrative expenses. General and administrative expenses consist primarily of employee-related expenses for administration, finance, human resources, general management and facilities, and consulting, outside services, legal and auditing expenses. For the quarters ended September 30, 1998 and 1997, general and administrative expenses were $1.1 million and $620,000, respectively, which represented 5.3% and 4.7% of net revenues, respectively. For the nine month periods ended September 30, 1998 and 1997, general and administrative expenses were $2.3 million and $1.5 million, respectively, which represented 4.7% and 4.8% of net revenues, respectively. This increase in absolute dollars was attributable to additional headcount to support the Company's growth and additional professional and outside services required by the Company as a result of its public reporting obligations. The Company expects that general and administrative expenses will continue to increase in absolute dollars and may increase as a percentage of net revenues, particularly in light of the Company's recently filed patent infringement claim against Motorola. Other income (expense), net. Other income (expense), net, for the third quarter of 1998 increased by $595,000 over the same period in 1997, and for the nine months ended September 30, 1998 increased by $1.3 million over the same period in 1997. The increase for the three months and nine months ended September 30, 1998 was due primarily to additional interest income from an increase in short-term investments in 1998 and a reduction in interest expense as a result of the repayment of $3.0 million of subordinated debt in the fourth quarter of 1997. The Company expects to continue to utilize term debt to finance its capital equipment needs. Provision for income taxes. Provision for income taxes represents Federal, state and foreign taxes. The provision for income taxes was $351,000 for the third quarter of 1998 compared to $306,000 for the same period in 1997. The provision for income taxes was $1.7 million for the first nine months of 1998 compared to $373,000 for the same period in 1997. The Company is using an effective tax rate of 17% reflecting the profitable results for the 1998 period, while the provision for 1997 represented minimum tax. The difference between the statutory rate and the Company's effective tax rate for 1998 is primarily due to the beneficial impact of net operating loss carryforwards. 12 LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, the Company had approximately $38.2 million in cash, cash equivalents and short-term investments. In addition, under a working capital line of credit agreement with a bank, the Company can borrow up to $8.0 million conditional upon meeting certain financial covenants, including maintaining quarterly profitability and specific financial covenants. As of September 30, 1998, there were no borrowings outstanding under the line of credit agreement. The Company has financed a significant portion of its machinery and equipment through capital equipment leases including an additional equipment financing in the amount of $1.4 million during the nine months ended September 30, 1998. At September 30, 1998, approximately $4.1 million was outstanding under various capital equipment leasing agreements. As of September 30, 1998, the Company had working capital, defined as current assets less current liabilities, of approximately $38.1 million, which was an increase of approximately $8.0 million over December 31, 1997. The Company generated $11.9 million from operating activities during the nine months ended September 30, 1998, reflecting net income of $8.5 million, depreciation of $2.3 million and $1.1 million provided by the net change in working capital items. The net change in working capital items primarily reflects an increase in inventory of $1.7 million as part of the Company's program to provide shorter lead times to its customers, a decrease in accounts payable of $1.3 million, an increase in other liabilities of $2.0 million, and an increase of $1.4 million in deferred revenue. The nature of the semiconductor industry, combined with the current economic environment, make it very difficult for the Company to predict future liquidity requirements with certainty. However, the Company believes that its existing cash, cash equivalents and short-term investments, cash generated from operations and other existing sources of working capital will be adequate to finance its operations through the next twelve months. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and presentation of comprehensive income. SFAS No. 130 requires companies to report a new measure of income. The Company adopted SFAS No. 130 in the first quarter of 1998. "Comprehensive Income" is to include foreign currency translation gains and losses and other unrealized gains and losses that have historically been excluded from net income and reflected instead in equity. The adoption of SFAS No. 130 did not have a material impact on the Company's financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which requires companies to report financial and descriptive information about its reportable operating segments. SFAS No. 131 will be adopted by the Company in its 1998 annual consolidated financial statements. The Company anticipates that SFAS No. 131 will not have a material impact on its financial statements. 13 FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS The Company's future results of operations are dependent upon a number of factors, including those described below. For a complete description of such factors, see the Company's Form 10-K/A for the year ended December 31, 1997. Unpredictable and Fluctuating Operating Results. The Company's quarterly net revenues and operating results have varied significantly in the past, are difficult to forecast, are subject to numerous factors both within and outside of the Company's control, and may fluctuate significantly in the future. Although the Company was profitable in the third quarter of 1998, there can be no assurance that the Company will continue to be profitable in future periods. The Company believes that period-to-period comparisons are not necessarily meaningful and should not be relied upon as indicative of future operating results. Factors which may affect the Company's net revenues and operating results include the timing and volume of orders received by the Company; competitive pressures on selling prices; the volume and timing of orders placed by the Company with its foundries; the availability of raw materials; fluctuations in manufacturing yields, whether resulting from the transition to new foundries or from other factors; changes in product mix including the impact of new product introduction, such as the Tiny Switch ICs, on existing products; the Company's ability to develop and bring to market new products and technologies on a timely basis; introduction of products and technologies by the Company's competitors; market acceptance of the Company's and its customers' products; the timing of investments in research and development and sales and marketing; the Company's patent infringement claim against Motorola; cyclical semiconductor industry conditions; fluctuations in exchange rates, particularly exchange rates between the U.S. dollar and the Japanese yen; changes in the international business climate; and economic conditions generally. Many computer systems were not designed to handle any dates beyond the year 1999, and therefore, computer hardware and software for virtually all businesses will need to be modified prior to the year 2000 in order to remain functional. The Company is concerned that many enterprises will be devoting a substantial portion of their information systems spending to resolving this upcoming Year 2000 problem. This expense may result in spending being diverted from ICs for use in AC to DC power conversion in the near future. The Company is still assessing the impact of the Year 2000 issue on its internal information systems and has begun, and in many cases completed, corrective efforts in these areas. The Company has evaluated the functionality of its current products with respect to any Year 2000 problems and has determined that its current products have no Year 2000 problems. The Company does not anticipate that addressing the Year 2000 problem for its internal information systems and future products will have a material impact on its operations or financial results. However, there can be no assurance that these costs will not be greater than anticipated, or that corrective actions undertaken will be completed before any Year 2000 problems could occur. The Year 2000 issue could lower demand for the Company's products while increasing the Company's costs. These combining factors, while not quantified, could have a material adverse impact on the Company's financial results. The Company has certain key relationships with suppliers. If these suppliers fail to adequately address the Year 2000 issue for the products they provide to the Company, this could have a material adverse impact on the Company's operations and financial results. The Company is still assessing the effect the Year 2000 issue will have on its suppliers and at this time, cannot determine the impact it will have. Contingency plans will be developed if it appears the Company or its key suppliers will not be Year 2000 compliant, and such noncompliance is expected to have a material adverse impact on the Company's operations. The Company's operating results in a future quarter or quarters are likely to fall below the expectations of public market analysts or investors. In such an event, the price of the Company's common stock will likely be materially and adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Concentration of Applications. A limited number of applications of the Company's products, primarily in the cellular phone battery chargers and desktop PC stand-by markets, currently account for approximately one-half of the Company's net revenues. The Company expects that its net revenues and operating results will continue to be substantially dependent upon these markets for the foreseeable future. The cellular phone and desktop PC markets 14 can be highly cyclical and have been subject to significant economic downturns at various times, characterized by diminished product demand, accelerated erosion of average selling prices and production over capacity. The Company may experience substantial period-to-period fluctuations in future operating results due to general conditions of these markets. The Company's net revenues and operating results are subject to many of the risks to which the markets for these applications are subject, and may also be impacted by technological or other developments in these markets. While the Company continues its efforts to enhance the cost effectiveness of TOPSwitch-based switchers, there can be no assurance that the Company will be successful in its efforts, and, in the absence of a successful competitive response by the Company, demand for the Company's products would be materially adversely affected. Similarly, if a competitor of the Company successfully and cost effectively combines desktop PC stand-by power supplies with the main PC desktop power supplies prior to such combination by the Company, demand for the Company's products could be materially adversely affected. Customer Concentration and Competing Products from Customers. The Company's end user base is highly concentrated and a relatively small number of OEMs, directly or indirectly through merchant power supply manufacturers, account for a significant portion of the Company's net revenues. The Company estimates that its top ten customers, including distributors which resell to large OEMs and merchant power supply manufacturers, accounted for approximately 67% of the Company's net revenues for both of the nine month periods ended September 30, 1998 and 1997. The Company expects that it will continue to be dependent upon a relatively limited number of customers for a significant portion of its net revenues in future periods, although no customer is presently obligated either to purchase a specified amount of products or to provide the Company with binding forecasts of product purchases for any period. The reduction, delay or cancellation of orders from one or more of the Company's significant customers, or the discontinuance of the Company's products by the Company's end users, could materially and adversely affect the Company's business, financial conditions and results of operations. The Company has experienced such effects in the past and there can be no assurance that any of the Company's customers will not reduce, cancel or delay orders in the future. Dependence on Wafer Suppliers. The Company outsources all of its semiconductor manufacturing and product assembly except for testing and finishing. The Company has supply arrangements for the production of wafers with Matsushita Electronics Corporation and an affiliate of Matsushita ("MEC"), and OKI Electric Industry Co., Ltd. ("OKI"). Although certain aspects of the Company's relationships with MEC and OKI are contractual, many important aspects of these relationships depend on the continued cooperation of these strategic partners and, in many instances, the parties' course of conduct deviates from the literal provisions of the contracts. There can be no assurance that the Company and its strategic partners will continue to work together successfully in the future or that either MEC or OKI will not seek an early termination of its wafer supply agreement with the Company. The Company's wafer supply contract with OKI was renewed on October 1, 1998. The term of this contract is for five years, expiring in September 2003. There can be no assurance that the Company at that time will be able to reach an agreement with OKI to extend the term of its wafer supply agreement. The Company's wafer supply contract with MEC terminates in June 2000. There can be no assurance that the Company will be able to reach an agreement with MEC to extend the term of its wafer supply agreement. The Company's failure to reach, in a timely fashion, an extension of either agreement or to enter into an arrangement with another manufacturer, could result in material disruptions in supply. Certain contractual provisions limit the conditions under which the Company can enter into such arrangements with other Japanese manufacturers or their subsidiaries during the term of the agreement with MEC. In the event of a supply disruption with OKI or MEC, if the Company were unable to qualify alternative manufacturing sources for existing or new products in a timely manner or if such sources were unable to produce wafers with acceptable manufacturing yields, the Company's business, financial condition and operating results would be materially and adversely affected. From time to time in the past, the Company has been unable to fully satisfy customer requests for its products. Any significant disruptions in deliveries of the Company's products to its customers would materially and adversely affect the Company's business and operating results. Risks of Outside Manufacturing and Assembly; Sole Source Risks. The Company depends on MEC and OKI to produce wafers, and independent subcontractors to assemble finished products, at acceptable yields and to deliver them to the Company in a timely manner. To the extent the wafer foundries do not achieve acceptable manufacturing yields or they experience product shipment delays, the Company's financial condition or results of 15 operations would be materially adversely affected. The Company's IC assembly process requires a sole source high-voltage molding compound that is difficult to process. This compound and its required processes, together with the other non-standard materials and processes needed to assemble the Company's products, require a more exacting level of process control than normally required for standard packages. Unavailability of the sole source compound or problems with the assembly process can materially adversely affect yields and cost to manufacture. Good production yields are particularly important to the Company's business and financial results, including its ability to meet customers' demand for products and to maintain profitability. As the Company continues to increase its product output, there can be no assurance that the Company's foundries and assemblers will not experience a decrease in yields. Moreover, there can be no assurance that acceptable yields will be maintainable in the future. Risks of International Sales. Sales to customers outside of the United States represented 82% and 81% for the nine months ended September 30, 1998 and 1997, respectively. These sales involve a number of inherent risks, including imposition of government controls, currency exchange fluctuations, potential insolvency of international distributors and representatives, reduced protection for intellectual property rights in some countries, the impact of recessionary environments in economies outside the United States, political