<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1997
REGISTRATION NO. 333-35421
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
POWER INTEGRATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 3674 94-3065014
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
477 N. MATHILDA AVE.
SUNNYVALE, CA 94086
(408) 523-9200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
HOWARD F. EARHART
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER INTEGRATIONS, INC.
477 N. MATHILDA AVE.
SUNNYVALE, CA 94086
(408) 523-9200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
BRUCE E. SCHAEFFER, ESQ. GAIL CLAYTON HUSICK, ESQ.
GRAY CARY WARE & FREIDENRICH J. MICHAEL ARRINGTON, ESQ.
A PROFESSIONAL CORPORATION DANIEL P. DILLON, ESQ.
400 HAMILTON AVENUE WILSON SONSINI GOODRICH & ROSATI
PALO ALTO, CA 94301-1825 PROFESSIONAL CORPORATION
(650) 328-6561 650 PAGE MILL ROAD
PALO ALTO, CA 94304-1050
(650) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 21, 1997
PROSPECTUS
SHARES
[POWER INTEGRATIONS LOGO APPEARS HERE]
COMMON STOCK
Of the 4,000,000 shares of Common Stock offered hereby, 2,100,000 shares are
being sold by the Company and 1,900,000 shares are being sold by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $10.00 and $12.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol POWI.
--------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
- --------------------------------------------------------------------------------
Total (3)................ $ $ $ $
================================================================================
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $1,000,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
600,000 additional shares of Common Stock solely to cover over-allotments,
if any. If all such shares are purchased, the total Price to Public,
Underwriting Discount, and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997, at the office of the agent of Hambrecht &
Quist LLC in New York, New York.
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY SECURITIES, INC.
BANCAMERICA ROBERTSON STEPHENS
, 1997
<PAGE>
(LOGO OF (GRAPHIC OF Patented TOPSwitch devices
POWER INTEGRATIONS, INC. COMPONENTS achieve a high level of
APPEARS HERE) CONTAINED IN A integration, combining a
TOPSWITCH controller, MOSFET and
APPEARS HERE) other electronic
components in a single IC.
(GRAPHIC OF IC APPEARS
HERE)
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
TOPSwitch and the Power Integrations logo are trademarks of the Company.
This Prospectus contains trademarks of other companies.
<PAGE>
(LOGO OF LARGE, DIVERSE MARKETS AND APPLICATIONS
POWER
INTEGRATIONS,
INC.
APPEARS HERE)
TOPSWITCH ICS ENABLE COST-EFFECTIVE INTEGRATION
OF AC TO DC SWITCHING POWER SUPPLIES.
(GRAPHIC OF TOPSWITCH IC AND A TYPICAL POWER SUPPLY AND THE PRODUCTS
THAT INCORPORATE SUCH POWER SUPPLIES UTILIZING TOPSWITCH ICs,
INCLUDING CELLULAR PHONE CHARGERS, DESKTOP PCs, VCRs AND
SET-TOP DECODERS APPEAR HERE)
- ----------------------------------
Based on a common, scalable architecture, Power Integrations' TOPSwitch ICs
operate over a wide power range. Customers incorporate TOPSwitch ICs into a
broad array of switching power supplies to address a large number of
high-volume markets.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes appearing elsewhere in this
Prospectus. The Common Stock offered hereby involves a high degree of risk. See
"Risk Factors."
THE COMPANY
Power Integrations, Inc. (the "Company") designs, develops and markets
proprietary, high-voltage analog integrated circuits ("ICs") for use in AC to
DC power conversion. The Company has targeted high-volume power supply markets,
including the cellular telephone, personal computer, cable and direct broadcast
satellite and various consumer electronics markets. The Company is initially
focusing on those markets that are sensitive to size, portability, energy
efficiency and time-to-market. The Company believes its patented TOPSwitch ICs,
introduced in 1994, are the first highly integrated power conversion ICs to
achieve widespread market acceptance. The Company introduced an enhanced family
of ICs, TOPSwitch-II, in April 1997. See "Business--Intellectual Property and
Others Proprietary Rights."
Virtually every electronic device that plugs into a wall socket requires some
type of power supply to convert high-voltage, alternating current ("AC") into
low-voltage, direct current ("DC"). A large segment of the power supply market
in the 0.5 to 150 watt power range consists of switching power supplies
("switchers") which typically use a high-voltage discrete semiconductor along
with other components to perform the power conversion. Discrete solutions,
which emerged in the 1970's, have not kept pace with the rapid integration
trends in the electronics industry and require numerous components and a high
level of system complexity compared to a more highly integrated IC solution.
The limitations of discrete switchers have become more pronounced as a result
of increasing consumer demand for smaller and lighter electronic devices,
government guidelines promoting energy efficiency and manufacturers' continuing
efforts to reduce costs and simplify system designs. However, prior attempts to
replace discrete switchers with integrated switchers through the use of high-
voltage analog ICs did not achieve widespread acceptance because they were not
as cost-effective as discrete alternatives.
The Company's objective is to be the leading provider of high-voltage power
conversion ICs that cost effectively enable the integration of AC to DC
switching power supplies. The Company's strategy is to target high-volume
switching power supply markets with its families of TOPSwitch products. End
users include Motorola, Samsung Electronics and Nokia in the cellular telephone
market, certain of the world's largest PC manufacturers, and Pace, Nokia and
API (Sun Moon Star) in the cable and direct broadcast satellite market. The
Company also sells its products into a wide variety of other markets which
include PC peripherals, televisions, VCRs, industrial meters and kitchen
appliances. As these and other markets emerge as significant opportunities for
the Company's TOPSwitch products, the Company intends to focus its resources on
the development and penetration of these markets.
To accelerate its market penetration, the Company has dedicated approximately
15% of its workforce to applications engineering and offers its customers
comprehensive application design support including extensive application notes
and production-ready reference design boards. The Company sells its products to
OEMs and merchant power supply manufacturers through a direct sales staff and a
worldwide network of independent sales representatives and distributors. The
Company has established strategic partnerships with Matsushita Electronics
Corporation and OKI Electric Industry Co., Inc. in order to attain high-volume
manufacturing resources, broad market penetration and royalty revenues.
The Company was incorporated in California in March 1988, and will
reincorporate in Delaware prior to the consummation of this offering. The
Company's executive offices are located at 477 N. Mathilda Avenue, Sunnyvale,
California 94086. Its telephone number is (408) 523-9200. Its e-mail address is
[email protected].
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company.......................... 2,100,000 shares
Common Stock offered by the
Selling Stockholders............. 1,900,000 shares
Common Stock to be outstanding
after the offering............... 11,467,036 shares (1)
Use of proceeds................... For working capital and other general
corporate purposes as well as the repayment
of $3.0 million of subordinated debt. See
"Use of Proceeds."
Proposed Nasdaq National Market
symbol........................... POWI
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED DECEMBER 31, ENDED SEPT. 30,
------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF (UNAUDITED)
OPERATIONS DATA:
Net revenues.......... $ 1,944 $ 5,763 $ 7,126 $18,415 $23,943 $ 17,055 $30,458
Gross profit (loss)... (114) 1,999 2,802 6,044 8,397 5,731 12,856
Income (loss) from
operations........... (5,406) (3,167) (2,723) (363) (585) (766) 3,292
Net income (loss) .... $(5,409) $(3,532) $(2,752) $ (803) $(1,341) $ (1,287) $ 2,370
Pro forma net income
(loss) per share..... $ (0.14) $ (0.13) $ 0.23
Pro forma weighted
average common and
common equivalent
shares (2)........... 9,580 9,556 10,468
</TABLE>
<TABLE>
<CAPTION>
SEPT. 30, 1997
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..... $10,275 $27,758
Working capital....................................... 11,076 29,862
Total assets.......................................... 27,350 44,833
Long term debt and capitalized lease obligations, net
of current portion................................... 4,160 2,463
Stockholders' equity.................................. 12,096 32,579
</TABLE>
- --------
(1) Excludes 733,959 shares of Common Stock issuable upon exercise of
outstanding options at September 30, 1997 with a weighted average exercise
price of $1.50 per share and 474,216 shares of Common Stock issuable upon
exercise of outstanding warrants at September 30, 1997 with a weighted
average exercise price of $3.65 per share. See "Capitalization" and
"Management--Stock Plans" and Notes 6 and 7 of Notes to Consolidated
Financial Statements.
(2) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute per
share amounts.
(3) Adjusted to reflect the sale of 2,100,000 shares of Common Stock offered by
the Company hereby at an assumed public offering price of $11.00 per share
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
----------------
Except as otherwise noted, all information in this Prospectus assumes (i) no
exercise of the Underwriters' over-allotment option, (ii) the reincorporation
of the Company in Delaware, (iii) the amendment of the Company's Certificate of
Incorporation prior to the effective date of this offering effecting a 1 for
6.8 reverse stock split, (iv) the conversion of all outstanding shares of
Preferred Stock of the Company into an aggregate of 7,446,923 shares of Common
Stock upon the consummation of this offering and (v) no exercise of outstanding
warrants.
4
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. The following risk factors
should be considered carefully in addition to the other information in this
Prospectus before purchasing the shares of Common Stock offered hereby.
Unpredictable and Fluctuating Operating Results. The Company's quarterly and
annual revenues and operating results have varied significantly in the past,
are difficult to forecast, are subject to numerous factors both within and
outside of the Company's control, and may fluctuate significantly in the
future. Although the Company achieved profitability in the quarters ended June
30, 1997 and September 30,1997, there can be no assurance that the Company
will continue to be profitable in future periods. The Company believes that
period-to-period comparisons are not necessarily meaningful and should not be
relied upon as indicative of future operating results. The Company believes
that the growth in revenues and operating income in the first nine months of
1997 compared to the first nine months of 1996 resulted in large part from a
combination of factors relating to transitions in the Company's strategy,
increasing market acceptance of the Company's TOPSwitch products and customer
ordering patterns. Similar growth rates are not expected in future periods.
The Company's revenues and operating results are substantially dependent
upon the volume and timing of orders received by the Company from its
customers. The Company's lengthy sales cycle limits its visibility regarding
future financial performance. The Company is also subject to the risks to
which the markets for its customers' or end users' products are subject and to
technological or other changes in those markets, which may affect customer
buying patterns. In addition, the ordering patterns of some of the Company's
existing large customers have been unpredictable in the past, and the Company
expects that customer ordering patterns will continue to be unpredictable in
the future. Not only does the volume of units ordered by particular customers
vary substantially from period to period, but purchase orders received from
particular customers often vary substantially from early oral estimates
provided by those customers to the Company for planning purposes. The
Company's business is characterized by short-term customer orders and shipment
schedules, and customer orders typically can be canceled or rescheduled
without significant penalty to the customer. The Company has in the past
experienced customer cancellations of substantial orders for reasons beyond
the Company's control, and significant cancellations could occur again at any
time in the future.
The Company's revenues and operating results are also subject to competitive
pressures on selling prices. Historically, average selling prices of products
in the semiconductor and the high-voltage AC to DC power supply industries
have decreased over the lives of the products. If the Company is unable to
successfully introduce new products with higher average selling prices or is
unable to reduce manufacturing costs to offset expected decreases in the
prices of its existing products, the Company's operating margins will be
adversely affected.
The Company's operating results are also substantially dependent upon the
volume and timing of orders placed by the Company with its foundries. Due to
the absence of substantial noncancellable backlog, the Company must plan its
production and inventory levels based on internal forecasts of customer
demand, which is unpredictable and may fluctuate substantially. Because of
recent increases in demand for its products, the Company is currently seeking
to increase the level of its inventories. If the Company underestimates the
number of units required to meet customer demand and fails to maintain
adequate inventory levels, the Company may lose significant revenue
opportunities and may lose market share to competitors. On the other hand, if
the Company overestimates the number of units required to meet customer
demand, the Company's operating results may be materially and adversely
affected as a result of costs associated with carrying excess inventory and
with obsolescence. Excess inventory and obsolescence costs could be further
increased by any unestimated returns from the Company's distributors or
customers.
Other factors which may affect the Company's revenues and operating results
include the availability of raw materials; fluctuations in manufacturing
yields, whether resulting from the transition to new foundries or
5
<PAGE>
from other factors; changes in product mix including the impact of new product
introduction on existing products; the Company's ability to develop and bring
to market new products and technologies on a timely basis; introduction of
products and technologies by the Company's competitors; market acceptance of
the Company's and its customers' products; the timing of investments in
research and development and sales and marketing; cyclical semiconductor
industry conditions; fluctuations in exchange rates, particularly exchange
rates between the U.S. dollar and the Japanese yen; changes in the
international business climate; and economic conditions generally.