instability, generally longer receivables collection periods, tariffs and other trade barriers and restrictions, and the burdens of complying with a variety of foreign laws. Furthermore, because substantially all of the Company's foreign sales are denominated in U.S. dollars, increase in the value of the dollar would increase the price in local currencies of the Company's products in foreign markets and make the Company's products relatively more expensive and less price competitive than competitors' products that are priced in local currencies. The Company is exposed to additional risks to the extent that the products of its customers are subject to foreign currency or other international risks. There can be no assurance that these factors will not have an adverse effect on the Company's future international sales and, consequently, on the Company's business, financial condition or operating results. New Products and Technological Change. The Company's future success depends in significant part upon its ability to develop new ICs for high-voltage power conversion for existing and new markets, to introduce such products in a timely manner and to have such products selected for design into products of leading manufacturers. The development of these new devices is highly complex, and from time to time the Company has experienced delays in completing the development of new products. There can be no assurance that the Company will be able to adjust to changing market demands as quickly and cost-effectively as necessary to compete successfully. Furthermore, there can be no assurance that the Company will be able to introduce new products in a timely and cost-effective manner or in sufficient quantities to meet customer demand or that such products will achieve market acceptance. The Company's or its customers' failure to develop and introduce new products successfully and in a timely manner would materially adversely affect the Company's business, financial condition or operating results. Lengthy Sales Cycle. The Company's products are generally incorporated into a customer's products at the design stage. However, customer decisions to use the Company's products (design wins), which can often require significant expenditures by the Company without any assurance of success, often precede volume sales, if any, by a year or more. If a customer decides at the design stage not to incorporate the Company's products into its product, the Company will not have another opportunity for a design win with respect to that product for many months or years. Because of such a lengthy sales cycle, the Company may experience a delay between increasing expenses for research and development and its sales and marketing efforts and the generation of volume production revenues, if any, from such expenditures. Failure by the Company to timely develop and introduce products that are incorporated into its customers' products could have a material adverse effect on the Company's business, financial condition or results of operations. Product Quality, Performance and Reliability. The fabrication and assembly of ICs is a highly complex and precise process. The Company expects that its customers will continue to establish demanding specifications for quality, performance and reliability that must be met by the Company's products. ICs as complex as those offered by the Company often encounter development delays and may contain undetected defects or failures when first introduced or after commencement of commercial shipments. The Company has from time to time in the past experienced product quality, performance or reliability problems. There can be no assurance that defects or failures relating to the Company's product quality, performance and reliability will not occur in the future or that such defects or failures will not have a material adverse effect on the Company's operating results. 16 Competition. The high-voltage power supply industry is intensely competitive and characterized by extreme price sensitivity. Accordingly, the most significant competitive factor in the target markets for the Company's products is cost effectiveness. The Company's products face competition from alternative technologies, primarily discrete switchers. The Company believes that at current pricing, the TOPSwitch families of products offer favorable cost performance benefits compared to discrete switchers in many high-volume applications. However, any significant erosion in the price of discrete components, such as high voltage Bipolar and MOSFET transistors and PWM controller ICs, could adversely affect the cost effectiveness of the TOPSwitch products. Also, older alternative technologies to switchers are more cost- effective than switchers that use the Company's TOPSwitch products in certain power ranges for certain applications. In the Company's continuing efforts to enhance the cost effectiveness of its solutions in the lower power range for power supplies, it announced the TinySwitch family of ICs in September 1998. TinySwitch ICs are primarily targeted at the sub 10 watt power range and incorporate the Company's new EcoSmart technology which is designed to reduce energy leakage from power supplies. There can be no assurance that the Company will be successful in these efforts. In addition, the Company faces competition from MEC, which currently manufactures and sells its versions of the Company's TOPSwitch families of products under the right (exclusive during the term of the contract as to other Japanese companies, except OKI, and their subsidiaries) granted by the Company to manufacture and sell products using the Company's technology to Japanese companies worldwide and to subsidiaries of Japanese companies located in Asia. Beginning in April 1997, the Company agreed not to sell its products to new customers in Japan. The Company's TOPSwitch product families have also begun to meet additional competition from hybrid and single high-voltage ICs similar to TOPSwitch. These competing products are being developed or have been developed and are being produced by companies such as Motorola, STMicroelectronics, Samsung and Sanken. The Company expects competition to increase as Motorola, STMicroelectronics, Samsung, Sanken and possibly other companies develop and introduce new products. The Company's ability to compete in its target markets also depends on such factors as the timing and success of new product introductions by the Company and its competitors, the pace at which the Company's customers incorporate the Company's products into their end user products, availability of wafer fabrication and finished good manufacturing capability, availability of adequate sources of raw materials, protection of Company products by effective utilization of intellectual property laws and general economic conditions. There can be no assurance that the Company's products will continue to compete favorably or that the Company will be successful in the face of increasing competition from new products and enhancements introduced by existing competitors or new companies entering this market. Failure of the Company to compete successfully in the high-voltage power supply business would materially and adversely affect the Company's business, financial condition and results of operations. Dependence on Proprietary Technology. The Company's future success depends in part upon its ability to protect its intellectual property, including patents, trade secrets, and know-how, and to continue its technological innovation. There can be no assurance that the steps taken by the Company to protect its intellectual property will be adequate to prevent misappropriation or that others will not develop competitive technologies or products. The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. While the Company has not received formal notice of any infringement of the right of any third party, questions of infringement in the semiconductor field involve highly technical and subjective analyses. Litigation may be necessary in the future to enforce the Company's patents and other intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity, and there can be no assurance that the Company would prevail in any future litigation. In addition, the laws of certain foreign countries in which the Company's technology is or may in the future be licensed may not protect the Company's intellectual property rights to the same extent as the laws of the United States, thus increasing the possibility of infringement of the Company's intellectual property. Motorola Litigation. In July 1998, the Company filed a complaint 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 that complaint, and filed a new complaint in the U.S. District Court, District of Delaware, alleging that Motorola has infringed and continues to infringe on two of the Company's circuit patents. The Company seeks, among other things, an order enjoining Motorola from infringing on the Company's patents and an award for damages resulting from the alleged infringement. In October 1998, Motorola asserted various 17 counterclaims against the Company alleging that the Company is infringing on certain of Motorola's patents. The Company believes that Motorola's counterclaims are without merit and intends to vigorously defend itself against such claims. Litigation may be necessary to resolve the claims asserted by the Company against Motorola, and any claims which Motorola may assert in the future against the Company, and to defend, enforce and protect the Company's intellectual property rights. There can be no assurance that the Company will prevail in any litigation with Motorola, or any other party. Any such litigation, whether or not determined in the Company's favor or settled by the Company, would be costly and would divert the efforts and attention of the Company's management and technical personnel from normal business operations, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any litigation between the Company and Motorola could delay the Company's ability to have its products incorporated into a customer's products at the design stage. Delays in customers' decisions to use the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. Adverse determinations in any litigation could result in the loss of certain of the Company's proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties, or prevent the Company from manufacturing and selling certain of its products or licensing its technology, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Key Personnel. The Company's success depends to a significant extent upon the continued service of its executive officers and other key management and technical personnel, and on its ability to continue to attract, retain and motivate qualified personnel, such as experienced systems applications engineers. The loss of the services of one or more of the Company's engineers, executive officers or other key personnel or the Company's inability to recruit replacements for such personnel or to otherwise attract, retain and motivate qualified personnel could have a material adverse effect on the Company's business, financial condition or operating results. The Company does not have long-term employment contracts with any of its employees. Management of Growth. The Company has experienced a period of rapid growth and expansion which has placed, and continues to place, a significant strain on its resources. To accommodate this growth, the Company will be required to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of its accounting and other internal management systems, all of which may require substantial management efforts. There can be no assurance that such efforts can be accomplished successfully. Year 2000 Compliance. The Company is aware of the issues associated with the programming code in existing computer systems and software products as the year 2000 approaches. Computer programs that are written using two digits rather than four digits to define the applicable year, may have date-sensitive software and, for instance, may recognize a date using 00 as the year 1900 rather than the year 2000 ("Date Code Dependency"). Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is in the process of defining costs, issues and uncertainties associated with making the Company's internal-use software applications compliant with the Year 2000. In general, the Company expects to resolve the Year 2000 issues through planned replacement upgrades of its software applications. The Company has evaluated the functionality of its products with respect to Year 2000 Date Code Dependencies and has determined that its products have no Date Code Dependencies. The Company's ICs are installed by third party manufacturers in their products. Accordingly, if any of those products have Date Code Dependencies, there could be unforeseen Year 2000 compliance problems with some of the Company's customers products, which could result in such customers ordering less products from the Company. Any such decrease in customers' orders would have a material adverse effect on the Company's operating results and financial condition. In addition, some of the Company's customers may experience Date Code Dependency problems that result in disruption of their internal operations, which could delay their purchases of the Company's products, and result in a material adverse effect on the Company's operating results and financial condition. The Company also is subject to risks to the extent that suppliers of products, services and systems to the Company have business systems or products that have Date Code Dependencies. Where practicable, the Company will attempt to mitigate its risks with respect to the failure of suppliers to be Year 2000 compliant. In the event that suppliers are not Year 2000 compliant, the Company will seek to qualify alternative sources of supplies. In the event the Company's current suppliers are not Year 2000 compliant, or the Company is unable to qualify in a timely 18 manner suppliers that are Year 2000 compliant, the Company's results of operations and financial condition could be materially adversely affected. Additionally, litigation may arise from situations in which the Company has minimum purchase commitment contracts with suppliers that are not Year 2000 compliant. If any such third party suppliers are unable to provide the Company with products, services or systems that meet Year 2000 requirements in a timely manner, the Company's operating results and financial condition could be materially adversely affected. Management does not expect the Year 2000 issues to have a material impact on the Company's business or future results of operations. Management also believes that the total costs to become Year 2000 compliant will be immaterial to the Company's financial condition or results of operations. However, if the planned replacement upgrades to its software applications are not made, or are not completed on a timely basis, the Year 2000 issues could have a material impact on the operations of the Company. The Company currently expects that its internal-use software applications will be Year 2000 compliant by no later than June 1999, before any Date Code Dependencies within the Company's internal systems would have a material adverse impact on the Company's operations. The cost of the project and the date on which the Company believes it will complete the Year 2000 upgrades are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Year 2000 compliance is an issue for virtually all businesses, whose computer systems and applications may require significant hardware and software upgrades or modifications. Companies owning and operating such systems may plan to devote a substantial portion of their information systems spending to fund such upgrades and modifications and divert spending away from ICs for use in AC to DC power conversion. Such changes in customers' spending patterns could have a material adverse impact on the Company's sales, operating results and financial condition. Possible Volatility of Stock. The stock market has from time to time experienced significant price and volume fluctuations which have particularly affected the market prices of the stock of high technology companies, and which may be unrelated to the operating performance of particular companies. Since its initial public offering in December 1997, the market price of the Company's common stock has ranged from a high of $18.50 to a low of $7.75 per share. Factors such as technology and product announcements by the Company or by competitors, disputes relating to patents and proprietary rights, and failures or delays in the Company's development program may have a significant effect on the market price of the Company's common stock. 19 PART II. OTHER INFORMATION ITEM 1. 