The Company's operating results in a future quarter or quarters are likely
to fall below the expectations of public market analysts or investors. In such
an event, the price of the Company's Common Stock will likely be materially
and adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Limited History of Profitability; Accumulated Deficit. Since inception the
Company has incurred significant losses and negative cash flow. At September
30, 1997, the Company had cumulative net losses of $24.4 million, with net
losses of $2.8 million, $803,000, $1.3 million and $71,000 for 1994, 1995,
1996 and the first quarter of 1997, respectively. Although the Company was
profitable on an operating basis in the fourth quarter of 1996 and in each
quarter during the nine-month period ended September 30, 1997, and achieved a
positive net income for the quarters ended June 30, 1997 and September 30,
1997, there can be no assurance that the Company will achieve profitability in
any future quarterly or annual periods, and recent operating results should
not be considered indicative of future financial performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Concentration of Applications. A limited number of applications of the
Company's products, primarily in the cellular phone battery chargers and
desktop PC stand-by markets, currently account for the majority of the
Company's revenues. Although the exact dollar amounts and percentages of sales
for use in particular markets are difficult to ascertain because such sales
occur through distributors or indirectly through sales to power supply
manufacturers, during the nine-month period ended September 30, 1997,
approximately 30% of the Company's revenues were attributable to use of the
Company's products in power supplies for cellular phone battery chargers and
approximately 16% of the Company's revenues were attributable to the use of
the Company's products in desktop PC stand-by power supplies. The Company
expects that its revenues and operating results will continue to be
substantially dependent upon these markets for the foreseeable future. The
cellular phone and desktop PC markets can be highly cyclical and have been
subject to significant economic downturns at various times, characterized by
diminished product demand, accelerated erosion of average selling prices and
production overcapacity. The Company may experience substantial period-to-
period fluctuations in future operating results due to general conditions of
these markets. The Company's revenues and operating results are subject to
many of the risks to which the markets for these applications are subject, and
may also be impacted by technological or other developments in these markets.
In particular, recent advances in battery technology which offer competitive
advantages to the OEMs of cellular telephones permit such OEMs, including
Motorola, Inc. and its subsidiaries ("Motorola"), to lower, or consider
lowering, the wattage level of the power supplies used to recharge batteries.
As the output power drops below approximately 5 watts, older technological
alternatives to switchers can be more cost effective than any of the Company's
current products. While the Company continues its efforts to enhance the cost
effectiveness of TOPSwitch-based switchers, there can be no assurance that the
Company will be successful in its efforts, and, in the absence of a successful
competitive response by the Company, demand for the Company's products would
be materially adversely affected. Similarly, if a competitor of the Company
successfully and cost effectively combines desktop PC stand-by power supplies
with the main PC desktop power supplies prior to such combination by the
Company, demand for the Company's products could be materially adversely
affected. The Company believes that its future success will depend in part
upon its ability to penetrate additional markets for its products, and there
can be no assurance that the Company will be able to overcome the marketing or
technological challenges necessary to do so. To the extent that a competitor
penetrates additional markets before the Company is able to do so, or takes
market share from the Company in its existing markets, the Company's strategy
to be the leading provider of high-voltage power conversion ICs, and the
Company's revenues, financial condition and operating results would be
materially adversely affected. See "Business--Markets & Customers."
6
<PAGE>
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, accounted
for a significant portion of the Company's revenue in 1996 and the nine months
ended September 30, 1997. Motorola is presently the Company's largest end
user. Although the exact dollar amounts and percentages of sales to Motorola
are difficult to ascertain because most of such sales occur through
distributors or indirectly through sales to merchant power supply
manufacturers which, in turn, sell power supplies to Motorola, the Company
estimates that direct and indirect sales to Motorola accounted for
approximately 20% of the Company's net revenues for the nine months ended
September 30, 1997.
The Company estimates that its top ten customers, including distributors
which resell to Motorola and other large OEMs and merchant power supply
manufacturers, accounted for 64% and 75% of the Company's net revenues for
1996 and the nine months ended September 30, 1997, respectively. The Company
expects that it will continue to be dependent upon a relatively limited number
of customers for a significant portion of its net revenues in future periods,
although none of them is presently obligated to purchase any specified amounts
of products or to provide the Company with binding forecasts of product
purchases for any period. The Company's products are typically one of many
components used in a larger product produced by the Company's customers.
Demand for the Company's products is therefore subject to many risks beyond
the Company's control, including, among others, competition faced by the
Company's customers in their particular industries, market acceptance of the
products of the Company's customers, technical challenges which may or may not
be related to the components supplied by the Company, the technical, sales and
marketing and management capabilities of the Company's customers, and the
financial and other resources of the Company's customers. Certain divisions
within Motorola have developed products intended to compete with TOPSwitch, as
has Samsung Electronics ("Samsung"), another customer of the Company's
products. The Company believes that it has been successful in competing
against such internally developed products to date, but there can be no
assurance that it will not in the future lose sales as a result of such
competing products. The reduction, delay or cancellation of orders from
Motorola or one of the Company's other significant customers, or the
discontinuance of the Company's products by the Company's end users, could
materially and adversely affect the Company's business, financial conditions
and results of operations. The Company has experienced such effects in the
past and there can be no assurance that any of the Company's customers will
not reduce, cancel or delay orders in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Slower Growth Rates in Orders from Significant Customers. As Motorola
continues to shift to cellular phone chargers with power ranges below 5 watts
and, in certain lower end products, trades form factor and functionality for
additional cost savings, Motorola may increase its usage of solutions based on
older technologies rather than switchers. As a result of these factors, the
Company has received indications that the growth rate of orders from Motorola
is likely to slow, and there is no assurance that direct or indirect orders
from Motorola will not decline from levels experienced in prior quarters. If
the Company's current efforts to enhance the cost-effectiveness of solutions
utilizing TOPSwitch are not successful in preventing this slowing of growth or
decline in orders, the Company's business, financial condition and operating
results will be materially and adversely affected, unless the Company is able
to offset any such reduction with orders from other customers.
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. See
"Business--Manufacturing."
7
<PAGE>
The Company's wafer supply contracts with OKI and MEC terminate in June 1998
and June 2000, respectively. There can be no assurance that the Company will
be able to reach an agreement with either company to extend the term of its
respective wafer supply agreements. The Company's failure to reach, in a
timely fashion, an extension of either agreement or to enter into an
arrangement with another manufacturer, could result in material disruptions in
supply. Certain contractual provisions limit the conditions under which the
Company can enter into such arrangements with other Japanese manufacturers or
their subsidiaries during the term of the agreement with MEC. In addition, the
Company's products do not require leading edge device process geometries. As
device process geometries become increasingly smaller and as demand for such
smaller geometries increases, MEC and OKI may decide at some point to convert
all of their manufacturing processes to smaller geometries in response to
these industry trends. In the event of a supply disruption with OKI or MEC, if
the Company were unable to qualify alternative manufacturing sources for
existing or new products in a timely manner or if such sources were unable to
produce wafers with acceptable manufacturing yields, the Company's business,
financial condition and operating results would be materially and adversely
affected. The Company estimates that it would take between 9 to 12 months from
the time an alternate manufacturing source is identified for such source to
produce wafers with acceptable manufacturing yields in sufficient quantities
to meet the Company's needs. See "Business--Manufacturing."
The Company typically receives shipments from MEC or OKI in approximately 12
to 14 weeks after placing orders, and lead times for new products can be
substantially longer. To provide sufficient time for assembly, testing and
finishing, the Company typically needs to receive wafers from MEC or OKI 4 to
6 weeks before the desired ship date to the Company's customers. As a result
of these factors and the fact that customers' orders can be made with little
advance notice, the Company has only a limited ability to react to
fluctuations in demand for its products, which could cause the Company to have
an excess or a shortage of inventory of a particular product. From time to
time in the past, the Company has been unable to fully satisfy customer
requests as a result of these factors. Any significant disruptions in
deliveries would materially and adversely affect the Company's business and
operating results. Although the Company provides OKI and MEC with rolling
forecasts of its production requirements, the ability of MEC or OKI to provide
wafers to the Company is limited by the available capacity of the foundry in
which it manufactures wafers for the Company. An increased need for capacity
to meet internal demands or demands of other customers could cause MEC and OKI
to reduce capacity available to the Company. MEC and OKI may also require the
Company to pay amounts in excess of contracted or anticipated amounts for
wafer deliveries or require that the Company make other concessions in order
to acquire the wafer supply necessary to meet the Company's customers'
requirements. Any such concessions could materially adversely affect the
Company's business, financial condition or operating results. See "Business--
Manufacturing."
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. The manufacture of the Company's TOPSwitch
products utilizes a CMOS process with a proprietary, highly sensitive implant
process step. To the extent the wafer foundries do not achieve acceptable
manufacturing yields or they experience product shipment delays, the Company's
financial condition or results of operations would be materially and adversely
affected. The Company's IC assembly process requires a sole source high-
voltage molding compound that is difficult to process. This compound and its
required processes, together with the other non-standard materials and
processes needed to assemble the Company's products, require a more exacting
level of process control than normally required for standard packages.
Unavailability of the sole source compound or problems with the assembly
process can materially and adversely 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 Licensing Technology to Third Parties. MEC currently manufactures
and sells its versions of the Company's TOPSwitch families of products under
the right (exclusive during the term of the contract as
8
<PAGE>
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. In certain circumstances, these products are redistributed by the
Japanese customers to their manufacturing operations in other regions.
Beginning in April 1997, the Company agreed not to sell its products in Japan
to new customers. The Company receives royalties on sales by MEC, although
such royalties are substantially lower than the gross profit the Company would
receive on direct sales. In addition, the royalties paid by MEC are
denominated in Japanese yen and are subject to risks inherent in exchange rate
fluctuations. Although the Company engages in sales, marketing and support
activities to encourage sales by MEC, should MEC fail to adequately promote
and deliver the Company's products, the Company's ability to take advantage of
the potentially large Japanese market for its products could be severely
limited. OKI has a similar, non-exclusive license arrangement with the Company
but it does not currently manufacture and sell products to third parties. See
"Business--Intellectual Property and Other Proprietary Rights." Should the
Company fail to negotiate acceptable royalty-bearing extensions to its
contracts with MEC or OKI (if OKI begins to actively exercise its license
rights), substantial effort and expense would be required for the Company to
establish itself in this market directly or though a different partner, and
there can be no assurance that customers for MEC's or OKI's products would not
be lost to the Company during such a transition. In addition, the licenses to
MEC and OKI for many important aspects of the Company's technology are
perpetual, and there can be no assurance that MEC or OKI will not use such
technology rights, together with the information and expertise it gains in its
relationship with the Company, to develop or market competing products
following any termination of its relationships with the Company or after
termination of its royalty obligations to the Company. See "Business--Sales,
Distribution and Marketing."
Risks of International Sales. Sales to customers outside of the United
States were $2.9 million, $11.3 million, $16.8 million and $23.9 million in
1994, 1995 and 1996 and for the nine months ended September 30, 1997,
respectively, which represented 57%, 65%, 72% and 81% of total revenues for
such periods. These sales involve a number of inherent risks, including
imposition of government controls, currency exchange fluctuations, potential
insolvency of international distributors and representatives, reduced
protection for intellectual property rights in some countries, the impact of
recessionary environments in economies outside the United States, political
instability and generally longer receivables collection periods, tariffs and
other trade barriers and restrictions, and the burdens of complying with a
variety of foreign laws. Furthermore, because substantially all of the
Company's foreign sales are denominated in U.S. dollars, increase in the value
of the dollar would increase the price in local currencies of the Company's
products in foreign markets and make the Company's products relatively more
expensive and less price competitive than competitors' products that are
priced in local currencies. The Company is exposed to additional risks to the
extent that the products of its customers are subject to foreign currency or
other international risks. There can be no assurance that these factors will
not have an adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition or operating
results.
Dependence on Foreign Manufacturers and Assemblers. Because the Company
depends on MEC and OKI, both located in Japan, for the manufacture of all of
its finished silicon wafers and on foreign assembly subcontractors of its
products, the Company is directly affected by the political and economic
conditions of the countries in which its wafers are or are expected to be
manufactured. To the extent that these conditions result in any prolonged work
stoppages or other inability of the Company to manufacture and assemble its
products, the Company's business, financial condition or results of operations
could be materially adversely affected. The Company's contracts with MEC and
OKI are denominated in Japanese yen, exposing the Company to the risk of
increase in the value of the yen against the U.S. dollar resulting in
increased costs for finished wafers which could not be readily passed through
to the Company's customers.