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 that complaint, and filed a new complaint in the U.S. District Court, District of Delaware, alleging that Motorola has infringed and continues to infringe on two of the Company's circuit patents. The Company seeks, among other things, an order enjoining Motorola from infringing on the Company's patents and an award for damages resulting from the alleged infringement. In October 1998, Motorola asserted various counterclaims against the Company alleging that the Company is infringing on certain of Motorola's patents. The Company believes that Motorola's counterclaims are without merit and intends to vigorously defend itself against such claims. Litigation may be necessary to resolve the claims asserted by the Company against Motorola, and any claims which Motorola may assert in the future against the Company, and to defend, enforce and protect the Company's intellectual property rights. There can be no assurance that the Company will prevail in any litigation with Motorola, or any other party. Any such litigation, whether or not determined in the Company's favor or settled by the Company, would be costly and would divert the efforts and attention of the Company's management and technical personnel from normal business operations, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any litigation between the Company and Motorola could delay the Company's ability to have its products incorporated into a customer's products at the design stage. Delays in customers' decisions to use the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. Adverse determinations in any litigation could result in the loss of certain of the Company's proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties, or prevent the Company from manufacturing and selling certain of its products or licensing its technology, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits. The following exhibits are attached hereto and filed herewith: 10.21* Wafer Supply Agreement between the Company and OKI, dated October 1, 1998. 10.22 Master Equipment Lease Agreement between the Company and Metlife Capital Limited Partnership, dated July 31, 1998. 27.1 Financial Data Schedule. * This Exhibit has been filed separately with the Commission pursuant to an application for confidential teatment. The confidential portions of this Exhibit have been omitted and are marked by an asterisk. b. Reports on Form 8-K. None. 20 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: November 10, 1998 By: ____________________________________ Robert G. Staples Chief Financial Officer 21 EX-10.21 2 WAFER SUPPLY AGREEMENT EXHIBIT 10.21 WAFER SUPPLY AGREEMENT ---------------------- THIS AGREEMENT, made and entered into as of this 1st day of October, 1998 (the "Effective Date") by and between: (1) Power Integrations, Inc., a Delaware corporation having its principal place of business at 477 N. Mathilda Ave; Sunnyvale, CA U.S.A. ("PI"); and (2) OKI ELECTRIC INDUSTRY CO., LTD., a Japanese corporation having its registered head office at 7-12, Toranomon 1-chome, Minato-ku, Tokyo 105-8460, Japan ("OKI"). WITNESSETH: WHEREAS, OKI is engaged in providing wafer foundry services for IC companies; and WHEREAS, PI is engaged in the design, development, marketing and sale of various IC products for use in power source applications; and WHEREAS, PI desires to acquire from OKI fabrication and supply of wafers of certain IC products, and OKI is willing to supply such wafers to PI within the limitation of available production capacity of OKI. NOW, THEREFORE, in consideration of the above premises and the mutual covenants of the parties contained herein, PI and OKI hereby agree as follows: Article 1. (Definitions) - --------- ----------- When used throughout this Agreement, each of the following terms shall have the meaning indicated below: 1.1 PRODUCTS: Any and all IC products of PI which will be processed in --------- accordance with the PI PROCESS. 1.2 WAFERS: Non-probed four (4) and/or five (5) inch silicon wafers ------- produced during the PILOT PRODUCTION and VOLUME PRODUCTION which meet the COMMON Page 1 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. SPECIFICATION. 1.3 PILOT PRODUCTION: The production by OKI of WAFERS for the purpose of ----------------- evaluation by PI. 1.4 VOLUME PRODUCTION: The production by OKI of WAFERS for the volume ------------------ production of PRODUCTS. 1.5 PI PROCESS: PI's process technologies, which are implemented in the ----------- OKI wafer fabrication facility to produce the WAFERS, and of which the detailed specification is specified in the COMMON SPECIFICATION plus any improvements made by PI or jointly by PI and OKI during the term of the Agreement. 1.6 OKI PROCESS: OKI's process technologies developed exclusively by OKI ------------ and implemented in the OKI wafer fabrication facility to produce the WAFERS. 1.7 COMMON SPECIFICATION: The specifications for the production, delivery --------------------- and acceptance of the WAFERS which are defined in the EXHIBIT C attached hereto. 1.8 INDIVIDUAL SALES CONTRACTS: Individual contracts of sale and purchase of --------------------------- the WAFERS that will be concluded between OKI and PI pursuant to this Agreement. INDIVIDUAL SALES CONTRACTS are only for the purposes of establishing the quantity, delivery dates, and pricing of WAFERS, and no other terms and conditions stated in any INDIVIDUAL SALES CONTRACTS have any force or effect. The terms and conditions of this Agreement apply to all INDIVIDUAL SALES CONTRACTS. 1.9 LWS AGREEMENT: The Licensing and Wafer Supply Agreement, dated June 18, -------------- 1993, between OKI and PI, including all amendments. 1.10 SUBSIDIARY: Any corporation, company or other entity in which OKI or PI, ----------- as the case may be, owns and/or controls, directly or indirectly, now or hereafter, more than fifty percent (50%) of the outstanding shares of stock entitled to vote for the election of directors or their equivalents regardless of the form thereof (other than any shares of stock whose voting rights are subject to restriction); provided, however, that any entity which would be a SUBSIDIARY by reason of the foregoing shall be considered a SUBSIDIARY only so long as such ownership or control exists. 1.11 OKI: OKI and any of its SUBSIDIARIES unless otherwise expressly provided. ---- 1.12 PI: PI and any of its SUBSIDIARIES unless otherwise expressly provided. --- Page 2 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 1.13 CONFIDENTIAL INFORMATION: Technical information, or other non-public ------------------------- information relating to PI and OKI, whether in a man-readable or machine- readable form and whether recorded on paper, tape, diskette or any other media, which is disclosed by the disclosing party to the receiving party, and (i) which is designated in writing, by appropriate legend, as confidential or, (ii) if disclosed orally is identified as confidential information at the time of disclosure and a summary of which is confirmed in writing within thirty (30) days after oral disclosure and designated, by appropriate legend, as confidential. Not withstanding the foregoing, all information generated by the activities and actions of OKI under this Agreement on PI's behalf or any information including all PI INTELLECTUAL --------------- PROPERTY received from PI by OKI to effect the terms of this Agreement -------- shall also be considered PI's CONFIDENTIAL INFORMATION unless explicitly agreed to be exempted by PI in writing. 1.14 OKI IMPROVEMENTS: Any modification or improvement to the OKI PROCESS or ----------------- the PI PROCESS, developed exclusively by OKI, during the term of the Agreement and all OKI improvements under the LWS Agreement. 1.15 JOINT IMPROVEMENTS: Any and all enhancements, modifications, derivative ------------------ works, improvements and/or changes made by OKI in conjunction with PI to the PI PROCESS, the COMMON SPECIFICATION, the MASK TOOLING SETS, and/or the PI CONFIDENTIAL INFORMATION. 1.16 MASK TOOLING SETS: Those MASK TOOLING SETS delivered by PI to OKI pursuant ------------------ to this Agreement. 1.17 PI INTELLECTUAL PROPERTY: The PI PROCESS, the COMMON SPECIFICATION, the ------------------------ MASK TOOLING SETS, the JOINT IMPROVEMENTS, and all INTELLECTUAL PROPERTY RIGHTS in the foregoing. 1.18 INTELLECTUAL PROPERTY RIGHTS: Copyrights, patents, trade secrets, moral ---------------------------- rights, know-how and other intellectual or proprietary rights of any kind. Article 2. (Foundry Commitment and Forecasts) - --------- -------------------------------- 2.1 Both OKI and PI desire to enter into a relationship under which they will act in good faith and cooperate to achieve their objectives to their mutual benefit as set forth in this Agreement. Page 3 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 2.2 OKI agrees to commit to PI the foundry capacity ("FOUNDRY CAPACITY") set forth in EXHIBIT A attached hereto until March 31, 1999. Each January, beginning in 1999, OKI and PI will meet to review PI `s non-binding twelve (12) month forecast of wafer orders ("PI ANNUAL FORECAST") for the upcoming OKI fiscal year (April 1 through March 31 of each year) and OKI's FOUNDRY CAPACITY for the upcoming OKI fiscal year. For the period beginning on April 1st, 1999 and annually on April 1st thereafter during the term of this Agreement, OKI will commit a FOUNDRY CAPACITY for the current OKI fiscal year, at the OKI plant specified per Section 3.3 , in an amount no less than * Percent (*%) of PI's total wafer purchases during the previous OKI fiscal year, and PI will submit the PI ANNUAL FORECAST on April 1st. During the OKI fiscal year, OKI shall accept up to a * (*%) upside request over the current FOUNDRY CAPACITY upon a three (3) month written advance notice from PI. OKI can request PI to negotiate to reduce the committed FOUNDRY CAPACITY, for the then current OKI fiscal year, if OKI and PI determine that PI will not order at least *% of the PI ANNUAL FORECAST. Any negotiated reduction in FOUNDRY CAPACITY must be agreed to by PI in writing. 2.3 During the term of this Agreement, PI shall provide OKI on or before a mutually agreed day of each calendar month a written forecast ("PI MONTHLY FORECAST") of the quantity of the WAFERS of each PRODUCT to be manufactured and delivered (if any) within the period of the following six (6) calendar months which shall fall within the effective term of this Agreement, provided that such forecast shall be in conformity with the FOUNDRY CAPACITY. 2.4 PI must order at least the quantity of WAFERS forecasted in the first two (2) months of the PI MONTHLY FORECAST unless OKI agrees to any change. PI may revise the quantity for each of the last four (4) months of each PI MONTHLY FORECAST without penalty or charge. 2.5 In the event of any direct or indirect governmental intervention in Japan or the United States or in any country of destination of the WAFERS purchased by PI, which intervention may virtually or legally render infeasible supply of the full quantity of the WAFERS ordered by PI, then OKI shall be obligated to supply only such quantity as may Page 4 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. feasibly and legally be supplied without any liability to PI and PI will have the right to terminate this agreement without liability, effective upon written notice to OKI. 2.6 At the request of OKI, PI and OKI shall discuss allocating the production of the WAFERS from one plant of OKI to another. Article 3. (Sale and Purchase of WAFERS; INTELLECTUAL PROPERTY RIGHTS) - --------- --------------------------------------------------------- 3.1 As implementation of the foundry services provided in the preceding Article, PI shall purchase from OKI, and OKI shall sell to PI, those WAFERS ordered pursuant to the terms and conditions of this Agreement, which shall be non-probed WAFERS. 3.2 Subject to the provisions of Section 3.1 above and 5.2 below, PI shall submit to OKI a purchase order for the WAFERS which shall be substantially in line with the binding forecast provided for in Section 2.4 above. Once submitted, such purchase order shall be irrevocable except as set forth in Section 2.4 and 2.5 above. All purchase orders shall be subject to acceptance by OKI through issuance of a written confirmation within five (5) business days of receipt of the purchase order. Upon such written confirmation, the terms of the purchase order and confirmation relating to total quantity, delivery time and pricing shall constitute a binding INDIVIDUAL SALES CONTRACT which incorporates all of the terms and conditions of this Agreement except to the extent expressly modified by the INDIVIDUAL SALES CONTRACT. The mix of PRODUCTS and the quantity of WAFERS allocated per each of the PRODUCTS in any INDIVIDUAL SALES CONTRACT can be modified at any time, prior to the week the WAFERS ordered pursuant to such Individual Sales Contract will be started, by PI with confirmation from OKI so long as the total quantity of all WAFERS is not less. 3.3 The WAFERS sold hereunder shall be processed at OKI's * plant or other plants of OKI as mutually agreed in writing by OKI and PI. 3.4 The sale and purchase of the WAFERS may be made between PI and OKI or any of their respective SUBSIDIARIES pursuant to the terms and conditions of this Agreement. 3.5 PI is and shall remain the sole and exclusive owner of all right, title and interest in the PI INTELLECTUAL PROPERTY. Subject to all of the terms and conditions of this agreement, PI grants OKI a limited, non-exclusive license in the PI INTELLECTUAL Page 5 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. PROPERTY for the sole purpose of using it internally to manufacture WAFERS for PI in accordance with the terms and conditions of this Agreement. OKI may not use the PI INTELLECTUAL PROPERTY for any other purpose or license it to any party, unless a separate written agreement for any such rights is executed by the parties. 3.6 OKI hereby does and will irrevocably and unconditionally transfer and assign to PI all of OKI's right, title and interest worldwide in the JOINT IMPROVEMENTS. OKI will promptly disclose in writing all OKI IMPROVEMENTS to PI promptly upon their creation. OKI shall take all reasonable actions, at PI's expense, to assist PI in perfecting and enforcing its rights in the JOINT IMPROVEMENTS. Such actions shall include but not be limited to execution of assignments, patent applications and other documents. Subject to all of the terms and conditions of this agreement, PI hereby grants to OKI a non-exclusive, irrevocable, perpetual, royalty-free, non- transferable, worldwide, right and license, under all INTELLECTUAL PROPERTY RIGHTS to use, modify, reproduce, (but sub-license only to an OKI SUBSIDIARY) the JOINT IMPROVEMENTS for OKI's internal use only. 3.7 In the event that any portion of Section 3.6 is declared invalid or illegal according to any applicable law, (a) OKI hereby waives and agrees never to assert such rights, including any moral rights or similar rights, against PI or PI's licensees and (b) the parties hereby modify such portion, effective upon such declaration, in such manner as shall secure for PI an exclusive, irrevocable, perpetual, worldwide, fully paid and royalty-free license under all INTELLECTUAL PROPERTY RIGHTS, with rights to sublicense through multiple levels of sublicensees, to use, modify, reproduce, create derivative works of, distribute, publicly perform and publicly display by all means now known or later developed, such rights in the JOINT IMPROVEMENTS to the maximum extent permitted by applicable law. 3.8 OKI shall be the sole and exclusive owner of all right, title and interest in the OKI IMPROVEMENTS. OKI hereby grants to PI a non-exclusive, irrevocable, perpetual, royalty-free, non-transferable, worldwide, right and license, under all INTELLECTUAL PROPERTY RIGHTS to use, modify, reproduce, distribute and otherwise exploit in any manner the OKI IMPROVEMENTS as part of the PI PROCESS and any modifications Page 6 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. thereto. Without any consent of OKI, PI may sublicense the OKI IMPROVEMENTS to PI's SUBSIDIARY so long as the sublicense provides for the protection of OKI's Confidential Information on terms not less protective of OKI's rights than those set forth the in the Agreement. 3.9 OKI agrees not to use the PI INTELLECTUAL PROPERTY or any license under this Agreement in whole or in part or knowledge gained by OKI through producing WAFERS for PI to develop an equivalent or competing process or other product or service that would compete with PI. Article 4. (Mask Tooling Sets) - --------- ----------------- 4.1 The mask tooling sets for WAFERS of any PRODUCT shall be supplied by PI to OKI one (1) week before its commencement of the WAFERS fabrication at no cost to OKI. If, upon OKI's examination, the MASK TOOLING SETS are found to be defective or not in conformance with the COMMON SPECIFICATION, OKI shall immediately notify PI in detail as to such defects or non-conformity, and PI shall either provide corrected MASK TOOLING SETS at PI's expense or, notwithstanding any other provision of this Agreement, PI can cancel the INDIVIDUAL SALES CONTRACT for the affected WAFERS, without any liability except for affected WAFER work in progress ("WIP") and inventory, upon written notice to OKI. The MASK TOOLING SETS shall be and remain PI's CONFIDENTIAL INFORMATION. Article 5. (Pilot Production and Minimum Order Quantity) - --------- ------------------------------------------- 5.1 PILOT PRODUCTION ---------------- 5.1.1 For the PILOT PRODUCTION, PI shall, if PI's desires to, place an order with OKI for a minimum of * (*) WAFER starts (one (1) pilot lot) or multiples thereof per each PRODUCT. 5.1.2 The output will be shipped to PI if the WAFERS output is at least * percent (*%) of the ordered quantity. If the WAFERS output is less than * percent (*%) of ordered quantity, OKI will inform PI of the output quantity of the WAFERS and if PI requires to have the shortage covered, OKI will re-input the WAFERS to cover Page 7 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. the shortage of quantity at no additional cost to PI. 5.2 VOLUME PRODUCTION ----------------- 5.2.1 For the VOLUME PRODUCTION, PI shall place an order with OKI for a minimum of * (*) WAFER starts (one (1) lot) or multiples thereof per each PRODUCT and OKI will ship monthly orders in quantities not less than * percent (*%) of the quantities ordered of each PRODUCT. 5.2.2 The orders of PI for the VOLUME PRODUCTION shall be subject to the provisions of Section 3.2 above. Article 6. (Delivery) - --------- -------- 6.1 The terms of delivery of the WAFERS shall be FOB Tokyo port or FCA Tokyo airport (as such terms are defined in Incoterms 1990). 6.2 The title and risk of loss relating to the WAFERS delivered by OKI to PI shall transfer from OKI to PI at such time and point as provided in Incoterms 1990 relating to such FOB or FCA terms. PI shall have the right to designate a freight forwarder, subject to OKI's reasonable approval. 6.3 OKI will deliver WAFERS within the number of calendar days after receipt of PI's purchase order as specified in the order. In the event that OKI foresees the delay of the delivery schedule of WAFERS, OKI shall make a best effort to correct any delay and OKI shall promptly notify PI of such delay and submit to PI the new delivery schedule. PI will have the right to cancel, without liability, the INDIVIDUAL SALES CONTRACT for the delayed WAFERS if the delay is greater than thirty (30) days. 6.4 OKI shall pack the WAFERS in accordance with packing standards which shall be defined in the COMMON SPECIFICATION attached hereto. Article 7. (Test and Inspection) - --------- ------------------- 7.1 PI shall conduct incoming inspection according to the COMMON SPECIFICATION. This inspection shall be regarded as final in terms of quality, quantity and other conditions of the WAFERS supplied to PI subject to OKI's warranty as defined in Section 11.1. Page 8 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 7.2 PI shall notify OKI of a result of inspection judgment within * (*) business days after the date of receipt by PI. Should PI fail to so notify within the said * (*) business days, the shipment lot shall be deemed to have been accepted by PI. PI will owe OKI payment only for the quantity of wafers that have been accepted by PI. 7.3 OKI shall not be held responsible for the defects and failures which are attributable to the design, test and assembly by PI of the PRODUCTS. 7.4 OKI shall not be held responsible for the defects, failures and yield problems of the non-probed WAFERS if the WAFERS meet the specifications set forth in the COMMON SPECIFICATION. Article 8. (Process and Specification Changes) - --------- --------------------------------- 8.1. OKI shall notify PI in writing as soon as possible, in advance and in accordance with the COMMON SPECIFICATION, of process changes which require PI's change in data-base or which would affect the quality, reliability, form, fit or function of the PRODUCTS in order to receive PI's prior written approval of the process change. PI will have the right to cancel, without liability, any INDIVIDUAL SALES CONTRACT affected by the process change. 8.2. PI shall have sole responsibility for the control, maintenance, distribution and modification of the COMMON SPECIFICATION including but not limited to the addition and maintenance of applicable process, inspection, quality and procurement specifications. PI will notify OKI of any changes to the COMMON SPECIFICATION by amending Exhibit C and attaching the relevant specification or documentation. OKI will acknowledge acceptance of the COMMON SPECIFICATION in writing and OKI's acceptance of the COMMON SPECIFICATION will not be unreasonable withheld. In the case of any issue with the COMMON SPECIFICATION, OKI agrees that PI is the ultimate authority on the COMMON SPECIFICATION. PI and OKI shall specify in advance in writing the scope and purpose of any JOINT IMPROVEMENT project for the purpose of pre-defining to what extent and specifically which process technology will be considered a JOINT IMPROVEMENT. OKI's rights under Section 3.6 shall not extend to any process technology not so defined as a Joint Improvement. Page 9 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Article 9. (Price and Charge) - --------- ----------------- 9.1 The prices of the WAFERS of each PRODUCT, which are produced both in the PILOT PRODUCTION and the VOLUME PRODUCTION are set forth in EXHIBIT B attached hereto. Any modifications thereto must be agreed upon by OKI and PI in writing, either as an amendment to EXHIBIT B or as part of an INDIVIDUAL SALES CONTRACT. OKI and PI may jointly review and revise the WAFERS price within * or upon a material change to the COMMON SPECIFICATION. 9.2 In the event of any direct or indirect intervention of the Japanese, the United States and/or any other relevant Governments, including the legislative, administrative and judicial branches thereof, which may virtually or legally disallow a price at which the WAFERS shall be supplied under this Agreement, then OKI shall not be obligated to abide by such price without any liability to PI and PI will have the right to terminate this agreement without liability, effective upon written notice to OKI. Article 10. (Payment) - ---------- ------- Payment for the WAFERS shall be by telephonic transfer * (*) days after receipt of invoice and secured by a standby letter of credit to be opened at a first class bank acceptable to OKI. OKI agrees to negotiate terms or alternate forms of payment as proposed by PI. Article 11. (Warranty, Indemnification and Improvements) - ---------- ------------------------------------------ 11.1 OKI warrants that the WAFERS sold to PI under this Agreement and any Wafers provided to PI under the LWS Agreement within the * (*) months before the Effective Date of this Agreement will conform to their agreed specifications set forth in COMMON SPECIFICATION attached hereto. OKI's warranty provided in this Section shall not apply in case any non- conformity or other defect is attributable to the design, assembly or test of PI. PI shall notify OKI in writing of any such non-conformity or defect of said WAFERS within three (3) months after the acceptance of the WAFERS by PI per Section 7.2 above. OKI's sole obligations under this warranty are limited to, at PI's option, (i) Page 10 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. replacing or reworking any said WAFERS which shall be returned to OKI's manufacturing facility with transportation charges prepaid, or (ii) OKI crediting an amount equal to the purchase price of said WAFERS. 11.2 OKI shall defend, indemnify and hold harmless PI, its officers, directors, employees and representatives from and against any claim, demand, cause of action, debt, or liability, including reasonable attorneys' fees, relating to or arising from allegations that the OKI PROCESS, OKI IMPROVEMENTS and any OKI contributions to the JOINT IMPROVEMENTS used to produce WAFERS or the resulting WAFERS under this Agreement or under the LWS Agreement infringes any patent, copyright, trade secret or other right of any kind of a third party; provided that OKI is promptly notified in writing of the action and is allowed to assume and control the defense. OKI shall pay all damages and costs awarded therein, but shall not be responsible for any compromise or settlement made without OKI's consent. 11.3 EXCEPT AS EXPRESSLY STATED HEREIN, NO EXPRESS OR IMPLIED WARRANTIES ARE MADE BY OKI RELATING TO THE WAFERS, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. PI MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND WITH REGARD TO ANY OF THE PI INTELLECTUAL PROPERTY. 11.4 PI shall defend, indemnify and hold harmless OKI, its officers, directors, employees and representatives from and against any claim, demand, cause of action, debt, or liability, including reasonable attorneys' fees, relating to or arising from allegations that the PI PROCESS and any PI contributions to the JOINT IMPROVEMENTS used to produce WAFERS infringes any patent, copyright, trade secret or other right of any kind of a third party; provided that PI is promptly notified in writing of the action and is allowed to assume and control the defense. PI shall pay all damages and costs awarded therein, but shall not be responsible for any compromise or settlement made without PI's consent. 11.5 OKI shall keep records for three (3) years, notwithstanding the termination of this Agreement, of each processed lot manufactured and summaries of process monitors. OKI agrees to permit such records to be examined and copied by PI, or PI's authorized Page 11 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. representative, upon reasonable prior written notice to OKI during normal business hours at OKI's offices. Such records shall be deemed PI's CONFIDENTIAL INFORMATION. Article 12. (Confidentiality) - ---------- --------------- 12.1 The receiving party shall use any CONFIDENTIAL INFORMATION acquired from the disclosing party in connection with this Agreement solely for the purposes of this Agreement. 12.2 For a period of * after the receipt of the CONFIDENTIAL INFORMATION, or during the effective term of this Agreement, which may be longer, the receiving party shall use a reasonable standard of care not to publish or disseminate the CONFIDENTIAL INFORMATION to any third party, except as otherwise provided herein. The receiving party shall have no obligation with respect to any CONFIDENTIAL INFORMATION received by it which the receiving party shall prove is: 12.2.1 Published or otherwise available to the public other than by a breach of this Agreement or any other agreement by the receiving party 12.2.2 Rightfully received by the receiving party hereunder from a third party not obligated under this Agreement or any other agreement, and without confidential limitation; 12.2.3 Known to the receiving party prior to its first receipt of the same from the disclosing party; 12.2.4 Independently developed by the receiving party; or 12.2.5 Furnished to a third party by the disclosing party without a similar restriction on the third party's right of disclosure. In the case that Recipient intends to disclose publicly or to a third party any CONFIDENTIAL INFORMATION under the previously defined exceptions above, the Recipient must first give the disclosing party written notice (30) thirty days prior to such a disclosure. CONFIDENTIAL INFORMATION approved in writing by the disclosing party for release by the receiving party without a confidentiality agreement designating the information as confidential will remove the receiving party's obligations to the CONFIDENTIAL INFORMATION. Page 12 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 12.3 If any CONFIDENTIAL INFORMATION is disclosed pursuant to the requirement or request of a governmental or judicial agency or disclosure is required by operation of law, such disclosure will not constitute a breach of this Agreement, provided that the receiving party shall promptly notify the disclosing party and seek a protective order with respect thereto reasonably satisfactory to the disclosing party to the extent available under applicable law. 12.4 The receiving party shall limit access to the CONFIDENTIAL INFORMATION only to such officers and employees of the receiving party who are reasonably necessary to implement this Agreement and only to such extent as may be necessary for such officers and employees to perform their duties. The receiving party shall be liable to cause all of such officers and employees to sign a secrecy agreement or to otherwise abide by the secrecy obligations provided in this Agreement. The receiving party shall maintain records of such officers and employees. 12.5 Confidential Information and all materials including, without limitation, documents, drawings, masks, specifications, models, apparatus, sketches, designs and lists furnished to the receiving party by and which are themselves identified to be or designated in writing to be the property of the disclosing party are and shall remain the property of the disclosing party and shall be returned to the disclosing party promptly at its request, including any copies. 12.6 Any CONFIDENTIAL INFORMATION disclosed by the disclosing party at any time under the LWS AGREEMENT shall be deemed for the purpose of this Article to be or have been disclosed pursuant to this Agreement as CONFIDENTIAL INFORMATION. PI may disclose information with respect to any OKI IMPROVEMENTS to the PI PROCESS to one or more third parties as PI Confidential Information and covered by a non-disclosure agreement with protection equivalent to this Agreement for the sole purpose of having such third parties provide PI with design, layout, foundry, assembly and testing services. 12.7 The COMMON SPECIFICATION will be CONFIDENTIAL INFORMATION for a period of * after the term of this Agreement and OKI agrees to use its best efforts to never make public the COMMON SPECIFICATION. Page 13 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 12.8 PI may request the confidential release of OKI`s CONFIDENTIAL INFORMATION to a customer of the PRODUCTS for purposes of such customer's evaluation or audit. OKI shall not unreasonably withhold approval of the release. Article 13. (Term and Termination) - ---------- -------------------- 13.1 This Agreement shall continue in full force and effect for a period of five (5) years from the Effective Date, unless earlier terminated as provided herein. 13.2 Notwithstanding anything to the contrary in Section 16.11 ("Force Majeure"), If any Japanese governmental agency, entity or authority requires (including through administrative guidance) any changes to this Agreement, PI may terminate this Agreement immediately if the changes are, in PI's sole discretion, detrimental to PI's interests or otherwise not reasonably acceptable to PI, without liability of any kind. 13.3 In the event that either party has committed a material breach of this Agreement, the other party shall have the right to terminate this Agreement by giving sixty (60) days' written notice of termination specifying any alleged material breach or breaches, such termination to become effective at the end of said period unless during said period all material breaches specified have been remedied or waived. 13.4 Either party shall also have the right to terminate this Agreement with immediate effect by giving written notice of termination to the other party at any time upon or after the occurrence of any of the following events with respect to such other party: 13.4.1 Insolvency, bankruptcy, reorganization or liquidation or filing of any application therefor, or other commitment of an affirmative act of insolvency, which is not promptly removed or stayed; 13.4.2 Attachment, execution or seizure of substantially all of the assets or filing of any application therefor which is not promptly released or stayed; 13.4.3 Assignment or transfer of that portion of the business to which this Agreement pertains to a trustee for the benefit of creditors; 13.4.4 Termination of its business or dissolution. 13.5 In the event either party shall be acquired or controlled, directly or indirectly, by, or shall be consolidated or merged into, any other company or corporation and reasonable Page 14 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. assurance satisfactory to the other party shall not be forthcoming in connection therewith as to the continued performance by the party's successor of its obligations under this Agreement or in the event of such other company or corporation being a direct and significant competitor of the other party, then the other party shall notify the party's successor immediately of such a determination in writing and will have the right for a period of ninety (90) days to request negotiations to cure any concerns and if no cure is obtained, to request to negotiate the orderly termination of this Agreement by giving written notice to the party's successor. 13.6 No failure or delay on the part of either party in exercising its right of termination hereunder for any one or more causes shall be construed to prejudice its rights of termination for such cause or any other or subsequent cause. 13.7 In the event of expiration or termination of this Agreement, within sixty (60) days after expiration or termination of this Agreement, the receiving party shall return to the disclosing party all media and documentation containing the CONFIDENTIAL INFORMATION and render unusable all said CONFIDENTIAL INFORMATION placed in any storage apparatus under the receiving party's control in accordance with the instruction of the disclosing party. 