New Products and Technological Change. The Company's future success depends
in significant part upon its ability to develop new ICs for high-voltage power
conversion for existing and new markets, to introduce such products in a
timely manner and to have such products selected for design into products of
leading manufacturers. The development of these new devices is highly complex,
and from time to time the Company has experienced delays in completing the
development of new products. Successful product development and introduction
depends on a number of factors, including accurate new product definition,
9
<PAGE>
timely completion and introduction of new product designs, availability of
foundry capacity, achievement of manufacturing yields and market acceptance of
the Company's and its customers' products. There can be no assurance that the
Company will be able to adjust to changing market demands as quickly and cost-
effectively as necessary to compete successfully. Furthermore, there can be no
assurance that the Company will be able to introduce new products in a timely
and cost-effective manner or in sufficient quantities to meet customer demand
or that such products will achieve market acceptance. The Company's or its
customers' failure to develop and introduce new products successfully and in a
timely manner would materially adversely affect the Company's business,
financial condition or operating results. Certain customers may defer or
return orders for existing products in response to the introduction of new
products. Although the Company maintains reserves against any such returns,
there can be no assurance that such resources will be adequate.
Lengthy Sales Cycle. The Company's products are generally incorporated into
a customer's products at the design stage. However, customer decisions to use
the Company's products (design wins), which can often require significant
expenditures by the Company without any assurance of success, often precede
volume sales, if any, by a year or more. If a customer decides at the design
stage not to incorporate the Company's products into its product, the Company
will not have another opportunity for a design win with respect to that
product for many months or years. Because of such lengthy sales cycle, the
Company may experience a delay between increasing expenses for research and
development and its sales and marketing efforts and the generation of volume
production revenues, if any, from such expenditures. Moreover, the value of
any design win will largely depend upon the commercial success of the
customer's product. There can be no assurance that the Company will continue
to achieve design wins or that any design win will result in future revenues.
Failure by the Company to timely develop and introduce products that are
incorporated into its customers' products could have a material adverse effect
on the Company's business, financial condition or results of operations.
Product Quality, Performance and Reliability. The fabrication and assembly
of ICs is a highly complex and precise process. The Company expects that its
customers will continue to establish demanding specifications for quality,
performance and reliability that must be met by the Company's products. ICs as
complex as those offered by the Company often encounter development delays and
may contain undetected defects or failures when first introduced or after
commencement of commercial shipments. The Company has from time to time in the
past experienced product quality, performance or reliability problems. There
can be no assurance that defects or failures will not occur in the future
relating to the Company's product quality, performance and reliability that
may have a material adverse effect on the Company's operating results. If such
defects and failures occur, the Company could experience lost revenue,
increased costs (including warranty expense and costs associated with customer
support), delays in or cancellations or reschedulings of orders or shipments
and product returns or discounts, any of which would have a material adverse
effect on the Company's business, financial condition or operating results.
Competition. The high-voltage power supply industry is intensely competitive
and characterized by extreme price sensitivity. Accordingly, the most
significant competitive factor in the target markets for the Company's
products is cost effectiveness. The Company's products face competition from
alternative technologies, primarily discrete switchers. The Company believes
that at current pricing, the TOPSwitch families of products offer favorable
cost performance benefits compared to discrete switchers in many high-volume
applications over the power range of approximately 0.5 watts to 150 watts.
However, any significant erosion in the price of discrete components, such as
high voltage Bipolar and MOSFET transistors and PWM controller ICs, could
adversely affect the cost effectiveness of the TOPSwitch products. Also, older
alternative technologies to switchers are more cost-effective than switchers
that use the Company's TOPSwitch products in certain power ranges for certain
applications. If power requirements for certain applications in which the
Company's products are currently utilized, such as battery chargers for
cellular telephones, drop below certain power levels, these older alternative
technologies can be used more cost effectively than TOPSwitch-based switchers.
The Company is continuing its efforts to enhance the cost effectiveness of
TOPSwitch-based switchers in the lower power ranges. There can be no assurance
that the Company will be successful in these efforts.
10
<PAGE>
Recently, the Company's TOPSwitch product families have begun to meet
additional competition from hybrid and single high-voltage ICs similar to
TOPSwitch. These competing products are being developed or have been developed
and are being produced by companies such as Motorola, SGS-Thompson
Microelectronics ("SGS"), Samsung and Sanken Electric Company, Ltd.
("Sanken"). The Company expects competition to increase as Motorola, SGS,
Samsung, Sanken and possibly other companies develop and introduce new
products. To the extent these competitors' products are more cost-effective
than the Company's products, the Company's business, financial condition and
results of operations could be materially and adversely affected. Many of the
Company's emerging competitors, including Motorola, SGS, Samsung and Sanken,
have significantly greater financial, technical, manufacturing and marketing
resources than the Company. In the context of a market where a high-voltage IC
is designed into a customer's product and the provider of such ICs is
therefore the sole source of the IC for that product, greater resources and,
in particular, greater manufacturing resources, may be a significant factor in
the customer's choice of the IC because of the customer's perception of
greater certainty in its source of supply. See "Risk Factors--Customer
Concentration and Competing Products from Customers."
The Company's ability to compete in its target markets also depends on such
factors as the timing and success of new product introductions by the Company
and its competitors, the pace at which the Company's customers incorporate the
Company's products into their end user products, availability of wafer
fabrication and finished good manufacturing capability, availability of
adequate sources of raw materials, protection of Company products by effective
utilization of intellectual property laws and general economic conditions.
There can be no assurance that the Company's products will continue to compete
favorably or that the Company will be successful in the face of increasing
competition from new products and enhancements introduced by existing
competitors or new companies entering this market. Failure of the Company to
compete successfully in the high-voltage power supply business would
materially and adversely affect the Company's business, financial condition
and results of operations. See "Business--Competition."
Dependence on Proprietary Technology. The Company's future success depends
in part upon its ability to protect its intellectual property, including
patents, trade secrets, and know-how, and to continue its technological
innovation. There can be no assurance that the steps taken by the Company to
protect its intellectual property will be adequate to prevent misappropriation
or that others will not develop competitive technologies or products.
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. While the Company has not
received formal notice of any infringement of the right of any third party,
questions of infringement in the semiconductor field involve highly technical
and subjective analyses. Litigation may be necessary in the future to enforce
the Company's patents and other intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity, and there can be no assurance that the Company would prevail in
any future litigation. Any such litigation, whether or not determined in the
Company's favor or settled by the Company, would be costly and would divert
the efforts and attention of the Company's management and technical personnel
from normal business operations, which would have material adverse effect on
the Company's business, financial condition and results of operations. Adverse
determinations in litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require
the Company to seek licenses from third parties or prevent the Company from
licensing its technology, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Moreover, the laws of certain foreign countries in which the Company's
technology is or may in the future be licensed may not protect the Company's
intellectual property rights to the same extent as the laws of the United
States, thus increasing the possibility of infringement of the Company's
intellectual property.
Dependence on Key Personnel. The Company's success depends to a significant
extent upon the continued service of its executive officers and other key
management and technical personnel, and on its ability to continue to attract,
retain and motivate qualified personnel, such as experienced systems
applications engineers. The competition for such employees is intense. The
loss of the services of one or more of the Company's engineers, executive
officers or other key personnel or the Company's inability to recruit
11
<PAGE>
replacements for such personnel or to otherwise attract, retain and motivate
qualified personnel could have a material adverse effect on the Company's
business, financial condition or operating results. The Company does not have
long-term employment contracts with any of its employees. The Company does not
have in place "key person" life insurance policies on any of its employees.
See "Business--Employees" and "Management."
Management of Growth. The Company has experienced a period of rapid growth
and expansion which has placed, and continues to place, a significant strain
on its resources. To accommodate this growth, the Company will be required to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the improvement of its accounting and other
internal management systems, all of which may require substantial management
efforts. There can be no assurance that such efforts can be accomplished
successfully. In addition, any future periods of rapid growth or expansion
could be expected to place a significant strain on the Company's limited
managerial, financial, engineering and other resources. Relationships with new
customers generally require significant engineering support. As a result, any
increases in the number of customers using the Company's technology will
increase the strain on the Company's resources, particularly the Company's
engineers. Any delays or difficulties in the Company's research and
development process caused by these factors or others could make it difficult
for the Company to develop future generations of its products and to remain
competitive. In addition, the rapid rate of hiring new employees could be
disruptive and adversely affect the efficiency of the Company's research and
development process. Any failure to improve the Company's operational,
financial and management systems, or to hire, train, motivate or manage its
employees could have a material adverse effect on the Company's business,
financial condition and operating results.
Concentration of Share Ownership and Voting Power; Anti-Takeover
Provisions. Upon the closing of this offering (assuming no exercise of the
Underwriters' over-allotment option), officers, directors and affiliates of
the Company will beneficially own approximately 29.0% of the Company's
outstanding Common Stock. As a result, these stockholders as a group will be
able to substantially influence the management and affairs of the Company and,
if acting together, would be able to influence most matters requiring the
approval by the stockholders of the Company, including election of directors,
any merger, consolidation or sale of all or substantially all of the Company's
assets and any other significant corporate transactions. The concentration of
ownership could have the effect of delaying or preventing a change in control
of the Company, reducing the likelihood of any acquisition of the Company at a
premium price. See "Principal and Selling Stockholders."
Upon the closing of this offering, the Company's Board of Directors ("Board
of Directors" or "Board") has the authority to issue up to 3,000,000 shares of
Preferred Stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by the stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be
issued in the future. The issuance of shares of Preferred Stock, while
potentially providing desirable flexibility in connection with possible
acquisitions and for other corporate purposes, could have the effect of making
it more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. The Company has no present intention to issue
shares of Preferred Stock. In addition, certain provisions of the Company's
Amended Certificate of Incorporation, which will become effective upon
consummation of this offering, may have the effect of delaying or preventing a
change of control of the Company, which could adversely affect the market
price of the Company's Common Stock. These provisions provide, among other
things, that stockholders may not take action by written consent, that the
ability of stockholders to call special meetings of stockholders and to raise
matters at meetings of stockholders is restricted and that certain amendments
of the Company's Certificate of Incorporation, and all amendments of the
Company's Bylaws, require the approval of holders of at least 66 2/3% of the
voting power of all outstanding shares. In addition, the Company is subject to
the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which will prohibit the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. The application of Section 203 also could have the effect of delaying
or preventing a change of control of the Company.
12
<PAGE>
Broad Management Discretion over Use of Proceeds. The primary purposes of
this offering are to increase the Company's equity capital, to create a public
market for the Company's Common Stock and to facilitate future access by the
Company to public capital markets. A significant portion of the anticipated
net proceeds to the Company from this offering has not been designated for
specific uses. Accordingly, management of the Company will have broad
discretion with respect to the use of these funds. See "Use of Proceeds."
Risks of Additional Shares Sold in the Public Market. Sales of substantial
amounts of Common Stock in the public market after this offering could
adversely affect the prevailing market price of the Common Stock. Immediately
upon the effectiveness of this offering, 4,000,000 shares will be freely
tradeable. Commencing 180 days following the date of this offering, an
additional 7,467,036 shares will become freely tradeable upon the expiration
of agreements not to sell such shares, subject to compliance with Rule 144
promulgated under the Securities Act of 1933, as amended. Hambrecht & Quist
LLC may in its sole discretion and at any time without notice, release all or
any portion of the securities subject to such agreements. Immediately after
this offering, the Company intends to register approximately 2,038,457 shares
of the Company's Common Stock reserved for issuance under its stock option and
purchase plans. See "Shares Eligible for Future Sale."
As of the effective date of the Registration Statement, the holders of
6,258,952 shares of the Company's Common Stock (including 474,216 shares
issuable upon exercise of outstanding warrants) will be entitled to certain
registration rights with respect to such shares. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have an adverse
effect on the market price for the Company's Common Stock. If the Company were
required to include in a Company initiated registration shares held by such
holders pursuant to the exercise of their piggyback registration rights, such
sale might have an adverse effect on the Company's ability to raise needed
capital. See "Description of Capital Stock--Registration Rights."
No Prior Market; Expected Volatility of Stock Price. Prior to this offering
there has been no public market for the Common Stock of the Company. The
initial public offering price will be determined by negotiations between the
Company, the Selling Stockholders and the Representatives of the Underwriters.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. There can be no assurance that
an active public market will develop or be sustained after this offering or
that the market price of the Common Stock will not decline below the initial
public offering price. Future announcements concerning the Company or its
competitors, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, proprietary rights
or other litigation, changes in earnings estimates by analysts or other
factors could cause the market price of the Common Stock to fluctuate
substantially. In addition, stock prices for many technology companies
fluctuate widely for reasons which may be unrelated to operating results.
These fluctuations, as well as general economic, market and political
conditions such as recessions or military conflicts, may materially adversely
affect the market price of the Company's Common Stock. Moreover, the trading
prices of many high technology stocks are at or near their historical highs
and reflect price/earning ratios substantially above historical norms. There
can be no assurance that the trading price of the Company's Common Stock will
remain at or near its initial offering price to the public. See
"Underwriting."