13.8 The termination or expiration of this Agreement shall not release either party from any liability which at said date of termination or expiration has already accrued to the other party. OKI waives any right to damages for termination or expiration of this Agreement in accordance with its terms except for affected WIP and WAFER inventory. 13.9 Notwithstanding any termination or expiration of this Agreement, the provisions of Articles 1,11,12, Sections 13.7,13.8,13.9, Articles 14, 15, 16 shall survive this Agreement. Article 14. (Government Regulations) - ---------- ---------------------- 14.1 Unless prior approval is obtained from the competent governmental agency, each party shall not knowingly export or re-export, directly or indirectly, any WAFERS to any country or countries to which export or re-export will violate any laws or regulations of either the United States of America or Japan. Page 15 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 14.2 OKI shall obtain, at OKI's expense, any and all governmental licenses, permits and approvals and make any necessary filings, registrations and notifications in Japan which are required in connection with this Agreement and shall provide PI with translated copies of any such documents. Article 15. (Non-Disclosure) - ---------- -------------- 15.1 PI and OKI shall keep the terms and existence of this Agreement confidential and shall not make disclosure thereof to any third party except: 15.1.1 with the prior written consent of the other party, such consent will not be unreasonably withheld, 15.1.2 as required by any governmental body having jurisdiction, 15.1.3 as otherwise required by law or regulations of a stock exchange at which the shares of OKI or PI are listed, or 15.1.4 to legal counsel or accountants of the parties. 15.2 Neither of the parties shall unilaterally make any announcement of the formation and existence of this Agreement without prior written consent of the other party. Article 16. (Miscellaneous Provisions) - ---------- ------------------------ 16.1 Entire Agreement. This Agreement embodies the entire understanding of the ---------------- parties as it relates to the subject matter hereof and this Agreement supersedes any prior agreements or understandings between the parties with respect to such subject matter, including without limitation all of the provisions (including license grants) under the LWS. Any potential or existing liabilities and claims regarding the purchase of and payment for wafers under the terms of the LWS are declared by OKI and PI to be paid in full and without further recourse. 16.2 Article Headings. The article and section headings herein are for ---------------- convenience only and shall not affect the construction hereof. 16.3 Waiver. Should either PI or OKI fail to enforce any provision of this ------ Agreement or to exercise any right in respect thereto, such failure shall not be construed as constituting a waiver or a continuing waiver of its rights to enforce such provision or right or any other Page 16 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. provision or right. 16.4 No License. Nothing contained in this Agreement shall be construed as ---------- conferring by implication, estoppel or otherwise upon either party hereunder any license or other right except as expressly set forth herein. 16.5 English Language. This Agreement is in the English language only, ---------------- which language shall be controlling in all respects, and all versions hereof in any other language shall be for accommodation only and shall not be binding upon the parties. All communications between OKI and PI to effect the terms of this Agreement shall be in the English language only. 16.6 No Agency. The parties to this Agreement are independent contractors. --------- There is no relationship of agency, partnership, joint venture, employment or franchise between the parties. Neither party has the authority to bind the other or to incur any obligation on its behalf. OKI shall not have, and shall not represent that it has, any power, right or authority to bind PI, or to assume or create any obligation or responsibility, express or implied, on behalf of PI or in PI's name, except as herein expressly permitted. 16.7 Notices. Any notice required or permitted to be given by either party ------- under this Agreement shall be deemed to have been given at the time it is delivered in writing by person or by telefax (provided that in the case of telefax, a copy of the notice will promptly be delivered by overnight courier) to the other party at the following respective addresses or such new addresses as may from time to time be supplied hereunder. To: OKI Electric Industry Co., Ltd. 550-1 Higashiasakawa-cho Hachioji-shi, Tokyo 193-8550, Japan Attention: Eiki Kudo, General Manager Foundry BU Division Fax: 81-426-62-6709 To: Power Integrations, Inc. 477 N. Mathilda Ave. Sunnyvale, CA 94086 Page 17 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Attention: President Fax: (408) 523-9300 16.8 Invalidity. If any provision of this Agreement, or the application ---------- thereof to any situation or circumstance, shall be invalid or unenforceable, the remainder of this Agreement or the application of such provision to situations or circumstances other than those as to which it is invalid or unenforceable, shall not be affected; and each remaining provision of this Agreement shall be valid and enforceable to the fullest extent permitted by applicable law. In the event of such partial invalidity, the parties shall seek in good faith to agree on replacing any such legally invalid provisions with provisions which, in effect, will, from an economic viewpoint, most nearly and fairly approach the effect of the invalid provision. 16.9 Assignment. This Agreement and any rights or licenses granted herein ---------- shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Neither party shall assign any of its rights or privileges hereunder without the prior written consent of the other party except as set forth in Section 13.5. Such consent shall not be unreasonably withheld. 16.10 Amendment. This Agreement may not be extended, supplemented or --------- amended in any manner except by an instrument in writing expressly referring to this Agreement and duly executed by authorized officers of both Parties. 16.11 Force Majeure. Either party shall be excused for failures and delays ------------- in performance caused by war, declared or not, any laws, proclamations, ordinances or regulations of the government of any country or of any political subdivision of any country, or strikes, lockouts, floods, fires, explosions or such catastrophes as are beyond the control or without the material fault of such party ("Causes"). Any party claiming any such excuse for failure or delay in performance due to such Causes shall give prompt notice thereof to the other party, and neither party shall be required to perform hereunder during the period of such excused failure or delay in performance except as otherwise provided herein. This provision shall not, however, release such party from using its best efforts to avoid or remove all such Causes and such party shall continue performance hereunder with the utmost dispatch whenever such Causes are removed. In the event that the period of Page 18 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. excused performance continues for ninety (90) days, this Agreement may be terminated by the affected party with written notice to the other party without liability. 16.12 Indemnity. Both parties agree that neither party shall assume any --------- responsibility or be liable for death or any injury or accident which may occur to any personnel of the other party or the property of such personnel during any visits to its facility, or otherwise. Each party agrees to indemnify the other party and to hold such other party harmless from and against all liabilities, claims and demands on account of personal injuries (including death), or loss or damage to property, arising out of or in any manner connected with the visits of its personnel to such other party's offices or facilities and occasioned by the negligence of such personnel, and it shall defend at its own expense any and all actions based thereon and shall pay all reasonable charges of attorneys and all costs and other expenses arising therefrom. 16.13 Arbitration. All disputes and differences between OKI and PI arising out ----------- of or under this Agreement or the LWS Agreement shall be settled amicably through negotiations. In case such dispute or difference cannot be settled amicably through negotiations in a reasonable period of time, it shall be finally settled by arbitration in San Francisco, California if initiated by OKI and in Tokyo, Japan if initiated by PI pursuant to the Japan-American Arbitration Agreement of September 16, 1952, by which each party is bound. The award rendered by arbitrator(s) shall be final and binding upon the parties hereto. The arbitrator's award shall be fully enforceable in any court having jurisdiction of the parties and OKI irrevocably consents to the non-exclusive jurisdiction of the California courts for matters related to injunctive relief or the enforcement of such award. Notwithstanding the foregoing, if the dispute involves the protection of the CONFIDENTIAL INFORMATION or INTELLECTUAL PROPERTY RIGHTS then either party make seek injunctive relief immediately from the courts. 16.14 Limitation of Liability. EXCEPT AS TO OBLIGATIONS ARISING UNDER ----------------------- SECTIONS 11.2 AND 11.4, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY THIRD PARTY FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, LOSS OF PROFITS OR REVENUE, LOST OPPORTUNITY, OR INTERRUPTION OF BUSINESS IN ANY WAY ARISING OUT Page 19 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OF OR RELATED TO THIS AGREEMENT, REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT PRODUCT LIABILITY OR OTHERWISE, EVEN IF ANY REPRESENTATIVE OF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 16.15 Governing Law. This Agreement and matters connected with the ------------- performance hereof shall be construed, interpreted, applied and governed in all respects in accordance with the laws of California and the United States without regard to conflict of laws principles. 16.16 OKI and PI shall each enter into separate written agreements with each of their subsidiaries who wish to exercise any rights under this Agreement, binding the subsidiary to the terms and conditions of this Agreement. OKI and PI each guarantee to the other the performance of their respective subsidiaries under this Agreement, and each will indemnify and hold harmless the other from any costs, damages, or liabilities incurred by the other arising out of a breach by a subsidiary of the terms and conditions of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in their respective corporate names by their duly authorized representatives on the date written below. OKI Electric Industry Co., Ltd. Power Integrations, Inc. Signature: /s/ Yasuahi Ozawa Signature: /s/ H.F. Earhart ------------------------- ------------------------- Name: Yasuahi Ozawa Name: H.F. Earhart ----------------------------- ------------------------------ Title: Dir. & Gen. Mgr. Lsi Div. Title: Pres. & CEO ---------------------------- ----------------------------- Date: Sep. 29, 1998 Date: September 30, 1998 ----------------------------- ------------------------------ Page 20 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT A OKI FOUNDRY CAPACITY and PI ANNUAL FORECAST ------------------------------------------- 1. OKI FOUNDRY CAPACITY: 4 inch wafer (M1 Fabrication.) 5 inch wafer (M2 Fabrication.) ------------------------------- ------------------------------ From July 1, 1998 * wafers per month * wafers / month up to March 31, 1999 2. PI's projected PI ANNUAL FORECAST of WAFER orders (non-binding).
- --------------------------------------------------------------------------------------- OKI Fiscal Year 1999 2000 2001 2002 - --------------------------------------------------------------------------------------- 4" Wafers * * * * - ---------------------------------------------------------------------------------------
Page 21 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT B WAFERS PRICE ------------ Production WAFERS (4") BASE_PRICE = * F/X_BASE = * Initial F/X_RATE = * A new F/X_RATE is only established at the time of placing a purchase order for WAFERSs if the Previous Month's Average daily exchange rate is equal to or greater than * from the current F/X_RATE. The new F/X_RATE will be set to the Previous Month's Average exchange rate and will remain in effect for at least the month it was established. The actual WAFERS PURCHASE_PRICE used at the time of order will be calculated by the following formula: PURCHASE_PRICE = * Examples: 1) Nominal F/X Rate Example: F/X_RATE = *: PURCHASE_PRICE = * 2) Higher F/X Rate Example: New F/X_RATE = *: PURCHASE_PRICE = * 3) Lower F/X Rate Example: New F/X_RATE = *: PURCHASE_PRICE = * Additionally, a F/X_ADDITIONAL_CHARGE of * will be paid to OKI for each of the WAFERS accepted by PI during the first year of the Agreement. Page 22 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT C COMMON SPECIFICATION -------------------- The initial COMMON SPECIFICATION is the * to produce and deliver WAFERS to PI under the LWS AGREEMENT on the effective date of this agreement. Page 23 of 23 Confidential [*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPERATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-10.22 3 MASTER EQUIPMENT LEASE AGREEMENT EXHIBIT 10.22 MASTER EQUIPMENT LEASE AGREEMENT THIS AGREEMENT is entered into the 31st day of July, 1998 between METLIFE CAPITAL, LIMITED PARTNERSHIP ("Lessor") whose address is 10900 N.E. 4th St., Suite 500, mailing address C-97550, Bellevue, Washington 98009 and POWER INTEGRATIONS, INC. ("Lessee") whose address is 477 NORTH MATHILDA AVENUE, SUNNYVALE, CA 94086 1. LEASE OF EQUIPMENT This Master Equipment Lease Agreement ("Agreement") contains general terms and conditions applying to each Equipment Lease ("Lease") between Lessor and Lessee that incorporates this Agreement by reference. The equipment or other personal property covered by all Leases, together with all components, parts, additions, accessions, attachments, substitutions therefor and replacements thereof is collectively called the "Equipment" and individually called an "Item." Each Lease will contain terms and conditions applying only to the Equipment covered by that Lease and will constitute a separate lease of that Equipment. To accept an Item under a Lease, Lessee will sign and deliver to Lessor a Certificate of Acceptance for the Item in a form provided by Lessor. When Lessor has confirmed that all of its requirements and conditions have been met, it will promptly pay the Total Cost of the Item specified in the Certificate of Acceptance, as directed by Lessee. Lessor requirements and conditions shall include, but not be limited to, receipt from Lessee of such instruments, documents, and certifications as Lessor reasonably may request, including without limitation evidences of authority (such as corporate certificates, corporate resolutions, and partnership authorizations), evidence of insurance, purchase orders and acceptances thereof, purchase and sale agreements, guarantees or other credit enhancements, if any, required by Lessor and financial information and instruments and documents to implement, perfect or continue the perfection of Lessor's rights and remedies as owner and Lessor of the Equipment, including Uniform Commercial Code forms. Notwithstanding the execution, delivery or filing of any instruments or documents, it is agreed that this transaction is a lease and is not intended as security. Following the date ("Closing Date") which is the earlier of: (i) the date Lessee gives Lessor a Certificate of Acceptance for the last Item; (ii) the Purchase Cut-Off Date; or (iii) on such other day as is mutually agreed, Lessor shall send Lessee a Closing Schedule, setting forth any adjustments to payment schedules, stipulated loss values or other matters. Such Closing Schedule and the facts and determinations set forth therein shall upon execution by Lessee and Lessor be conclusive as to the matters therein. Alternatively, in lieu of signing the Closing Schedule, Lessee may, within thirty (30) days after the Closing Schedule is sent by Lessor to Lessee, give Lessor written notice identifying any claimed error therein. Notwithstanding any such notice, Lessee shall pay all rentals as they become due. If Lessee establishes an error that affects the amount of rentals, Lessor shall give Lessee a credit for any overpayment of rentals, and Lessee promptly shall pay to Lessor on demand any underpayments. If Lessee neither signs the Closing Schedule nor gives written notice of claimed errors, the Closing Schedule shall be conclusively deemed to be accurate thirty (30) days after the Closing Schedule is sent by Lessor to Lessee. Lessee authorizes Lessor to insert in the Lease or the Closing Schedule, dates, models, serial numbers, and other pertinent data relative to the proper identification of Equipment and/or the Lessee. If by the "Purchase Cut-Off Date" set forth in a Lease, Lessee shall not have given Lessor written notice of acceptance of an Item, Lessor shall have no obligation to purchase the Item or to lease it to Lessee. In such event Lessee shall immediately pay all accrued Interim Rental and reimburse Lessor for all sums Lessor may have paid for or with respect to the Item and for all Lessor's costs and expenses with respect thereto, and Lessee shall indemnify and defend Lessor against and hold Lessor harmless from any and all cost, expense, loss, liability and damage that Lessor may suffer or may be asserted against Lessor by reason of Lessor's failure or refusal to purchase such Item. Any such item shall be deemed to be deleted from the Lease and no longer included as an Item of Equipment. 