Immediate and Substantial Dilution to New Investors. The initial public
offering price is substantially higher than the book value per outstanding
share of Common Stock. Investors purchasing Common Stock in this offering
will, therefore, incur immediate dilution of $8.16 in net tangible book value
per share of Common Stock from the initial offering price and may incur
additional dilution upon the exercise of outstanding stock options. See
"Dilution."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,100,000 shares of
Common Stock offered by the Company hereby at an assumed initial public
offering price of $11.00 per share are estimated to be $20,483,000
($26,621,000 if the Underwriters' over-allotment option is exercised in full).
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders. See "Principal and Selling Stockholders."
The Company intends to use the net proceeds of this offering primarily for
working capital and general corporate purposes. The Company anticipates that
approximately $3.0 million of the net proceeds will be used to repay the
outstanding balance of the Company's subordinated debt to Hambrecht & Quist
Transition Capital, LLC, which bears interest at an annual rate of 12% and
which matures on November 15, 1999. See "Underwriting." The Company may in the
future use a portion of the net proceeds to make acquisitions of businesses,
products or technologies intended to broaden the Company's current product
offerings. The Company has no present plans, agreements or commitments and is
not currently engaged in any negotiations with respect to any such
transactions. The amount actually expended by the Company for working capital
purposes will vary significantly depending upon a number of factors, including
future revenue growth, the amount of cash generated by the Company's
operations and the progress of the Company's product development efforts.
Pending such uses, the Company expects to invest net proceeds in short-term
investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid or declared any cash dividends. It is the present
policy of the Company to retain earnings to finance the growth and development
of the business and, therefore, the Company does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. In addition, the
Company's bank credit facility contains covenants that prohibit the Company
from paying dividends without prior bank approval.
14
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of September 30, 1997, (ii) the pro forma capitalization to reflect the
conversion upon the closing of this offering of all outstanding shares of
Preferred Stock into shares of Common Stock, and (iii) the pro forma
capitalization as adjusted to reflect the sale of 2,100,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $11.00 per share and the application of the estimated net proceeds
therefrom. This table should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------
(UNAUDITED)
AS
ACTUAL PRO FORMA ADJUSTED
------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable to a certain shareholder (1):
Current portion................................... $ 1,303 $ 1,303 $ --
Long-term portion................................. 1,697 1,697
------- ------- -------
Total Note payable to a Shareholder.............. 3,000 3,000 --
------- ------- -------
Shareholders' equity:
Convertible Preferred Stock, $0.001 par value,
54,000,000 shares authorized, 45,863,796 shares
issued and outstanding as of September 30, 1997;
3,000,000 shares authorized, none issued and
outstanding pro forma and as adjusted........... 35,271 -- --
Common Stock, $0.001 par value, 100,000,000
shares authorized, 1,920,113 shares issued and
outstanding as of September 30, 1997; 40,000,000
shares authorized, pro forma; 11,467,036 shares
issued and outstanding as adjusted (2).......... 2,113 37,384 57,867
Common stock warrants............................ 12 12 12
Shareholder notes receivable..................... (405) (405) (405)
Deferred compensation............................ (495) (495) (495)
Cumulative translation adjustment................ (33) (33) (33)
Accumulated deficit.............................. (24,367) (24,367) (24,367)
------- ------- -------
Total shareholders' equity..................... 12,096 12,096 32,579
------- ------- -------
Total capitalization......................... $15,096 $15,096 $32,579
======= ======= =======
</TABLE>
- ------------
(1) See Note 4 of Notes to Consolidated Financial Statements.
(2) Excludes 733,959 shares of Common Stock issuable upon exercise of
outstanding options at September 30, 1997 with a weighted average exercise
price of $1.50 per share and 474,216 shares of Common Stock issuable upon
exercise of outstanding warrants at September 30, 1997 with a weighted
average exercise price of $3.65 per share. See "Capitalization" and
"Management--Stock Plans" and Notes 6 and 7 of Notes to Consolidated
Financial Statements.
15
<PAGE>
DILUTION
As of September 30, 1997, the Company had a net tangible book value of
approximately $12.1 million or $1.29 per share of Common Stock. Net tangible
book value per share represents the amount of total tangible assets of the
Company reduced by the amount of its total liabilities and divided by the
total number of shares of Common Stock outstanding (reflecting the conversion
of all preferred stock into 7,446,923 shares of Common Stock upon the closing
of the offering made hereby). Without taking into account any other change in
such net tangible book value after September 30, 1997, other than to give
effect to the sale by the Company of 2,100,000 shares offered hereby at an
assumed initial public offering price of $11.00 per share and receipt of the
estimated net proceeds therefrom, the pro forma net tangible book value of the
Company as of September 30, 1997, would have been approximately $32.6 million,
or $2.84 per share. This represents an immediate increase in such net tangible
book value of $1.55 per share to existing stockholders and an immediate
dilution of $8.16 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $11.00
Net tangible book value per share before the offering .......... $1.29
Increase per share attributable to new investors................ 1.55
-----
Pro forma net tangible book value per share after the offering.... 2.84
------
Dilution per share to new investors............................... $ 8.16
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997, the differences between the existing stockholders and the new investors
with respect to the number of shares of Common Stock purchased from the
Company, the total gross consideration paid and the average price per share
paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(1).................... 9,367,036 81.7% $37,166,000 61.7% $ 3.97
New investors (1)....... 2,100,000 18.3 23,100,000 38.3 11.00
---------- ----- ----------- -----
Total................. 11,467,036 100.0% $60,266,000 100.0%
========== ===== =========== =====
</TABLE>
The above computations assume no exercise of options and warrants after
September 30, 1997. As of September 30, 1997, there were outstanding options
to purchase 733,959 shares of Common Stock at a weighted average exercise
price of $1.50 per share and outstanding warrants to purchase 474,216 shares
of Common Stock at a weighted average exercise price of $3.65 per share. To
the extent outstanding options are exercised, there will be further dilution
to new investors. See "Management--Stock Plans" and Notes 6 and 7 of Notes to
Consolidated Financial Statements.
- ------------
(1) Sales by Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 7,467,036 or approximately 65.1%
of the total number of shares of Common Stock outstanding after this
offering (or 61.9% if the Underwriters' over-allotment option is exercised
in full), and will increase the number of shares held by new investors to
4,000,000 or approximately 34.9% of the total number of shares of Common
Stock outstanding after the offering (or 38.1% if the Underwriters' over-
allotment option is exercised in full). See "Principal and Selling
Stockholders."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus. The consolidated
statement of operations data for the years ended December 31, 1992 and 1993
and the consolidated balance sheet data at December 31, 1992, 1993 and 1994
are derived from audited consolidated financial statements not included
herein. The consolidated statement of operations data for the years ended
December 31, 1994, 1995 and 1996 and for the nine months ended September 30,
1997 and the consolidated balance sheet data at December 31, 1995 and 1996 and
September 30, 1997 are derived from, and are qualified by reference to, the
Consolidated Financial Statements included elsewhere in this Prospectus and
have been audited by and reported on by Arthur Andersen LLP, independent
public accountants, and should be read in conjunction with those Consolidated
Financial Statements and Notes thereto. The consolidated statement of
operations data for the nine months ended September 30, 1996 are derived from
the unaudited financial statements included elsewhere in this Prospectus but
have been prepared on the same basis as the audited financial statements and,
in the opinion of management, contain all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
information set forth therein. The results of operations for the nine months
ended September 30, 1997 are not necessarily indicative of results to be
expected for the full year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ----------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues:
Product sales......... $ 401 $ 1,578 $ 5,027 $17,406 $23,324 $16,646 $29,668
License fees and
royalties............ 1,543 4,185 2,099 1,009 619 409 790
------- ------- ------- ------- ------- ------- -------
Total net revenues.. 1,944 5,763 7,126 18,415 23,943 17,055 30,458
------- ------- ------- ------- ------- ------- -------
Cost of revenues........ 2,058 3,764 4,324 12,371 15,546 11,324 17,602
------- ------- ------- ------- ------- ------- -------
Gross profit (loss)..... (114) 1,999 2,802 6,044 8,397 5,731 12,856
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development.......... 1,858 2,050 2,366 2,044 3,519 2,559 3,696
Sales and marketing... 2,660 2,158 2,098 2,744 3,905 2,746 4,408
General and
administrative....... 774 958 1,061 1,619 1,558 1,192 1,460
------- ------- ------- ------- ------- ------- -------
Total operating
expenses........... 5,292 5,166 5,525 6,407 8,982 6,497 9,564
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (5,406) (3,167) (2,723) (363) (585) (766) 3,292
Interest and other
expense, net........... 27 (42) (23) (406) (726) (505) (549)
------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes.................. (5,379) (3,209) (2,746) (769) (1,311) (1,271) 2,743
------- ------- ------- ------- ------- ------- -------
Provision for income
taxes.................. 30 323 6 34 30 16 373
------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $(5,409) $(3,532) $(2,752) $ (803) $(1,341) $(1,287) $ 2,370
======= ======= ======= ======= ======= ======= =======
Pro forma net income
(loss) per share....... $ (0.14) $ (0.13) $ 0.23
======= ======= =======
Pro forma weighted
average common and
common equivalent
shares (1)............. 9,580 9,556 10,468
<CAPTION>
DECEMBER 31,
------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and short-term
investments............ $ 923 $ 898 $ 1,551 $ 3,800 $ 7,692 $10,275
Working capital......... 255 683 2,580 7,435 9,769 11,076
Total assets............ 1,799 2,798 5,371 15,729 19,535 27,350
Long term debt and
capitalized lease
obligations, net of
current portion........ 105 202 508 2,219 5,499 4,160
Stockholders' equity.... 702 1,102 3,306 9,512 9,098 12,096
</TABLE>
- -------
(1) See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used to
compute per share amounts.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
The following discussion contains forward-looking statements that involve
risks and uncertainties, including without limitation, statements of the
Company's plans, objectives, expectations and intentions. The Company's actual
results could differ materially from those projected in the forward-looking
statements discussed here. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors," as well as those
discussed elsewhere herein. The Company assumes no obligation to update the
forward-looking statements.
OVERVIEW
The Company designs, develops, manufactures and markets proprietary, high-
voltage, analog ICs for use in AC to DC power conversion primarily for the
cellular telephone, personal computer, cable and direct broadcast satellite
and various consumer electronics markets. From its inception in March 1988
through 1993, the Company developed numerous standard and custom products
incorporating high levels of features and functionality, each intended to
address the needs of various markets. Although the Company was successful in
developing the core of its patented technology during this period, market
penetration of its products was low because these products were not as cost-
effective as alternative discrete products. The limited product revenue,
combined with the high costs of developing and marketing numerous solutions to
numerous target markets, prevented the Company from achieving profitability.
In 1993, the Company changed its strategy to focus on bringing cost-
effective, integrated products to the high-voltage AC to DC power supply
markets. As a result, in 1994, the Company completed development of the first
of its TOPSwitch family of products. The TOPSwitch family of products, with a
proprietary integrated architecture, is designed to address with relatively
few products broad applications in a number of high-volume, high-voltage AC to
DC power supply markets. The initial target markets addressed by TOPSwitch are
particularly sensitive to size, portability, energy efficiency and time-to-
market. The TOPSwitch products and the solutions enabled by them are
significantly lower in costs than the Company's previous products and the
solutions enabled by those products. Commercial shipments of TOPSwitch began
in May 1994. Primarily as a result of the increasing sales of TOPSwitch
products, the Company's net revenues from product sales more than tripled
between 1994 and 1995, increasing from $5.0 million to $17.4 million. Net
revenues from product sales increased 34% between 1995 and 1996 and 78% in the
first nine months of 1997 compared to the first nine months of 1996.
By focusing on the TOPSwitch family of products, the Company was able to
more effectively utilize its resources and limit the growth of operating
expenses in 1994 and 1995. Because of this and the growth in net revenues,
operating expenses were reduced from 77.5% of net revenues in 1994 to 34.8% of
net revenues in 1995. In response to increasing market acceptance of its
TOPSwitch products and faster revenue growth, in 1996 the Company accelerated
its investment in research and development and sales and marketing, including
technical customer support, and, as a result, operating expenses increased
from $6.4 million in 1995 to $9.0 million in 1996 and from $6.5 million in the
first nine months of 1996 to $9.6 million in the first nine months of 1997.
The Company expects that operating expenses will continue to increase in
absolute dollars, but will fluctuate as a percentage of net revenues, as it
continues to add resources to research and development, sales and marketing
and general and administrative activities.