2. NON-CANCELLABLE NET LEASE EACH LEASE IS A NON-CANCELLABLE NET LEASE. WHEN LESSEE SIGNS AND DELIVERS A CERTIFICATE OF ACCEPTANCE FOR ANY ITEM, ITS OBLIGATION TO PAY ALL RENT AND OTHER AMOUNTS WHEN DUE FOR THE ITEM AND OTHERWISE TO PERFORM AS REQUIRED UNDER THE RELATED LEASE IS UNCONDITIONAL, IRREVOCABLE AND INDEPENDENT. THESE OBLIGATIONS ARE NOT SUBJECT TO CANCELLATION, TERMINATION, MODIFICATION, REPUDIATION, EXCUSE OR SUBSTITUTION BY LESSEE. LESSEE IS NOT ENTITLED TO ANY ABATEMENT, REDUCTION, OFFSET, DEFENSE OR COUNTERCLAIM WITH RESPECT TO THESE OBLIGATIONS FOR ANY REASON, WHATSOEVER, WHETHER ARISING OUT OF DEFAULT OR OTHER CLAIMS AGAINST LESSOR OR THE MANUFACTURER OR SUPPLIER OF THE ITEM, DEFECTS IN OR DAMAGE TO THE ITEM, ITS LOSS OR DESTRUCTION, OR OTHERWISE. EACH LEASE IS INTENDED TO CONSTITUTE A TRUE LEASE AND NOT A SALE OF THE RELATED EQUIPMENT. TITLE TO THE EQUIPMENT WILL REMAIN WITH LESSOR AT ALL TIMES. LESSEE'S INTEREST IN THE EQUIPMENT IS LIMITED TO A LEASEHOLD. 3. LESSEE'S WARRANTIES AND COVENANTS Lessee represents and warrants to Lessor upon execution of this Agreement and each Lease, that: (i) unless Lessee is a sole proprietorship it is a corporation, limited liability company or partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and that it is qualified to do business in every jurisdiction where the failure to qualify would have a material adverse effect on Lessor's rights hereunder; (ii) it has taken all corporate, company or partnership action which may be required to authorize the execution, delivery and performance of this Agreement and each Lease; (iii) such execution, delivery and performance will not conflict with or violate any provision of its Charter or Articles or Certificate of Incorporation, By-laws, operating agreement or similar governing document, or any provisions thereof, or in the case of a partnership, its Certificate of Partnership or Limited Partnership and its Partnership Agreement, or in the case of a limited liability Page 1 of 8 company, its Articles of Organization, or result in a default or acceleration of any obligation under any agreement, order, decree or judgment to which it is a party or by which it is bound; (iv) it is not now in default under any of the same; (v) there is no litigation or proceeding pending or threatened against it which if decided adverse to Lessee's interests may have a material adverse effect on Lessee or which would prevent or hinder the performance by it of its obligations hereunder; (vi) this Agreement, each Lease and the attendant documents constitute valid obligations of the Lessee, binding and enforceable against it in accordance with their respective terms; (vii) no action by or with any commission or administrative agency is required in connection herewith; (viii) it has the power to own its assets and to transact business in which it is engaged; (ix) it will give to Lessor prompt notice of any change in its name, identity or structure; (x) each Lease will be effective against all creditors of Lessee under applicable law, including fraudulent conveyance and bulk transfer laws; (xi) the financial statements and any other information furnished and to be furnished to Lessor are and will be true and correct at the time of delivery; (xii) as long as any Lease is in effect, Lessee will promptly furnish Lessor with annual balance sheets and profit and loss statements of Lessee and any guarantor of Lessee's obligations accompanied, at Lessor's request, by the audit reports of an independent certified public accountant acceptable to Lessor and such other information as Lessor may reasonably request at any time concerning Lessee and its affairs; (xiii) each Item shall be personal property and in good order and condition and, unless Lessor otherwise agrees in writing, has not been used prior to the time of Lessee's execution of the Certificate of Acceptance pertaining thereto; (xiv) at all times Lessee shall keep the Equipment in Lessee's possession at the address specified in the Lease unless Lessor shall otherwise consent in writing (the only requirement with respect to rolling stock is that it remain within the continental United States); (xv) Lessee shall not cause, suffer or permit any Item to be attached or affixed to real property or improvements thereon (collectively, "Realty") unless Lessor first shall consent thereto in writing and Lessee shall have obtained from all persons having any interest in the Realty written consents in form satisfactory to Lessor which approve such attachment, waive any claims to or encumbrances upon attached Items and consent to the detachment and removal of such Items at any time by Lessor or Lessee; and (xvi) notwithstanding attachment of any Items to Realty, all the Equipment at all times shall be and remain personal property. 4. TERM OF LEASE The term of each Lease ("Term") shall consist of an "Interim Term" and a "Basic Term." The Interim Term shall begin on the date that Lessee first gives Lessor written notice of acceptance of an Item or written approval for partial payment, whichever is earlier, and shall continue until the time the Basic Term begins. The Basic Term shall begin on the Closing Date and shall continue for the length of the Basic Term set forth in the respective Lease. 5. INTERIM RENTAL During the Interim Term, Lessee shall pay rent monthly ("Interim Rental"), on a calendar month basis, in an amount determined by Lessor by applying the "Interim Rental Rate" set forth in the Lease to portions of the Total Cost then or theretofore expended by Lessor, for the number of days such sums are outstanding during such calendar month. Lessee shall pay Lessor each installment of Interim Rental on the fifteenth day after the end of such calendar month. 6. PERIODIC RENTAL Lessee shall pay rent ("Periodic Rental") for the Basic Term in an amount calculated by multiplying the Total Cost by the Periodic Rental Rate set forth in the Lease multiplied by the number of periods constituting the length of the Basic Term. Lessee shall pay installments of Periodic Rental to Lessor in accordance with the payment schedule set forth in the Lease. 7. LATE PAYMENT If any installment of rent or other sum owing under the Lease shall not be paid when due and shall remain unpaid for ten (10) days, Lessee shall pay Lessor a late charge equal to five percent (5%) of the amount delinquent, but in no event at a rate greater than limited by any applicable law. Such late charge is in addition to and not in lieu of other rights and remedies Lessor may have. 8. NO LESSOR EQUIPMENT WARRANTIES LESSOR LEASES THE EQUIPMENT AS-IS AND EXPRESSLY DISCLAIMS AND MAKES NO WARRANTIES, EXPRESS OR IMPLIED, AS TO THE CONDITION, DESIGN, QUALITY, CAPACITY, MERCHANTIBILITY OR FITNESS FOR A PARTICULAR PURPOSE OF, OR ANY OTHER MATTER, CONCERNING THE EQUIPMENT. LESSEE HEREBY WAIVES ANY CLAIM (INCLUDING ANY CLAIM BASED ON STRICT OR ABSOLUTE LIABILITY IN TORT) IT MAY HAVE AGAINST LESSOR FOR ANY LOSS, DAMAGE (INCLUDING INCIDENTAL OR CONSEQUENTIAL DAMAGE) OR EXPENSE CAUSED BY OR RELATING TO THE EQUIPMENT. LESSEE HAS SELECTED OR WILL SELECT BOTH THE EQUIPMENT OF THE TYPE AND QUANTITY WHICH IS THE SUBJECT HEREOF AND THE SUPPLIER FROM WHOM LESSOR PURCHASED THE EQUIPMENT. 9. INSURANCE Lessee shall at all times prior to return of an Item to Lessor procure and continuously carry, maintain and pay for: (A) physical damage insurance providing "all risks" coverage for the Item in an amount not less than the full replacement value thereof and (B) bodily injury and property damage combined single limit liability insurance, all in such amounts and against such risks and hazards and with insurance companies and pursuant to contract or policies and with exclusions and deductibles thereon satisfactory to Lessor. All contracts and policies: (i) shall include provisions for the protection of Lessor notwithstanding any act or neglect of or breach or default by Lessee; (ii) shall provide that they may not be modified, terminated or canceled unless Lessor is given at least thirty (30) days advance written notice thereof; (iii) shall contain endorsements (x) naming Lessor (and if Lessor requests at any time, any successor, assignee, or secured party of Lessor) as loss payee for physical damage insurance and as additional insured for liability insurance, (y) providing that such insurance is primary as to the Item without right of contribution from any other insurance, (z) providing thirty (30) days prior written notice to Lessor (and any successor, assignee, or secured party) before coverage lapses or is cancelled or materially changed, or before there is a change in insurer. Lessee shall promptly notify Page 2 of 8 any appropriate insurer and Lessor of each and every occurrence which may become the basis of a claim or cause of action against the insureds and provide Lessor with all data pertinent to such occurrence. Lessee will send Lessor a certificate evidencing such insurance and endorsements or copies of the policies upon request before the Item's Acceptance Date and whenever the insurance is renewed. As long as no Event of Default exists, Lessor will remit any physical damage insurance proceeds for an Item to Lessee when Lessee either (A) provides evidence that the Item has been repaired and restored to the good operating order and condition required under Section 11, or (B) pays Lessor the amount due upon an Event of Loss as provided in Section 13. 10. LESSEE TAX INDEMNITIES (a) GENERAL. Lessee will pay and defend, indemnify and hold harmless Lessor and any successor, assignee or secured party of Lessor on an after-tax basis from any and all Taxes (as defined below) on or relating to: (i) the Equipment; (ii) its ordering, purchase by Lessor, acceptance, delivery, installation, ownership, leasing, possession, maintenance, documentation, use, operation, transportation, return or other disposition; (iii) its rentals, receipts or earnings; and (iv) any Lease. "Taxes" means taxes, fees, or other governmental charges that are not based on the net income of the indemnified party, whether they are assessed to or payable by Lessee or an indemnified party, and includes without limitation: (A) franchise, business and occupation, gross receipts, sales, use, licensing, registration, titling, stamp and personal property taxes; (B) levies, imposts, duties, charges and withholdings; and (C) penalties, fines, and additions to tax and interest. Lessee shall not be obligated to pay any amount under this section so long as it shall in good faith and by appropriate proceedings contest the validity or the amount thereof, unless such contest would adversely affect the title of Lessor to any Item of Equipment or would subject any Item to forfeiture or sale. Lessee shall indemnify and hold harmless Lessor, on an after-tax basis, against any and all loss, claims, demands and expenses, including legal expenses, resulting from any such non-payment or contest. Unless Lessor elects otherwise, Lessor will prepare and file all reports and returns relating to Taxes covered by this Section and will pay all such Taxes to the appropriate taxing authority. Lessee will reimburse Lessor for all such payments promptly on request. However, if Lessor elects, upon written notice to Lessee, Lessee will prepare and file all such reports and returns, pay all such Taxes directly to the taxing authority and deliver to Lessor reasonable evidence thereof. Upon termination of this Lease as to any Item, Lessee will, on request, advance to Lessor the amount estimated by Lessor to equal personal property taxes on the Item which are not yet payable but for which Lessee will afterward become liable hereunder. Lessor will account to Lessee for such advances. (b) FEDERAL TAX INDEMNITIES. If Lessor shall lose the right to claim, suffer a disallowance of or be required to recapture all or any portion of the accelerated cost recovery deductions pursuant to Internal Revenue Code Section 168 with respect to the Total Cost for property with recovery period(s) referred to in the Lease; then, unless such result is due to Lessor's act or omission (other than its exercise of remedies after default) or to a loss for which Lessee pays the Stipulated Loss Value of the affected Equipment, Lessee shall pay to Lessor on demand a sum equal to the amount of deductions or credits lost by Lessor as a result of such event, plus the amount of any interest, penalties and additions to tax payable by Lessor as a result of such event. The amount of lost deductions and credits to be paid by Lessee pursuant to this Section shall be computed by Lessor so as to cause Lessor's after-tax rate of return on investment and after-tax cash flows in respect of the Lease to equal that which would have been realized by Lessor if such event had not occurred, but without regard to whether Lessor has or would have had taxable income sufficient to use the lost deductions or credits. Lessee shall indemnify and hold harmless Lessor from and against any and all taxes, assessments and other charges imposed upon Lessor under the laws of any federal, state, local or foreign government or taxing authority, as a result of any payment made by Lessee pursuant to this Section 10. 11. MAINTENANCE AND ALTERATIONS (a) Lessee at its expense at all times shall maintain, service and repair any damage to the Equipment so as to: (i) keep the Equipment in good and efficient working order, condition and repair, ordinary wear and tear resulting from proper use excepted, and make all inspections and repairs, including replacement of worn parts (which replacement parts shall be free and clear of all liens and encumbrances and shall, upon incorporation into the Item, become the property of Lessor free and clear of any and all liens and encumbrances and subject to the related Lease), to effect the foregoing and to comply with requirements of laws, regulations, rules and provisions and conditions of insurance policies; and (ii) pay all costs, expenses, fees and charges incurred in connection with the use or operation of the Equipment and of each Item, including but not limited to repairs, maintenance, storage and servicing. Lessee will maintain in effect a warranty by or maintenance contract with the manufacturer or other recognized maintenance provider of the Equipment, and will send Lessor a copy of such warranty or contract on request. If Lessee has the Equipment maintained by someone other than the manufacturer, Lessee will pay any costs necessary to have the manufacturer re-certify the Equipment for continued maintenance at the expiration of its Lease Term or any Renewal Term. Lessee shall not make any alterations, substitutions, improvements or additions to the Equipment or Items, except those required in order to comply with laws, regulations, rules and insurance policies, unless Lessor first shall have consented thereto in writing. Notwithstanding any consent by Lessor, Lessee shall pay all costs and expenses of the foregoing. All replacements, repairs, improvements, alterations, substitutions and additions shall constitute accessions to the Equipment and title thereto shall vest in Lessor, and shall be free of any and all liens. In performing its obligations under this Section, Lessee will not treat the Equipment less favorably than similar equipment that it owns or leases, or reduce its performance in contemplation of expiration of the Term or any Renewal Term. (b) Lessor hereby transfers and assigns to Lessee, for so long during the Term and any Renewal Term as Lessee is not in default, Lessor's right, title and interest in, under and to any assignable factory and dealer warranty, whether express or implied, with respect to the Equipment. All claims and actions upon any warranty shall be made and prosecuted by Lessee at its sole cost and expense. Lessor shall have no obligation to make or prosecute any claim upon or under a warranty. Page 3 of 8 12. USE; QUIET ENJOYMENT So long as Lessee shall not be in default, Lessee shall be entitled to the possession, use and quiet enjoyment of the Equipment during the Term and any Renewal Term in accordance with the terms of the Lease. Unless a purchase option is exercised, Lessee shall deliver and surrender the Equipment to Lessor at the end of the Term or Renewal Term in accordance with Section 16 hereof. Lessee warrants that the Equipment will at all times be used and operated solely in the conduct of Lessee's business in a careful and proper manner for the purpose for which it was designed and intended and under and in compliance with manufacturer's specifications and applicable laws and all lawful acts, rules, regulations and orders of any governmental bodies or officers having power to regulate or supervise the use of such property, except that Lessee may in good faith and by appropriate proceedings contest the application of any such rule, regulation or order in any reasonable manner that will not adversely affect the title of Lessor to any Equipment or subject the same to forfeiture or sale. Lessee will not permit its rights or interest hereunder to be subject to any lien, charge or encumbrance and will keep the Equipment free and clear of any and all liens, charges, encumbrances and adverse claims (except those arising from acts of Lessor). Lessor may inspect the Equipment and its maintenance records on reasonable notice and subject to Lessee's security procedures. All such inspection rights are for the sole benefit of Lessor and shall not be construed to impose any obligation on Lessor, whether or not Lessor makes any inspections or receives any reports. 13. EVENT OF LOSS Each Lease is a net lease. Lessee assumes all risk of and shall indemnify and hold harmless Lessor from and against all damage to and loss of the Equipment from any cause whatsoever, whether or not such loss or damage is or could have been covered by insurance (an "Event of Loss"). Except as otherwise specifically provided herein, neither this Agreement nor related Lease shall terminate and there shall be no abatement, reduction, suspension or deferment of Interim or Periodic Rental for any reason, including damage to or loss of the Equipment or any one or more Items. Lessee promptly shall give Lessor written notice of any material loss or damage, describing completely and in detail the cause and the extent of loss and damage. Upon the occurrence of an Event of Loss, at its option Lessee shall: (i) repair or restore the damaged or lost Items to good condition and working order; or (ii) replace the damaged or lost Items with similar equipment of equal value in good condition and working order; or (iii) pay Lessor in cash the Stipulated Loss Value, as defined below of the damaged or lost Items. Upon Lessee's complying with the foregoing, Lessor shall pay or cause to be paid over to Lessee the net proceeds of insurance, if any, with respect to such damage or loss. "Damage" and "loss" shall include damages and losses of any kind whatsoever including, without limitation, physical damage and partial or complete destruction, including intentionally caused damage and destruction, and theft. Upon payment by Lessee of the Stipulated Loss Value for an Item, along with any rent, late charges, taxes, or other amounts then due and owing, Lessor will then deliver a Bill of Sale for the Item, and Lessee's obligation to pay rent for the Item will terminate. The Stipulated Loss Value of an Item as of any date shall equal a sum computed by Lessor, which shall not exceed the amount determined by multiplying the Total Cost of the Item by the Stipulated Loss Factor as set forth in the applicable Closing Schedule for the Lease year during which the loss of the Item occurs. 14. OWNERSHIP AND MARKING Lessee has not and by execution and performance hereof will not have or obtain any title to the Equipment or any other interest therein except as Lessee hereunder and subject to all the terms hereof. Title to the Equipment shall at all times remain in Lessor and Lessee at its expense shall protect and defend the title of Lessor and keep it free of all claims and liens other than the rights of Lessee hereunder and claims and liens created by or arising through Lessor. Lessee will treat this transaction as a lease for tax purposes and will not claim any credit or deduction inconsistent with Lessor's ownership of the Equipment. If Lessor supplies Lessee with labels designating its interest in the Equipment, Lessee shall affix the same to and keep them in a prominent place on the Equipment. Notwithstanding the express intent of the parties, should a court of competent jurisdiction determine that this Agreement is not a true lease, but rather one intended as security, then solely in that event and for the expressly limited purposes hereof, Lessee shall be deemed to have hereby granted Lessor a security interest in this Lease, the Equipment, and all accessions thereto, substitutions and replacements therefor, and proceeds (including insurance proceeds) thereof, to secure the prompt payment and performance as and when due of all obligations and indebtedness of Lessee to Lessor, now existing, or hereafter created; provided however, that the foregoing shall not apply if such determination is made solely for purposes of federal tax laws and regulations. 15. LESSEE'S GENERAL INDEMNITIES Lessee will pay and defend, indemnify and hold harmless Lessor and any successor, assignee or secured party of Lessor, on an after-tax basis from and against any claim, cause of action, damage, liability, cost or expense (including but not limited to legal fees and costs) which may be asserted against or incurred in any manner by or for the account of Lessor: (i) relating to the Equipment or any part thereof, including without limitation the manufacture, construction, purchase, delivery, acceptance or rejection, installation, ownership, sale, leasing, removal or return of the Equipment, or as a result of the use, maintenance, repair, replacement, operation or the condition thereof (whether defects are latent or discoverable); (ii) by reason or as a result of any act or omission of Lessee for itself or as agent or attorney-in-fact for Lessor hereunder; (iii) as a result of claims for patent, trademark or copyright infringement; (iv) as a result of product liability claims or claims for strict liability; or (v) resulting from claims for personal injury, death or property damage. 16. LESSEE OPTIONS AT EXPIRATION OF LEASE TERM (a) At least One Hundred Twenty (120) days before the expiration of the Term of the first Item accepted under each Lease, Lessee will give Lessor written notice electing one of the following options with respect to all (but not less than all) Items covered by the Lease, to be performed with respect to each Item at the expiration of its Term: (i) renew the Lease as to all such Items at their Fair Market Rental Value (as defined below) subject to the provisions of the next paragraph; Page 4 of 8 (ii) purchase all such Items for their Fair Market Value (as defined below) on the last day of the Term; or (iii) return all such Items to Lessor in accordance with (b) below. If Lessee purchases an Item, it will also pay all sales, use and similar taxes imposed in connection with the purchase. When Lessor receives the Item's purchase price and any such taxes, and all other amounts due under the Lease it will deliver to Lessee a Bill of Sale for the Item "AS IS - WHERE IS" without recourse to or representation or warranty by Lessor except for a warranty that the Item is free and clear of liens, claims and encumbrances created by contract by Lessor or arising out of claims against Lessor unrelated to its ownership or leasing of the Equipment. Lessee's renewal option is for a single renewal term (the "Renewal Term") of one year unless otherwise agreed by Lessor and Lessee in writing, but is not available if an Event of Default, or an event which would become an Event of Default with passage of time or giving of notice or both, exists or if there has been a material adverse change in Lessor's sole discretion since the date of the Lease in the financial condition of Lessee or any guarantor of Lessee's obligations under the Lease. The terms and conditions under the Lease shall continue to apply to the Items during any Renewal Term except that rent payable for each Item shall be its then Fair Market Rental Value. At least one hundred twenty (120) days before the expiration of any Renewal Term, Lessee will give Lessor written notice electing one of the following options with respect to all (but not less than all) Items covered by the renewal, to be performed with respect to each Item at the expiration of its renewal term: (i) purchase all such Items for their then Fair Market Value; or (ii) return all such Items to Lessor. Each notice delivered by Lessee required above will constitute Lessee's irrevocable agreement to perform the action elected in the notice. (b) At the expiration of the Term or Renewal Term of each Item that Lessee does not purchase, Lessee will at its sole expense and risk de-install, pack, and crate such Items and return them to Lessor (all in accordance with industry standards and the manufacturer's recommendations and maintenance certification standards) at any location in the continental United States designated by Lessor in the good operating order and condition required under Section 11, free of all liens, claims and encumbrances as provided in Section 14, together with all related plans, specifications, operating manuals, maintenance records and similar documents. If for any reason Lessee fails to return any Item as required in the condition required, Lessee's obligations under the related Lease shall continue in full force and effect on a month to month basis as to the Item and Lessee will continue to pay the current rent for the Item. (c) The "Fair Market Value" and "Fair Market Rental Value" of any Item shall be the amount that would be paid for an Item in an arm's length transaction between an informed and willing buyer or lessee (other than a used equipment dealer) to an informed and willing seller or lessor, neither under any compulsion to buy, sell or lease. Costs of removal from the location of use shall not be deducted from such value. If Lessee has not maintained the Item to the standards required by this Agreement, Fair Market Value or Fair Market Rental Value shall be determined as though the Item had been maintained to those standards. If Lessor and Lessee have not agreed on the Fair Market Value or Fair Market Rental Value of an Item by the sixtieth (60th) day before its Term or Renewal Term expires, it shall be determined by averaging the determinations (disregarding the one that differs most from the other two) of three qualified independent appraisers, one appointed by Lessor, the second by Lessee, and the third by the first two appraisers or by a court having jurisdiction. Lessor and Lessee shall each pay the cost of its appointed appraiser and shall each pay half of the cost of the third appraiser. 17. LESSOR MAY PERFORM If Lessee at any time shall fail to pay any sum which Lessee is required by this Agreement to pay or shall fail to do or perform any other act Lessee is required by this Agreement to do or perform, Lessor at its option may pay such sum or do or perform such act, and Lessee shall reimburse Lessor on demand for the amount of such payment and for the cost and expense which may be incurred by Lessor for such acts or performance, together with interest thereon at the Default Rate from the date of demand until paid. 18. DEFAULT (a) EVENTS OF DEFAULT. Each of the following shall constitute an event of default ("Event of Default"): (i) failure to perform and comply with the provisions and conditions of Section 9 hereof or to pay any sum, including installments of rental, within ten (10) days of the date when due; (ii) failure to perform and comply with any other provision or condition of this Agreement within thirty (30) days after Lessor shall have given Lessee written notice of default with respect thereto, or failure to make good, within thirty (30) days after written notice by Lessor to Lessee, any representation or warranty, whether made in this Agreement or any Lease or in any certificate, agreement, instrument or statement, including income and financial statements, which shall prove to have been incorrect in any material respect when made; (iii) any event of default occurs with respect to any obligations of Lessee to Lessor on or with respect to any transactions, debts, undertakings or agreements other than this Agreement; (iv) the failure of Lessee generally to pay its debts as they become due in the ordinary course of business, or the filing of any application for the appointment of a receiver for a major part of Lessee's assets or the filing of any petition or application by or against Lessee under any present or future laws for the relief of debtors or for the subjection of the property of a debtor to the control of any court, tribunal or agency for the benefit of creditors, including proceedings under the Bankruptcy Code, if the proceeding commenced by such filing, if instituted against Lessee, shall not be dismissed for a period of sixty (60) days; (v) the execution by Lessee of a general assignment for the benefit of creditors; (vi) Lessee winds up, dissolves or otherwise terminates its corporate, partnership or limited liability company existence, or consolidates with or merges with or into any entity, or sells, leases or otherwise transfers substantially all of its assets to any entity, or incurs a substantial amount of indebtedness other than in the ordinary course of its business, or engages in a leveraged buy-out or any other form of corporate reorganization, including conversions to Sub "S" corporation status. (b) EFFECT ON LESSOR'S OBLIGATION. Upon the occurrence of an Event of Default, Lessor shall have no further obligation to Lessee to purchase Equipment or Items or to lease any thereof to Lessee. (c) REMEDIES. Upon the occurrence of an Event of Default as provided above, Lessor may at its option: Page 5 of 8 (i) proceed by appropriate court action or actions, either at law or in equity, to enforce performance by the Lessee of the applicable covenants of this Agreement and applicable Lease or to recover damages for the breach thereof; or (ii) by notice in writing to the Lessee terminate Lessee's right of possession of the Equipment, whereupon all rights of the Lessee to possess and use the Equipment shall absolutely cease and terminate, but Lessee shall remain liable as follows: Upon such a termination, Lessee at its expense shall immediately redeliver the Equipment to Lessor at the location specified in Section 16 (b) hereof. If Lessee shall fail to do so, Lessor may retake possession of the Equipment by entering upon any premises at any reasonable time and thereafter Lessor may hold, possess, sell, upgrade, lease to others or enjoy the same, free from any right of Lessee, or its successors or assigns. If Lessor so retakes possession, Lessee upon demand shall reimburse Lessor for all costs and expenses relating thereto. Notwithstanding such redelivery or retaking Lessor shall have a right to recover from Lessee any and all amounts which under the terms of this Agreement may be then due or which may have accrued to the date of such termination, and also to recover forthwith from the Lessee its damages for loss of a bargain and not as a penalty, an amount equal to the higher of Fair Market Value or the Stipulated Loss Value of the Equipment as of the rent payment date on or next preceding the date of default, less: (A) the amount Lessor in fact receives from the sale of the Equipment, after deduction of all estimated expenses of such sale (Equipment which Lessor is unable to recover shall at Lessor's option be deemed worthless); or (B) at Lessor's election, the present value of the non- cancellable regularly scheduled rentals receivable from a subsequent lease of all or part of the Equipment entered into by Lessor (discounted at the Default Rate), and taking into account only the rentals receivable from the commencement date of such subsequent lease until the end of the Term for such Equipment. In addition to all amounts and damages to which Lessor is entitled as set forth above, Lessee shall be liable to Lessor for all costs and expenses incurred by Lessor by reason of Lessee's breach or default. Lessee shall also be liable for interest on any of the above referenced amounts from and after the due date at the Default Rate, or the legal limit, whichever is smaller. Lessor's costs and expenses incurred by reason of Lessee's breach or default shall include, without limitation, costs and expenses of receiving or retaking possession of the Equipment, storing, holding, transporting, insuring, caring for, servicing, maintaining and renting the Equipment or Items and collecting rents and professional fees and expenses with respect to or incurred by reason of the breach or default, including legal fees and expenses for advice and legal services in any actions or proceedings which Lessor may commence or in which Lessor may appear or participate to exercise or enforce any rights or remedies or to protect or preserve any rights or interests, including but not limited to attorneys' fees and costs incurred for representation in matters arising under the bankruptcy statutes, including relief from stay motions and motions concerning the assumption or rejection of executory contracts and leases and in all reviews of and appeals from any such actions or proceedings. The "Default Rate" of interest shall be a rate per annum computed monthly which shall be five (5) percentage points above the prime rate, but not greater than the maximum rate, if any, limited by applicable law. The "prime rate" referred to in this Agreement shall mean the rate per annum announced by Chase Manhattan Bank, New York City, from time to time as its prime rate, whether or not such rate is applied by said bank to any then outstanding loans, changing with each announced change of such prime rate. 19. RIGHTS CUMULATIVE Unless otherwise expressly provided herein, all rights and remedies of Lessor are concurrent and cumulative. The exercise or partial exercise of any remedy shall not restrict Lessor from further exercise of that remedy or any other remedy. 