The Company has experienced increased net revenues in each of the last five
quarters, achieved a positive income from operations in each of the last four
quarters, and achieved positive net income in each of the quarters ended June
30, 1997 and September 30, 1997. However, the prediction of future operating
results is difficult. The Company's future operating results will depend on
many factors, including the volume and timing of orders received by the
Company from its customers; competitive pressures on selling prices; the
volume and timing of orders placed by the Company with its foundries; the
availability of raw materials;
18
<PAGE>
fluctuations in manufacturing yields, whether resulting from the transition to
new foundries or from other factors; changes in product mix; the Company's
ability to introduce new products and technologies on a timely basis; the
introduction of products and technologies by the Company's competitors; market
acceptance of the Company's and its customers' products; the timing of
investments in research and development and sales and marketing; cyclical
semiconductor industry conditions; fluctuations in exchange rates,
particularly the exchange rates between the U.S. dollar and the Japanese yen;
changes in the international business climate and economic conditions
generally. There can be no assurance that the Company will be able to sustain
profitability on a quarterly or annual basis. See "Risk Factors--Unpredictable
and Fluctuating Operating Results."
The Company licenses certain technologies and grants limited product
manufacturing and marketing rights to strategic partners in return for foundry
relationships, license fees and product royalty arrangements. Prior to the
introduction of TOPSwitch in 1994, the Company's analog ICs generated limited
product sales while license fees and prepaid royalties accounted for a
significant percentage of the Company's total revenues. In future periods, the
Company expects license fees and royalties to consist primarily of royalties
on products shipped by licensees incorporating licensed technology, and
anticipates that license fees and royalties will account for a small
percentage of net revenues. The Company does not expect significant prepaid
license fees from future license agreements.
A significant portion of the Company's cost of revenues consists of the cost
of wafers. The Company's contracts for its foundries' services are denominated
in Japanese yen. Changes in the exchange rate between the U.S. dollar and the
Japanese yen subject the Company's gross profit and operating results to the
potential for material fluctuations. From time to time, as the Company's
strategic partners close old production lines and move to new fabrication
facilities, the Company must absorb a portion of the costs of physically
moving the manufacturing of the Company's products to new production lines,
including the costs of installation of new process technologies. See "Risk
Factors--Dependence on Wafer Suppliers," "Risk Factors--Risks of Foreign
Manufacturers and Assemblers," "Business--Sales, Distribution and Marketing"
and "Business--Manufacturing."
Product revenues consist of sales to OEMs and merchant power supply
manufacturers and to distributors. Revenues from product sales to OEMs and
merchant power supply manufacturers are recognized upon shipment. At that
time, the Company provides for estimated sales returns and other allowances
related to those sales. Approximately half of the Company's sales are made to
distributors under terms allowing certain rights of return and price
protections for the Company's products held in the distributors' inventories.
Therefore, the Company defers recognition of revenue and the proportionate
cost of revenues derived from sales to distributors until such distributors
resell the Company's products to their customers. The gross profit deferred as
a result of this policy is reflected as "deferred income on sales to
distributors" on the Company's consolidated balance sheet. See Note 2 of Notes
to Consolidated Financial Statements.
In connection with the issuance of stock options to employees and
consultants, the Company has recorded deferred compensation in the aggregate
amount of approximately $566,000, representing the difference between the fair
market value of the Company's common stock and the exercise price of stock
options at the date of grant. The Company is amortizing the deferred
compensation expense over the applicable vesting period, which is typically
four years. For the nine month period ended September 30, 1997, the first
period effected by this deferred compensation charge, the amortization expense
was approximately $71,000, allocated to the appropriate operating expense
items. No compensation expense related to any other periods presented has been
recorded. See Note 7 of Notes to Consolidated Financial Statements.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share." The
requirements of SFAS No. 128 will become effective for the Company's year
ending December 31, 1997. If SFAS No. 128 had been applied by the Company, pro
forma basic income (loss) per share would have been $(0.14), $(0.13) and $0.23
for the year end December 31, 1996, and for the nine month periods ended
September 30, 1996 and 1997, respectively, and pro forma diluted income (loss)
per share would have been $(0.14), $(0.13) and $0.23 for the same periods,
respectively.
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total net revenues for the periods indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET REVENUES
------------------------------------------------------
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------- ------------------------
1994 1995 1996 1996 1997
------- ------- ------- ------------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Product sales......... 70.5% 94.5% 97.4% 97.6% 97.4%
License fees and
royalties............ 29.5 5.5 2.6 2.4 2.6
------- ------- ------- --------- ---------
Total net revenues.. 100.0 100.0 100.0 100.0 100.0
------- ------- ------- --------- ---------
Cost of revenues........ 60.7 67.2 64.9 66.4 57.8
------- ------- ------- --------- ---------
Gross profit............ 39.3 32.8 35.1 33.6 42.2
------- ------- ------- --------- ---------
Operating expenses:
Research and
development.......... 33.2 11.1 14.7 15.0 12.1
Sales and marketing... 29.4 14.9 16.3 16.1 14.5
General and
administrative....... 14.9 8.8 6.5 7.0 4.8
------- ------- ------- --------- ---------
Total operating
expenses........... 77.5 34.8 37.5 38.1 31.4
------- ------- ------- --------- ---------
Income (loss) from
operations............. (38.2) (2.0) (2.4) (4.5) 10.8
Interest and other
expense, net........... (.3) (2.2) (3.1) (2.9) (1.8)
------- ------- ------- --------- ---------
Income (loss) before
provision for income
taxes.................. (38.5) (4.2) (5.5) (7.4) 9.0
------- ------- ------- --------- ---------
Provision for income
taxes.................. .1 .2 .1 .1 1.2
------- ------- ------- --------- ---------
Net income (loss)....... (38.6)% (4.4)% (5.6)% (7.5)% 7.8%
======= ======= ======= ========= =========
</TABLE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Net revenues. Net revenues consist of revenues from product sales, which are
calculated net of returns and allowances, plus license fees and royalties paid
by licensees of the Company's technology. Net revenues increased 78.6% from
$17.1 million for the nine months ended September 30, 1996 to $30.5 million
for the nine months ended September 30, 1997. Net revenues from product sales
represented $16.6 million and $29.7 million of net revenues for the first nine
months of 1996 and 1997, respectively. The increase in net revenues from
product sales was due primarily to increased sales of the Company's TOPSwitch
family of products and, to a lesser extent, initial sales of the TOPSwitch-II
family of products, which began commercial shipment in April 1997. Net
revenues also grew because of an increase in royalty revenues, from $409,000
to $790,000 in the two periods, respectively.
International sales increased by $12.4 million in the first nine months of
1997 compared to the first nine months of 1996, growing from approximately 69%
of net revenues to approximately 81% respectively. Although the power supplies
using the Company's products are designed and distributed worldwide, most of
such power supplies are manufactured in Asia. As a result, the largest portion
of the Company's revenues is derived from sales to this region. The Company
expects international revenue to continue to account for a large portion of
the Company's net revenues. See "Risk Factors--Risks of International Sales."
For the nine months ended September 30, 1996, net revenues from one customer
accounted for approximately 12% of net revenues. For the nine months ended
September 30, 1997, net revenues from two different customers accounted for
approximately 16% and 23% of net revenues. For both periods, no other customer
accounted for more than 10% of net revenues. See "Risk Factors--Customer
Concentration and Competing Products from Customers" and Note 2 of Notes to
Consolidated Financial Statements.
20
<PAGE>
Gross profit. Gross profit is equal to net revenues less cost of revenues.
The Company's cost of revenues consists primarily of costs associated with the
purchase of wafers from MEC and OKI, the assembly and packaging of its
products, and internal labor and overhead associated with the testing of both
wafers and packaged components. These costs include expenses incurred in
connection with the physical move of the manufacturing of the Company's
products between wafer production lines at both of its foundry suppliers and
with the installation of new process technologies at these foundries, which
may recur from time to time and adversely effect the Company's cost of
revenues.
Gross profit increased from $5.7 million, or 33.6% of net revenues, to $12.9
million, or 42.2% of net revenues, in the first nine months of 1996 and 1997,
respectively, due to the combined effects of the absorption of certain fixed
costs over the increased sales volume, lower prices for wafers, partially as a
result of favorable foreign exchange rates, and improved packaging costs.
During this period the Company has experienced an improved foreign exchange
rate between the U.S. dollar and the Japanese yen, contributing approximately
$425,000, or approximately 1.4 percentage points, of the gross profit. Gross
profit in future periods may be influenced by fluctuations in the exchange
rate between the U.S. dollar and the Japanese yen.
Research and development expenses. Research and development expenses consist
primarily of employee-related expenses, expensed material and facility costs
associated with the development of new processes and new products. The Company
also expenses prototype wafers and mask sets related to new products as
research and development costs until new products are released to production.
Research and development expenses increased by 44.4%, from $2.6 million in the
first nine months of 1996 to $3.7 million in the first nine months of 1997.
The increase was primarily the result of increased salaries and other costs
related to the hiring of additional engineering personnel, outside consulting
fees and expensed prototype materials resulting from the transition of foundry
manufacturing processes with MEC and OKI. These expenses decreased as a
percentage of net revenues from 15.0% in the first nine months of 1996 to
12.1% in the comparable period of 1997 due to increased sales. The Company
expects that research and development expenses will continue to increase in
absolute dollars but will fluctuate as a percentage of net revenues.
Sales and marketing expenses. Sales and marketing expenses consist primarily
of employee-related expenses, commissions to sales representatives and
facilities expenses, including expenses associated with the Company's regional
sales and support offices. Sales and marketing expenses increased 60.5%, from
$2.7 million in the first nine months of 1996 to $4.4 million in the first
nine months of 1997, which represented 16.1% and 14.5% of net revenues,
respectively. This increase represents the addition of personnel to support
international sales and field application engineers. The Company expects that
sales and marketing expenses will continue to increase in absolute dollars but
will fluctuate as a percentage of net revenues.
General and administrative expenses. General and administrative expenses
consist primarily of employee-related expenses for administration, finance,
human resources and general management, and legal and auditing expenses. In
the first nine months of 1996 and 1997, general and administrative expenses
were $1.2 million and $1.5 million, which represented 7.0% and 4.8% of net
revenues, respectively. This increase in absolute dollars is attributable to
additional headcount to support the growth in the volume of sales. The Company
expects that general and administrative expenses will continue to increase in
absolute dollars but will fluctuate as a percentage of net revenues.
Interest and other expense, net. Interest and other expense, net, of
$505,000 and $549,000 in the first nine months of 1996 and 1997, respectively,
reflects interest incurred by the Company on its capital equipment lease
obligations and on the $3.0 million of subordinated debt originated in the
second quarter of 1996, partially offset by interest income earned on its cash
and short-term investments. The Company expects to pay off the subordinated
debt with the proceeds of this offering but to continue to utilize term debt
to finance its capital equipment needs. The Company further expects to realize
additional interest income in future periods from higher cash balances
resulting from the proceeds of this offering. See "Use of Proceeds" and
"Underwriting."
21
<PAGE>
Provision for income taxes. Provision for taxes for the nine months ended
September 30, 1996 and 1997 represents Federal, state and foreign taxes. The
increase in the effective rate from 1.3% for the nine months ended September
30, 1996 to 13.6% for the nine months ended September 30, 1997 reflects the
profitable results for the 1997 period. The difference between the statutory
rate and the Company's effective tax rate for 1997 is due to the impact of
benefitting net operating loss carryforwards offset partially by a change in
the deferred tax valuation allowance. As of September 30, 1997, the Company
had net operating loss carryforwards for Federal and state income tax
reporting purposes of approximately $18.6 million and $2.5 million,
respectively, which expire at various dates through 2011. See Note 8 of Notes
to Consolidated Financial Statements. The Company's ability to utilize such
operating losses will be dependent on several key factors including the
Company's future level of revenue and profitability, its market capitalization
and change in ownership.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Net Revenues. Net revenues were $7.1 million, $18.4 million and $23.9
million in 1994, 1995 and 1996, respectively. Net revenues from product sales
were $5.0 million, $17.4 million and $23.3 million in the same three fiscal
years, respectively, reflecting the growth in the Company's TOPSwitch family
of products, which comprised 18%, 68% and 79% of net revenues from product
sales in 1994, 1995 and 1996, respectively. For 1994, three customers
accounted for approximately 11%, 12% and 24% of net revenues. For 1995, three
customers accounted for approximately 12%, 20% and 21% of net revenues. For
1996, no individual customer accounted for more than 10% of net revenues. See
Note 2 of Notes to Consolidated Financial Statements. License fees consisted
of payments from foundry and technology licensing agreements with MEC and OKI
and a prior foundry. License fees have declined as fees payable pursuant to
license agreements executed in June 1990 and June 1993 sequentially declined
in accordance with the terms of those agreements. In future periods, the
Company expects license fees and royalties to consist primarily of royalties
paid on shipments by MEC and OKI of products that incorporate the Company's
licensed technologies.