20. NON-WAIVER Neither the acceptance by Lessor of any payment or any other performance, nor any act or failure of Lessor to act or to exercise any rights, remedies or options in any one or more instances shall constitute a waiver of any such right, remedy or option or of any other then existing or thereafter accruing right, remedy or option, or of any breach or default then existing or thereafter occurring. No purported waiver by Lessor of any right, remedy, option, breach or default shall be binding unless in writing and signed by an officer of Lessor. A written waiver by Lessor of any right, remedy, option, breach or default shall not constitute a waiver of any other then existing or thereafter accruing right, remedy or option or of any other then existing or thereafter occurring breach or default. 21. NOTICES; PAYMENTS (a) A written notice may be given: (i) by personal delivery of the same to a corporate officer of the party to whom it is directed (the "Addressee"), or to a general partner if the Addressee is a partnership, or to a member of a limited liability company, or to the owner if the Addressee is a sole proprietorship; (ii) by mailing the notice to the Addressee by first class mail, registered or certified, with postage prepaid, addressed to the Addressee at the address following its name in the opening paragraph of this Agreement or to such other address as Addressee may specify by notice in writing given in accordance with this Section; or (iii) by overnight courier service. Notice shall be effective upon delivery if sent pursuant to (i), effective three (3) days after mailing, or effective the next day if sent by overnight courier. A "business day" shall be any day that is not a Saturday or Sunday or a legal holiday. (b) The Lessee shall make all payments to Lessor at the place where the notice is to be mailed to Lessor pursuant to (a). Payments are deemed paid when received by Lessor. Page 6 of 8 22. ASSIGNMENT (a) LESSEE WILL NOT SUBLEASE OR LEND ANY ITEM OR SELL, ASSIGN, TRANSFER OR GRANT A SECURITY INTEREST IN ALL OR ANY PART OF ITS INTERESTS IN THE EQUIPMENT OR ANY LEASE WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR. Lessor's consent to an assignment, sublease, transfer, sale or grant in any one or more instances shall not impose any obligation upon Lessor to consent to any other or further assignments. Lessor's consent to an assignment, sublease, transfer, sale or grant shall not release Lessee from any obligations with respect to the Lease unless expressly so stated in the written consent. (b) All rights of Lessor hereunder may be assigned, pledged, mortgaged, transferred or otherwise disposed of, either in whole or in part, without notice to Lessee but subject always to the rights of Lessee under this Lease. If Lessee is given notice of any such assignment, Lessee shall acknowledge receipt thereof in writing. If Lessor assigns this Agreement or any Lease or the rent due or to become due hereunder or any other interest herein, whether as security for any of its indebtedness or otherwise, no breach or default by Lessor hereunder or pursuant to any other agreement between Lessor and Lessee, shall excuse performance by Lessee of any provision hereof or give rise to any defense, counterclaim or set off, with respect to Lessee's obligations under the Lease, it being understood that in the event of such default or breach by Lessor that Lessee shall pursue any rights on account thereof solely against Lessor through a claim for damages. No such assignee shall be obligated to perform any duty, covenant or condition required to be performed by Lessor under the terms of this Agreement. 23. SURVIVAL The representations, warranties, indemnities and agreements of Lessee, and Lessee's obligations under any and all provisions of this Agreement, shall survive the expiration or other termination of this Agreement, shall be binding upon its successors and assigns and are expressly made for the benefit of and shall be enforceable by Lessor and its successors and assigns. 24. MISCELLANEOUS (a) The term "Lessor" shall mean the Lessor named herein and its successors and assigns. (b) Whenever the context so requires, any pronoun gender includes all other genders, and the singular includes the plural. If more than one person constitute Lessee, whether as a partnership or otherwise, all such persons are and shall be jointly and severally liable for all agreements, undertakings and obligations of Lessee. (c) All captions and section, paragraph and other divisions and subdivisions are for convenience of reference only and shall not affect the construction, interpretation or meaning of this Agreement or any Lease or of any of the provisions thereof. (d) THIS LEASE SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAWS OF THE STATE OF WASHINGTON, WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS THEREOF. (e) This Lease shall be binding upon and, except as limited in Section 22 hereof, shall inure to the benefit of Lessor and Lessee and their respective successors and assigns. (f) THIS LEASE CANNOT BE CANCELLED OR TERMINATED EXCEPT AS EXPRESSLY PROVIDED HEREIN. (g) Lessee's obligation to pay or reimburse Lessor for expenses as provided hereunder shall be limited to reasonable expenses. (h) LESSEE AND LESSOR EACH WAIVES FOR ITSELF AND ITS RESPECTIVE SUCCESSORS AND ASSIGNS ANY RIGHT TO A TRIAL BY JURY WITH RESPECT TO ANY MATTER ARISING UNDER THIS AGREEMENT, ANY LEASE OR OTHER RELATED DOCUMENT. (i) Lessee hereby authorizes Lessor, in such jurisdictions where such action is authorized by law, to execute financing statements regarding the Equipment on Lessee's behalf or to effect recordation or filing of such financing statements without Lessee's signature thereon. (j) For all purposes hereof, "day" shall mean a calendar day. 25. ARTICLE 2A WAIVERS If Article 2A of the Uniform Commercial Code is adopted under applicable state law and applies to this Agreement or to any Lease, then Lessee, to the extent permitted by law, waives any and all rights and remedies conferred upon a lessee by Sections 2A-508 through 2A-522 of such Article 2A, including, but not limited to, Lessee's rights to: (i) cancel or repudiate this Agreement or a Lease; (ii) reject or revoke acceptance of the Equipment; (iii) claim, grant or permit attachment of a security interest in the Equipment in Lessee's possession or control for any reason; (iv) deduct from Interim or Periodic Rental payments, or other amounts due hereunder, all or any part of any claimed damages resulting from Lessor's default, if any, under this Agreement or any Lease; (v) accept partial delivery of the Equipment or an Item thereof; (vi) "cover" by making any purchase or lease of or contract to purchase or lease equipment in substitution for Equipment designated in this Agreement or any Lease; and (vii) obtain specific performance, replevin, detinue, sequestration, claim and delivery or the like for any Equipment identified in any Lease. To the extent permitted by applicable law, Lessee also hereby waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease or otherwise use or dispose of any Equipment in mitigation of Lessor's damages or which may otherwise limit or modify any of Lessor's rights or remedies. Page 7 of 8 26. ENTIRE AGREEMENT This Agreement, applicable Leases, Certificates of Acceptance and Closing Schedules shall constitute the entire agreement between the parties and shall not be altered or amended except by an agreement in writing signed by the parties hereto or their successors or assigns. IN WITNESS WHEREOF Lessor and Lessee have signed this agreement as of the day and year first hereinabove written. LESSOR: LESSEE: METLIFE CAPITAL, LIMITED POWER INTEGRATIONS, INC. PARTNERSHIP By: MetLife Capital Corporation Its: General Partner /s/ Mitchell J. Stevens /s/ Robert G.Staples By: ________________________________ By: _______________________________ Vice President Its: _______________________________ Its: ______________________________ By: _______________________________ Its:_______________________________ Date Signed: July 31, 1998 ________________________ EQUIPMENT LEASE NO. ONE Incorporating Master Equipment Lease Agreement dated ____________________ THIS EQUIPMENT LEASE is entered into the ______ day of _______________, 19___ between METLIFE CAPITAL CORPORATION ("Lessor") whose mailing address is C- 97550, Bellevue, Washington 98009 and POWER INTEGRATIONS, INC. ("Lessee") whose address is 477 NORTH MATHILDA AVENUE, SUNNYVALE, CA 94086 1. General ------- Lessor hereby leases to Lessee and Lessee hereby leases from Lessor each Item accepted under this Lease on the terms and conditions set forth in this Lease and the above Master Equipment Lease Agreement (the "Agreement"). Lessor and Lessee hereby affirm the Agreement and incorporate its terms in this Lease by this reference. Various terms used in each of the two documents are defined with reference to the other. 2. Equipment Description --------------------- Set forth below or in Exhibit A attached hereto:
NAME AND ADDRESS COMPLETE DESCRIPTION OF EQUIPMENT OF SUPPLIER QUANTITY (NEW UNLESS OTHERWISE SPECIFIED) PRICE - ----------------------------------------------------------------------------------------------------------------------------- --------------- TOTAL PRICE ---------------------------------------------------------------------------- FED. EXCISE TAX $ ---------------------------------------------------------------------------- TRANSPORTATION $ ---------------------------------------------------------------------------- OTHER $ - -----------------------------------------------------------------------------------------------------------------------------
3. Recovery Period Category for Federal Tax Purposes: Five (5) year property -------------------------------------------------- (See Section 10(b) of the Agreement) 4. Cost and Date Limitations ------------------------- The Total Cost of all Equipment accepted under this Lease (including manufacturer's invoice cost plus taxes, freight, installation and related costs approved by Lessor) shall not exceed _____________. No Item may be accepted under this Lease after _________, ("Purchase Cut-Off Date"). 5. Rent ---- Lessee will pay rent for each Item in the number of consecutive payments as shown below. Rent payments will be due and payable on each rent payment date during the Item's Lease Term. Each periodic rent payment will equal the Item's Total Cost (as specified in its Certificate of Acceptance) times the Periodic Rental Rate shown below. Interim Rent: Interim Rental Rate: ______________ (____%) percentage point(s) above ------------------- ---------------------- 30 Day Commercial Paper Periodic Rent: ------------- Number of rent payments: _____ (__) ---------- Rent Payment Factor (for each installment): _______% percent (%) of -------- Lessor's Cost of the Equipment** Payment Schedule: MONTHLY IN ARREARS ------------------------------------- Basic Term Length: ------------------------------------- **RENTAL ADJUSTMENT: The rental factor(s) expressed above as a percentage of Equipment Cost will be adjusted at lease closing in accordance with the following formula: The rental factor will be converted to a simple interest equivalent rate that is then increased or decreased 1% for each 1% (or pro rata for any fraction of 1%) change in the average yield of Three year U.S. Treasury Constant Maturities (as published in Federal Reserve Statistical Release H.15[519]) from the complete one week period immediately preceding the date of lease closing. Section 16. LESSEE'S OPTIONS AT EXPIRATION OF LEASE TERM of the Master -------------------------------------------- Equipment Lease Agreement, and only with respects to Equipment Lease No. One, is amended to include the following changes: (a) The reference to "One Hundred Twenty (120) days" is amended to "Ninety (90)" and the reference of "Lease" in the following sentence, "...following options with respect to all (but not less than all) Items covered by the Lease,..." is change to "Lease Closing Schedules". (b) The reference to "the continental United States" is amended to "California". Section 16. LESSEE'S OPTIONS AT EXPIRATION OF LEASE TERM of the Master -------------------------------------------- Equipment Lease Agreement, and only with respects to Equipment Lease No. One, is amended to include the following additional paragraph: (d) Provided that the lease term of the Equipment described in the Schedule has not been terminated and that no Event of Default under the Lease has occurred and is continuing, Lessee shall have the option to purchase all but not less than all of the Equipment at the end of the 48th month thereof (the "Early Purchase Option Date") for an amount (the "Early --------------------------- ----- Purchase Option Price"), payable in immediately available funds, equal to --------------------- THIRTY-ONE AND 09/100 percent (31.09%) of the Acquisition Cost, plus an amount equal to all sales or excise taxes on or measured by the sale of the Equipment to Lessee, and provided further that Lessee shall have notified Lessor in writing of Lessee's intention to exercise such option not more than ninety (90) nor less than sixty (60) days prior to the Early Purchase Option Date. Such option shall be exercisable only on the Early Purchase Option Date and at no other time. If the Early Purchase Option Price of the Equipment has not been paid to Lessor on the Early Purchase Option Date, Lessee shall continue to pay rent for the Equipment as specified in the Lease. A COMPLETE EQUIPMENT LIST WILL BE REVIEWED BY LESSOR'S ASSET MANAGEMENT DEPARTMENT PRIOR TO CLOSING TO ENSURE THAT THE ECONOMICS OF THE TRANSACTION HAVE BEEN MAINTAINED. A CHANGE IN THE ECONOMICS MAY RESULT IN AN ADJUSTMENT OF THE RENTAL FACTOR AND/OR THE EARLY PURCHASE OPTION PRICE DISCLOSED ABOVE. 6. Sales/Use Tax ------------- Sales or use tax shall be payable by Lessee on or along with each rent payment or upfront or Lessee will attach its sales/use tax exemption certificate, if applicable. 7. Required Documents ------------------ Unless Lessor shall have given written approval for partial payment, Lessor will be obligated to pay the Total Cost of any Item only when it has received and approved the following true and correct documents: (a) A Certificate of Acceptance for the Item signed by Lessee. (b) An original invoice from the vendor of the Item showing its Total Cost, or from Lessee if the transaction is a sale and leaseback of the Item. (c) If the invoice for the Item shows Lessee rather than Lessor as the "sold to" party, an assignment of the Lessee's purchase order, or, in Lessor's discretion a bill of sale for the Item from the vendor of the Item to Lessor, or from Lessee if the transaction is a sale and leaseback of the Item, in form and substance satisfactory to Lessor. (d) An authorizing board resolution and incumbency certificates or other authorization acceptable to Lessor. (e) If required by Lessor, a Guaranty of Lessee's obligations under this Lease together with authorizing board or partnership resolution of the guarantor. (f) The certificates of insurance or copies of policies required by Section 9 of the Agreement. (g) Uniform Commercial Code Financing Statement(s) as prepared by Lessor and signed by Lessee. (h) Such other documents as Lessor may reasonably request, including without limitation appropriate filings and notices if the transaction is a sale and leaseback of the Item. (i) Partial Payment Authorization (if applicable). 8. Closing Schedules. ------------------ Lessor shall send Lessee one or more Closing Schedules with respect to this Lease setting forth any adjustments to Equipment description, payment schedules, stipulated loss values and other matters. LESSOR: LESSEE: METLIFE CAPITAL CORPORATION POWER INTEGRATIONS, INC. By: ________________________________ By:_________________________________ Vice President Its:________________________________ Its:________________________________ Date Signed:________________________ EX-27.1 4 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 10,708 27,493 6,821 1,243 9,017 53,236 15,849 9,272 59,813 15,119 0 0 0 12 42,541 59,813 48,456 49,856 26,865 26,865 13,560 0 329 10,206 1,735 8,471 0 0 0 8,471 0.70 0.65
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