Gross profit. Gross profit was $2.8 million, $6.0 million and $8.4 million,
representing 39.3%, 32.8% and 35.1% of net revenues, in 1994, 1995 and 1996,
respectively. The decline in gross profit as a percent of net revenues in 1995
as compared to 1994 was due to the lower license fees in 1995. Gross profit
from product sales during 1994 and 1995 rose from 14.0% to 28.9% of net
revenues from product sales, respectively, reflecting the effects of
absorption of fixed costs over increased sales volume and lower unit costs for
wafers, despite the impact of unfavorable foreign exchange rates. The increase
in gross profit in absolute dollars and as a percent of net revenues in 1996
over 1995 continued to reflect the absorption of fixed costs over a larger
sales volume and reductions in prices for wafers, partially as a result of
favorable exchange rates, and packaged assemblies.
Research and development expenses. Research and development expenses were
$2.4 million, $2.0 million and $3.5 million, which represented 33.2%, 11.1%
and 14.7% of net revenues, in 1994, 1995 and 1996, respectively. The decline
in research and development expenses in 1995 as compared to 1994 was primarily
due to a general reduction in staffing in 1994 to lower operating losses and
conserve cash. Research and development expenses increased 72.2% in 1996
compared to 1995 due to decisions to invest more heavily in the development of
the Company's technology to expand the cost effective power range of the
Company's TOPSwitch products. However, there can be no assurance that the
Company's increased research and development activities will be successful or
will lead to increased sales of the Company's current or future products.
Sales and marketing expenses. Sales and marketing expenses were $2.1
million, $2.7 million and $3.9 million, which represented 29.4%, 14.9% and
16.3% of net revenues, in 1994, 1995 and 1996, respectively. This increase in
absolute dollars reflected the addition of staff in both sales and application
engineering to improve the Company's ability to facilitate customers' use of
the Company's products in the design of new power supplies for specific
applications. The increased spending also reflects higher commissions
resulting from the increase in sales volume. The fluctuation in sales and
marketing expense as a percentage of net revenues reflects primarily the
increase in sales.
General and administrative expenses. General and administrative expenses
were $1.1 million, $1.6 million and $1.6 million, which represented 14.9%,
8.8% and 6.5% of net revenues, in 1994, 1995 and
22
<PAGE>
1996, respectively. As a percentage of net revenues, general and
administrative expenses decreased, reflecting primarily the increase in sales.
Interest and other expense, net. Interest and other expense, net, was
$23,000, $406,000 and $726,000, representing .3%, 2.2% and 3.1% of net
revenues, in 1994, 1995 and 1996, respectively. The increases reflect
increases in borrowings under the Company's capital lease lines, primarily to
finance the addition of test equipment to expand capacity to meet the
increased volume of sales and, in 1996, the addition of $3.0 million in
subordinated debt to provide additional cash to support operations.
Provision for income taxes. Provision for income taxes during 1994, 1995 and
1996 represented Federal and state minimum taxes and foreign taxes. As of
December 31, 1996, the Company had net operating loss carryforwards for
Federal and state income tax reporting purposes of approximately $23.0 million
and $6.5 million, respectively, which expire at various dates through 2011.
See Note 8 of Notes to Consolidated Financial Statements. The Company's
ability to utilize such operating losses will be dependent on several key
factors including the Company's future level of revenue and profitability, its
market capitalization and change in ownership.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain consolidated statement of operations
data for each of the seven quarters in the period ended September 30, 1997, as
well as the percentage of the Company's net revenues represented by each item.
This information has been derived from the Company's unaudited consolidated
financial statements. The unaudited consolidated financial statements have
been prepared on the same basis as the audited consolidated financial
statements contained herein and include all adjustments, consisting only of
normal recurring adjustments, that the Company considers necessary for a fair
presentation of such information when read in conjunction with the Company's
annual audited Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. The results of operations for any quarter are
not necessarily indicative of the results for any subsequent period or for the
entire fiscal year.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
--------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Product sales......... $6,045 $5,247 $5,354 $6,678 $6,831 $ 9,878 $12,959
License fees and
royalties............ 78 127 204 210 235 171 384
------ ------ ------ ------ ------ ------- -------
Total net revenues.. 6,123 5,374 5,558 6,888 7,066 10,049 13,343
------ ------ ------ ------ ------ ------- -------
Cost of revenues........ 4,040 3,544 3,740 4,222 4,321 5,789 7,492
------ ------ ------ ------ ------ ------- -------
Gross profit............ 2,083 1,830 1,818 2,666 2,745 4,260 5,851
------ ------ ------ ------ ------ ------- -------
Operating expenses:
Research and
development.......... 705 886 968 960 1,077 1,215 1,404
Sales and marketing... 805 926 1,015 1,159 1,105 1,464 1,839
General and
administrative....... 398 355 439 366 410 430 620
------ ------ ------ ------ ------ ------- -------
Total operating
expenses........... 1,908 2,167 2,422 2,485 2,592 3,109 3,863
------ ------ ------ ------ ------ ------- -------
Income (loss) from
operations............. 175 (337) (604) 181 153 1,151 1,988
Interest and other
expense, net........... (138) (189) (178) (221) (214) (139) (196)
------ ------ ------ ------ ------ ------- -------
Income (loss) before
provision for income
taxes.................. 37 (526) (782) (40) (61) 1,012 1,792
Provision for income
taxes.................. 2 8 6 14 10 57 306
------ ------ ------ ------ ------ ------- -------
Net income (loss)....... $ 35 $ (534) $ (788) $ (54) $ (71) $ 955 $ 1,486
====== ====== ====== ====== ====== ======= =======
Pro forma net income
(loss) per share....... $ -- $(0.06) $(0.08) $(0.01) $(0.01) $ 0.09 $ 0.14
====== ====== ====== ====== ====== ======= =======
Pro forma weighted
average common and
common equivalent
shares................. 10,347 9,549 9,643 9,649 9,653 10,400 10,468
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET REVENUES
--------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
--------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Product sales......... 98.7% 97.6% 96.3% 97.0% 96.7% 98.3% 97.1%
License fees and
royalties............ 1.3 2.4 3.7 3.0 3.3 1.7 2.9
----- ----- ----- ----- ----- ----- -----
Total net revenues.. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- -----
Cost of revenues........ 66.0 65.9 67.3 61.3 61.2 57.6 56.1
----- ----- ----- ----- ----- ----- -----
Gross profit............ 34.0 34.1 32.7 38.7 38.8 42.4 43.9
----- ----- ----- ----- ----- ----- -----
Operating expenses:
Research and
development.......... 11.5 16.5 17.4 13.9 15.2 12.1 10.5
Sales and marketing... 13.1 17.2 18.3 16.8 15.6 14.6 13.8
General and
administrative....... 6.5 6.7 7.9 5.4 5.9 4.2 4.7
----- ----- ----- ----- ----- ----- -----
Total operating
expenses........... 31.1 40.4 43.6 36.1 36.7 30.9 29.0
----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............. 2.9 (6.3) (10.9) 2.6 2.1 11.5 14.9
Interest and other
expense, net........... (2.3) (3.5) (3.2) (3.2) (3.0) (1.4) (1.5)
----- ----- ----- ----- ----- ----- -----
Income (loss) before
provision for income
taxes.................. 0.6 (9.8) (14.1) (0.6) (0.9) 10.1 13.4
Provision for income
taxes.................. -- 0.1 0.1 0.2 0.1 0.6 2.3
----- ----- ----- ----- ----- ----- -----
Net income (loss)....... 0.6% (9.9)% (14.2)% (0.8)% (1.0)% 9.5% 11.1%
===== ===== ===== ===== ===== ===== =====
</TABLE>
Net revenues in the second and third quarters of 1996 decreased from net
revenues in the first quarter of 1996 due primarily to the termination of a
significant PC desktop program by one of the Company's end-users. The
Company's net revenues increased in each of the five consecutive quarters
through the quarter ended September 30, 1997, primarily due to increased
shipments of the Company's TOPSwitch family of products. These increased
shipments were due to growth in the volume of sales from existing customers,
the addition of new customers and, in the second quarter of 1997, the
introduction of the TOPSwitch II product family. In the second and third
quarters of 1997 the Company experienced significant increases in net revenues
from product sales resulting in a net revenue increase of 42.2% when comparing
the second quarter to the first quarter of 1997 and a net revenue increase of
32.8% when comparing the third quarter to the second quarter of 1997. Several
factors contributed to these increases including a significant increase in
revenues from one distributor which represented approximately 20% of net
product revenue in the second quarter and approximately 30% from the same
customer in the third quarter, an expansion in order volume from other
customers, primarily in the cellular telephone and desktop PC stand-by power
supply markets and an increase in the number of customers ordering production
level quantities of product. Similar growth rates are not expected in future
periods. See "Risk Factors--Unpredictable and Fluctuating Operating Results."
The Company's gross profit generally increased as a percentage of net
revenues during each of the seven quarters ended September 30, 1997. Gross
profit as a percentage of net revenues in the third quarter of 1996 declined
due to the lower absorption of manufacturing costs resulting from a reduced
level of production as the Company worked off excess inventories.
Research and development expenses generally increased in absolute terms
during the seven quarters presented, primarily due to increased staffing in
the areas of new product design and technology development. As a percentage of
net revenues, research and development expenses increased in the second and
third quarters of fiscal 1996 over the first quarter due to an increase in
expenses resulting from additional staffing and a lower net revenue base.
During the four quarters ended September 30, 1997, research and development
expenses fluctuated as a percentage of net revenues. The decline as a
percentage of net revenues in each of the quarters ended June 30, 1997 and
September 30, 1997 was due to an increase in net revenues.
24
<PAGE>
Sales and marketing expenses generally increased in absolute dollars over
the seven quarters presented, primarily due to the additional staffing in
sales and application engineering and the higher level of sales commissions in
the four quarters ended September 30, 1997 due to the higher level of net
revenues from product sales.
General and administrative expenses increased only slightly during the seven
quarters and fluctuated overall as a percentage of net revenues as net
revenues increased. The increase in spending in the third quarter of 1996 was
due to additional provisions for professional fees and severance pay while the
increases in the first three quarters of 1997 were due to general, non-
staffing, expenses associated with the increase in business activity,
including legal, audit, supplies and employee activity expenses.
Interest and other expense, net, increased in the third and fourth quarters
of 1996 due to the increase in interest expense resulting from increased
borrowings under the Company's capital lease lines, and interest expense
resulting from the $3.0 million subordinated debt incurred in May of 1996. The
fluctuation of interest and other expenses, net, in each of the three quarters
of 1997, is due to increased interest income from higher cash balances created
by a net positive cash flow in the fourth quarter of 1996 as the Company
worked off excess inventory.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded operations primarily through
revenues from product sales and the sale of approximately $35.3 million in
convertible preferred stock. The Company has also funded operations through
the sales of technology licenses and engineering design services totaling
approximately $13.4 million, and various capital equipment lease lines with
terms extending from thirty-six to forty-eight months, a $3.0 million
subordinated note with Hambrecht & Quist Transition Capital, LLC, an affiliate
of Hambrecht & Quist LLC, one of the Representatives of the Underwriters, and
an $8.0 million revolving line of credit with Imperial Bank. A portion of the
credit line is used to back up letters of credit which the Company provides to
MEC and OKI prior to the shipment of wafers by the foundries to the Company.
The balance of this line is unused and available. The line of credit is
secured by substantially all of the Company's assets. The line of credit
agreement contains financial covenants and requires that the Company maintain
profitability on a quarterly basis and not pay or declare dividends without
the bank's consent. The Company was in compliance with its covenants at
September 30, 1997. In the past, the lender modified the line of credit
agreement to ensure that the Company remained in compliance. To date there has
been no impact on the Company's business or results of operations due to non-
compliance with such covenants. Currently the Company has a capital equipment
lease line with Finova Capital Corporation with a commitment of $3.0 million,
of which approximately $1.9 million was available at September 30, 1997. The
Company has entered into lease agreements with each of Lighthouse Capital,
Inc. ("Lighthouse"), Leasing Technologies International, Inc. ("LTI") and
MMC/GATX Partnership No. 1 ("GATX"). As of September 30, 1997, the Company
owed $2,114,627 under its lease line with Lighthouse, $235,514 under its lease
line with LTI and $819,403 under its lease line with GATX. See Note 5 of Notes
to Consolidated Financial Statements.
As of September 30, 1997, the Company had working capital of $11.1 million,
including a short-term component of deferred income on sales to distributors
of $1.6 million. Excluding the deferred income reserve, working capital would
have been $12.7 million.
At September 30, 1997, the Company had cash, cash equivalents and short-term
investments of $10.3 million and no borrowings outstanding on its bank line of
credit. The Company's operating activities used cash of $3.5 million, $2.9
million and $1.6 million in fiscal 1994 and 1995 and for the nine months ended
September 30, 1996 and generated cash of $1.1 million and $4.0 million in
fiscal 1996 and for the nine months ended September 30, 1997, respectively.
Cash used in operations for fiscal 1994 was principally the result of the net
loss and the increases in accounts receivable and inventories. Cash used in
operations for fiscal 1995 was principally the result of the net loss and the
increases in accounts receivable and inventories, partially offset by an
increase in accounts payable. Cash generated in 1996 reflects an increase in
depreciation and
25
<PAGE>
amortization and a decrease in accounts receivable and inventories. Cash
generated in the nine months ended September 30, 1997 was principally the
result of the net income, depreciation and amortization, and an increase in
accounts payable and accrued liabilities, partially offset by an increase in
accounts receivable.
The Company's investing activities used cash of $1.0 million, $1.7 million,
$4.2 million, $1.6 million and $800,000 in 1994, 1995, 1996 and the nine
months ended September 30, 1996 and 1997, respectively. In 1994, 1995 and the
nine months ended September 30, 1997, such investing activities were
principally for equipment and leasehold improvements. In 1996, cash used for
investing activities was primarily for purchases of short-term investments and
the balance was for equipment and leasehold improvements.
At September 30, 1997, the Company had net operating loss carryforwards for
Federal and state tax reporting purposes of approximately $18.6 million and
$2.5 million, respectively, expiring at various dates through 2011. The
Company anticipates that the sale of Common Stock by the Company and the
Selling Stockholders in this offering will cause an annual limitation on the
use of its net operating loss carryforwards pursuant to the "change in
ownership" provisions of Section 382 of the Internal Revenue Code of 1986, as
amended. The Company currently estimates that this limitation will not
materially impact its utilization of its net operating loss carryforwards in
the near term.
The Company believes that cash generated from operations, together with its
existing sources of liquidity and the net proceeds to the Company from this
offering will satisfy the Company's projected working capital and other cash
requirements for at least the next 12 months.
26
<PAGE>
BUSINESS
OVERVIEW
Power Integrations, Inc. (the "Company") designs, develops and markets
proprietary, high-voltage, analog integrated circuits ("ICs") for use in AC to
DC power conversion. The Company has targeted high-volume power supply
markets, including the cellular telephone, personal computer, cable and direct
broadcast satellite and various consumer electronics markets. The Company's
ICs cost effectively bring the benefits of high levels of integration to AC to
DC switching supplies. The Company believes that the products in its TOPSwitch
family of high-voltage ICs, introduced in 1994, are the first highly
integrated power conversion ICs to achieve widespread market acceptance. An
enhanced family, TOPSwitch-II, was introduced in April 1997.
INDUSTRY BACKGROUND
Virtually every electronic device that plugs into a wall socket requires
some type of power supply. These power supplies convert incoming high-voltage,
alternating current ("AC") provided by electric utilities into low-voltage
direct current ("DC") that can be used by electronic devices. Additionally,
rechargeable, portable products, such as cellular phones and laptop computers,
also need an AC to DC power supply to recharge their batteries.
Historically, AC to DC power supplies have used large, inefficient
transformers which operate at low frequencies to transform high-voltage
current to low-voltage current. In the 1970s, the invention of high-voltage
discrete semiconductors enabled the development of a new generation of AC to
DC power supplies. These new AC to DC "switching" power supplies ("switchers")
used a high-voltage discrete semiconductor along with other components to
generate high frequency pulses of power enabling the use of smaller, more
efficient transformers to lower the voltage. Although these discrete switchers
offered advantages over older technologies, over the years they have not kept
pace with the rapid integration in the electronic devices they power.
Recent market trends in electronics have created new requirements for power
supplies. The proliferation of portable electronic devices, particularly in
wireless communications and mobile computing, has created a global market
where consumers demand that new generations of electronic devices become
smaller and lighter. This expectation of increasingly compact systems has
driven end user demand for smaller, lighter power supplies. Another major
trend affecting power supplies is the growing awareness of the financial and
environmental costs of excess energy consumption. Growing environmental
concerns have resulted in government guidelines, such as the voluntary "Energy
Star" rating in the United States, as well as in many foreign countries, which
encourage the use of more energy efficient electronic devices from home
appliances to personal computers. In addition, manufacturers are aggressively
seeking to reduce manufacturing costs and time-to-market by decreasing
component count and simplifying system design.
As the pressures from these market forces have increased, the limitations of
discrete switchers have become more pronounced. Discrete switchers require
numerous components which limit the power supply designers' ability to reduce
the size, increase the functionality and improve the efficiency of switchers
while at the same time meeting stringent market cost requirements. In
addition, discrete switchers involve a high level of system complexity which
limits the scalability of designs and increases time-to-market and development
risks for new products.
Despite these shortcomings, discrete switchers remain in widespread use in
the large market for high-voltage switchers within the 0.5 to 150 watt power
range. This market includes switchers for cellular phone chargers, personal
computers, cable and direct broadcast satellites and numerous other consumer
and industrial electronic devices. To address the shortcomings of discrete
switchers, attempts have been made to replace discrete switchers with
integrated switchers through the use of high-voltage analog ICs. Prior
attempts did not achieve widespread acceptance in the marketplace because they
were not as cost-effective as discrete alternatives. Consequently, the Company
believes that a substantial market opportunity exists for high-voltage ICs
that achieve a system cost that is better than or at parity with existing
solutions.
27
<PAGE>
THE COMPANY'S HIGHLY INTEGRATED SOLUTION
The Company has developed a family of high-voltage ICs which the Company
believes are the first highly integrated power conversion ICs to achieve
widespread market acceptance. Since introducing its TOPSwitch products in
1994, the Company has shipped approximately 67 million TOPSwitch ICs. These
patented ICs achieve a high level of system integration by combining a
controller, MOSFET and a number of other electronic components into a single
analog IC. The Company's TOPSwitch products enable many power supplies in the
0.5 to 150 watt range to have a total cost equal to or lower than discrete
switchers. The Company's TOPSwitch products offer the following key benefits
to power supplies:
FEWER COMPONENTS, REDUCED SIZE AND ENHANCED FUNCTIONALITY
The Company's highly integrated TOPSwitch ICs enable the design and
production of cost-effective switchers that use up to 50% fewer components and
have enhanced functionality compared to discrete-based solutions. For example,
the Company's integrated circuits provide thermal and short circuit protection
without increasing system cost while discrete switchers must add additional
components and cost to provide these functions.
IMPROVED EFFICIENCY
The Company's integrated circuit also improves electrical efficiency which
reduces power consumption and excess heat generation. The Company's patented
low-loss, high-voltage device, combined with its control circuitry, improves
overall electrical efficiency during both full operation and stand-by mode.
REDUCED TIME-TO-MARKET
The Company's integrated circuit enables a less complex system architecture
that greatly simplifies system design for power supply designers. This allows
manufacturers to leverage their existing TOPSwitch designs for new products,
which results in shorter time to market and reduced product development risk.
WIDE POWER RANGE AND SCALABILITY
Products in the Company's current TOPSwitch families of products share a
common proprietary architecture but vary in power capability to address a
power range of 0.5 to 150 watts. The Company's scalable architecture allows
switcher designers to leverage their existing TOPSwitch-based designs to
easily develop a wide range of products to address many different power supply
markets.
STRATEGY
The Company's objective is to be the leading provider of high-voltage power
conversion ICs. The Company intends to pursue the following strategies to
accelerate adoption of its products:
Target High-Volume Markets. The Company's strategy is to use its technology
and products to deliver cost-effective integrated solutions to high-volume AC
to DC switching power supply markets. The Company's proprietary TOPSwitch
architecture was designed to be used cost effectively over a wide power range
in multiple applications. The scalable TOPSwitch architecture allows the
Company to leverage a small number of products across a broad range of high-
volume markets, thereby gaining economies of scale and enhancing the Company's
competitiveness.
Focus on Markets that Can Derive Significant Benefits from Integration. The
Company is initially focusing its efforts on those markets that are
particularly sensitive to size, portability, energy efficiency and time to
market issues. The Company achieved early success penetrating the cellular
phone fast charger market as the cellular phone industry has moved from stand-
alone desktop chargers to more portable travel chargers. The Company has also
achieved rapid growth in the desktop PC market due to the market's recent
demand for stand-by power capability. As other markets emerge as significant
opportunities for the Company's TOPSwitch products, the Company intends to
focus its resources on the development and penetration of these markets. See
"Risk Factors--Concentration of Applications."
28
<PAGE>
Deliver Systems Solution and Provide Applications Expertise. To accelerate
market adoption of the TOPSwitch products, the Company offers its customers
comprehensive application design support. This system level support includes
extensive application notes and production-ready reference design boards. The
Company provides application engineering support out of the Company's
headquarters and through field application engineering labs located in
England, India, Japan, Korea, Singapore and Taiwan. The Company has committed
substantial resources to system support by dedicating approximately 15% of its
workforce to applications engineering. The Company believes its power supply
systems expertise and investment in field applications engineering provide it
with significant competitive advantages.
Extend Technological Leadership in High-voltage Analog ICs. The Company's
technology leadership is based on high-voltage analog device structures and
wafer fabrication processes coupled with analog circuit designs that have
resulted in 22 U.S. patents and 33 foreign patents. These patents, in
combination with the Company's other intellectual property, form the basis of
the Company's TOPSwitch product families. The Company recently introduced an
enhanced TOPSwitch product family that provides improved power capability and
system cost advantages while preserving the design simplicity of the Company's
original TOPSwitch products. The Company continues to improve its high-voltage
analog device structures, wafer fabrication processes and analog circuit
designs and seeks to obtain additional patents to protect its intellectual
property.
Leverage Patented Technology in Strategic Partnerships. The Company has
established strategic partnerships with MEC and OKI in order to obtain high
volume manufacturing resources, broader market penetration and royalty
revenues. The wafer manufacturing relationships with MEC and OKI enable the
Company to focus on product design and marketing while minimizing fixed costs
and capital expenditures. MEC and OKI also have licensed the right to
manufacture products for sale in certain geographic regions and for internal
consumption. See "Risk Factors--Dependence on Wafer Suppliers" and "Risk
Factors--Risks of Licensing Technology to Third Parties."
PRODUCTS
The Company has developed a series of product families that utilize its
high-voltage analog technology, analog IC design capabilities and power
conversion system expertise.
THE TOPSWITCH PRODUCT FAMILIES
The Company's TOPSwitch high-voltage analog IC products are able to meet the
power conversion needs of a wide range of applications within high volume
markets. Sales of TOPSwitch products accounted for 74% and 92% of the
Company's net revenues in 1996 and the first nine months of 1997,
respectively.
TOPSwitch. The TOPSwitch family consists of 13 products, the first of which
was introduced in 1994. The key benefits of the TOPSwitch family compared to
discrete switchers are fewer components, reduced size, enhanced functionality
and lower cost in many applications. The Company's TOPSwitch products achieve
a high level of system integration by combining a PWM controller, a high-
voltage MOSFET and a number of other electronic components into a single 3-pin
package. The TOPSwitch products are produced in two high-voltage versions--a
350 volt version which is required for the 115VAC switcher markets (e.g.
United States and Japan) and a 700 volt version which is required for the
230VAC switcher markets (e.g. Europe and International).
TOPSwitch II. The TOPSwitch II family currently consists of 11 products, the
first of which was introduced in April 1997. The TOPSwitch II products further
lower the switcher costs by improving the performance of TOPSwitch and
broadening the availability of a low cost package for low power applications.
The TOPSwitch II family utilizes the same proprietary architecture used in the
original TOPSwitch family, thereby enabling switcher designers experienced
with TOPSwitch to take advantage of the TOPSwitch II benefits without
implementing a new architecture.
29
<PAGE>
OTHER PRODUCTS
The Company's products also include the SMP family, the INT family and a
limited number of custom products. Sales of these products accounted for 26%
and 8% of the Company's net revenues in 1996 and the first nine months of
1997, respectively. The Company expects revenue from these products to
continue to decline as a percentage of net revenues.
SMP. The SMP family is the original line of power conversion products
developed by the Company for the AC to DC power supply market. These products
are used in applications where switcher designers are willing to pay a premium
price for additional features such as variable frequency.
INT. The INT products are interface drivers for motor control applications
which utilize the Company's high-voltage process technology.
Custom Products. The Company also manufactures a limited number of custom
products, including a hook switch for telephones.
MARKETS & CUSTOMERS
The Company's strategy is to target high-volume power supply markets and to
initially focus on those markets that can derive significant benefits from its
TOPSwitch products. The following chart shows representative customers, which
in some cases are also end users, of the Company's TOPSwitch products in power
supplies in several major market segments.
<TABLE>
<CAPTION>
MARKET SEGMENT CUSTOMERS
- -------------------------------------------------------------------------------
<S> <C>
Cellular Phones
Battery Chargers........... Motorola, Nokia, Phihong Enterprises, Samsung
Electronics
-----------------------------------------------------------------------------
Desktop Computers
Stand-by Power............. API (Sun Moon Star), Astec, Delta
Electronics, Intertek, Liteon
-----------------------------------------------------------------------------
Cable and Direct Broadcast
Satellite Amstrad, API, Grundig Hughes, Nokia, Pace
Set-top Decoders........... Micro Technology, Scientific Atlanta
Cable Telephone............ ADC Telecom, Alltemated, Phillips, Tellabs
-----------------------------------------------------------------------------
PC Peripherals
Multi-media Monitor
(Audio).................... Acer, Lucky Goldstar, Sony
Universal Serial Bus....... Nokia, Philips, Samsung, Sony
Removable Mass Storage..... Anam Instruments (End User: Iomega)
-----------------------------------------------------------------------------
Consumer
TV......................... Daewoo, Samsung, Sony
VCR........................ Daewoo
DVD........................ Malata, Samsung
-----------------------------------------------------------------------------
Industrial
Utility Meters............. General Electronics Corporation, Schlumberger
Uninterrupted Power Exide Electronics
Supply....................
</TABLE>
30
<PAGE>
CURRENT PRIMARY MARKETS
Cellular Phones. In 1996, approximately 60 million cellular phones were sold
worldwide. This market is estimated to grow to approximately 98 million
cellular phones worldwide by 2001. Demand in this market is driven by low
cost, ease of use, portability and miniaturization. The Company believes that
these factors have created a substantial market opportunity for small,
efficient power supplies for battery chargers. The Company intends to continue
its penetration of this market with its integrated solution which enables a
low cost, compact and efficient power supply.
Desktop Computers. Desktop computers consume energy while idle and turned on
to wait for communication functions such as receiving a fax. As the level of
communication functions performed by the computer increases, the computer's
power consumption during idle is becoming a significant cost for both users
and the economy. Therefore, computer manufacturers and governmental
authorities are promoting the use of stand-by power features in new PCs to
reduce the PCs' power consumption when idle. The Company's highly efficient
TOPSwitch products are currently being used in computers to provide this
stand-by power solution and meet the market demand for more energy-efficient
computers.
Cable and Direct Broadcast Satellite. Set-top decoders are rapidly changing
as broadcasters are providing more advanced capabilities and a greater number
of channels to consumers. This has created an opportunity for a scalable power
supply system solution which can be quickly redesigned to keep up with the
market's rapidly changing requirements. The scalable architecture of the
Company's TOPSwitch products addresses this need for a high-volume, versatile
solution.
OTHER MARKETS
Although the Company is currently focusing on the above key markets, the
Company also sells its products into a wide variety of other markets which
include PC peripherals, televisions, VCRs, industrial meters and kitchen
appliances. As these and other markets emerge as significant opportunities for
the Company's TOPSwitch products, the Company intends to focus its resources
on the development and penetration of these markets.
SALES, DISTRIBUTION AND MARKETING
The Company sells its products to OEMs and merchant power supply
manufacturers through a direct sales staff and through a worldwide network of
independent sales representatives and distributors. The Company currently
utilizes sales representatives throughout Asia and Europe. The Company's
international sales representatives also act as distributors. In the United
States, the Company currently utilizes one national distributor and a number
of regional sales representatives. The Company has sales offices in Atlanta,
Georgia and Newport Beach, California, as well as in England, India, Korea and
Taiwan. In the first nine months of 1997, direct sales and sales through
distributors were approximately equal as a percentage of net revenues. All
distributors are entitled to certain return privileges based on sales revenue
and are protected from price reductions affecting their inventories. The
Company's distributors are not subject to minimum purchase requirements and
the sales representatives and distributors can discontinue marketing any of
the Company's products at any time.
The Company's products are generally incorporated into a customer's power
supply at the design stage. The Company's sales and marketing efforts are
focused on facilitating the customer's use of the Company's products in the
design of new power supplies for specific applications. An important
competitive factor in achieving a design win is the Company's commitment to
provide comprehensive application design support. The Company publishes a
comprehensive Databook and Design Guide and provides to its current and
prospective customers extensive application notes and production-ready
reference design boards. In addition, the Company provides application
engineering support out of the Company's headquarters, and its field
application engineering labs located in England, India, Japan, Korea,
Singapore and Taiwan provide local
31
<PAGE>
resources to support customers in key geographies. The Company focuses
particular efforts on building relationships with and providing support to
industry-leading OEMs and merchant power supply manufacturers. The Company has
committed substantial resources to system support by dedicating approximately
15% of its workforce to applications engineering.
The Company's end user base is highly concentrated and a relatively small
number of OEMs, directly or indirectly through merchant power supply
manufacturers, accounted for a significant portion of the Company's revenue in
1996 and the nine months ended September 30, 1997. Motorola is presently the
Company's largest end user. Although the exact dollar amounts and percentages
of sales to Motorola are difficult to ascertain because most of such sales
occur through distributors or indirectly through sales to merchant power
supply manufacturers which, in turn, sell power supplies to Motorola, the
Company estimates that direct and indirect sales to Motorola accounted for
approximately 20% of the Company's net revenues for the nine months ended
September 30, 1997. The Company estimates that its top ten customers,
including distributors which resell to Motorola and other large OEMs and
merchant power supply manufacturers, accounted for 64% and 75% of the
Company's net revenues for 1996 and the nine months ended September 30, 1997,
respectively. For the nine months ended September 30, 1997, Maxisum Ltd. and
Phihong Enterprise accounted for 23% and 16% of the Company's net revenues,
respectively. For fiscal 1994, three customers accounted for approximately
11%, 12% and 24% of net revenues. For fiscal 1995, three customers accounted
for approximately 12%, 20% and 21% of net revenues. For fiscal 1996, no
individual customer accounted for more than 10% of net revenues. In fiscal
1994, 1995, 1996 and the first nine months of 1997, international sales
comprised 57%, 65%, 72% and 81%, respectively, of the Company's net revenues.
See "Risk Factors--Customer Concentration and Competing Products from
Customers."
Sales of the Company's products are generally made pursuant to standard
purchase orders, which are frequently revised to reflect changes in the
customer's requirements. Product deliveries are scheduled upon the Company's
receipt of purchase orders. Generally, these orders allow customers to
reschedule delivery dates and cancel purchase orders without significant
penalties. For these reasons, the Company believes that purchase orders
received, while useful for scheduling production are not necessarily reliable
indicators of future revenues. See "Risk Factors--Unpredictable and
Fluctuating Operating Results."
In the Japanese market, the Company has a license agreement with MEC under
which MEC sells its versions of the Company's products. While the Company
continues to sell its products to its existing Japanese customers, in April
1997, the Company agreed not to pursue new business in Japan until after June
2000. The Company believes that this new arrangement will better meet the
Company's market penetration and financial objectives in Japan. The Company
supports MEC's sales efforts and the Company's existing Japanese customers
through its office in Japan. OKI also has the rights to sell its versions of
the Company's products in Japan but is currently not exercising these rights.
See "Risk Factors--Risks of Licensing Technology to Third Parties" and
"Intellectual Property and Other Proprietary Rights."
TECHNOLOGY
HIGH-VOLTAGE TRANSISTOR STRUCTURE AND PROCESS TECHNOLOGY
The Company has developed a proprietary high-voltage, power IC technology
which utilizes the Company's MOS transistor structure and proprietary process
and has resulted in 7 U.S. patents. The technology enables the Company to
integrate cost effectively on the same monolithic IC, high-voltage n-channel
transistors with industry standard CMOS and bipolar components. The IC device
structure and the wafer fabrication process both contribute to the cost
effectiveness of the Company's high-voltage technology. The device structure
results in a transistor conduction capability that is significantly higher
than that of competing technologies. The IC device structure can be
implemented on low cost silicon wafers using a 3 micron CMOS process when
combined with the Company's proprietary implant process step. The Company has
focused its efforts on optimizing a single wafer fabrication process for its
TOPSwitch products. The same process can be adapted for power conversion
products that range from 20 to 800 volts.
32
<PAGE>
IC DESIGN AND SYSTEM TECHNOLOGY
The Company's proprietary IC designs combine complex control circuits and
high-voltage transistors on the same monolithic IC and have resulted in 15
U.S. patents. The Company's IC design technology takes advantage of the
Company's high voltage process to minimize the die size of both the high-
voltage device and the control circuits and improve the performance of the
Company's ICs versus alternative integration technologies. The combination of
the Company's IC design technology and the Company's system level expertise in
switchers has enabled the Company to develop the highly integrated TOPSwitch
ICs and scalable architecture for integrated switchers.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on improving the
Company's high-voltage device structures, wafer fabrication processes, analog
circuit designs and system level architecture. By these efforts, the Company
seeks to further reduce the costs of its products, and improve the cost
effectiveness and enhance the functionality of its customers' power supplies.
The Company has assembled a multidisciplined team of highly skilled engineers
to meet its research and development goals. These engineers bring to the
Company expertise in high-voltage structure and process technology, analog
design and power supply systems architecture.
In 1994, 1995, 1996 and the first nine months of 1997, the Company spent
$2.4 million, $2.0 million, $3.5 million and $3.7 million, respectively, on
its research and development efforts. The Company expects that it will
continue to invest substantial funds in research and development activities.
The development of high-voltage analog ICs is highly complex. There can be no
assurance that the Company will develop and introduce new products in a timely
and cost effective manner or that its development efforts will successfully
permit the Company's products to meet changing market demands. See "Risk
Factors--New Products and Technological Change."
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company utilizes a combination of patents, trademarks, copyrights, trade
secrets and confidentiality procedures to protect its intellectual property
rights. The Company holds 22 U.S. patents and has generally filed for or
received foreign patent protection on these patents resulting in 33 foreign
patents and 15 foreign patent applications. The U.S. patents have expiration
dates ranging from 2006 to 2016. Seven of the U.S. patents are related to the
device structure of the high-voltage transistor, 10 are circuit patents that
have been utilized in the Company's products and 3 are circuit patents that
provide the foundation for the Company's TOPSwitch products. Two of the U.S.
patents cover specific system applications using TOPSwitch. The Company is
currently pursuing additional U.S. patent applications relating to
improvements and extensions of the Company's products. There can be no
assurance that the Company's pending United States or foreign patent
applications or any future United States or foreign patent applications will
be approved, that any issued patents will protect the Company's intellectual
property or will not be challenged by third parties, or that the patents of
others will not have an adverse effect on the Company's ability to do
business. Furthermore, there can be no assurance that others will not
independently develop similar or competing technology or design around any
patents that may be issued to the Company. The Company also holds nine
trademarks, five in the U.S., two in California and two in Japan.
33
<PAGE>
Certain equipment, processes, information and knowledge developed by the
Company and used in the design and manufacture of its products are regarded as
proprietary by the Company. The Company's trade secrets include a proprietary
high volume production process that produces the Company's patented high-
voltage ICs. The Company attempts to protect its trade secrets and other
proprietary information through non-disclosure agreements, proprietary
information agreements with employees and consultants and other security
measures. Despite these efforts, there can be no assurance that others will
not gain access to the Company's trade secrets, or that the Company can
meaningfully protect its intellectual property. In addition, effective trade
secret protection may be unavailable or limited in certain foreign countries.
Although the Company intends to protect its rights vigorously, there can be no
assurance that such measures will be successful.
The Company has granted perpetual non-transferable licenses to MEC and OKI
to use the Company's semiconductor patents and other intellectual property for
the Company's current high-voltage technology, including the Company's
TOPSwitch technology, and improvements on the existing technology to
manufacture and design products for internal use and for sale or other
distribution to Japanese companies and to subsidiaries of Japanese companies
in Asia. In the case of OKI, to the extent such products are not based on
TOPSwitch technology, sales or other distribution may be on a worldwide basis
to any third parties. In the case of MEC, to the extent products are not based
on the TOPSwitch technology, sales or other distribution may also be made to
Asian companies in Asia. MEC and OKI have granted the Company perpetual cross
licenses to the technology developed by MEC or OKI under their license rights.
Until after June 2000, the Company has agreed not to license the technology
licensed to MEC to other Japanese companies (other than OKI) or their
subsidiaries. The Company has also agreed not to sell its products in Japan to
new customers. In exchange for their license rights, MEC and OKI have paid
and, in the case of MEC, will continue to pay to the Company licensing fees
for a fixed period and pay or will pay royalties on products using the
licensed technology during fixed periods. In April 1997, the license agreement
with MEC was amended to explicitly include high-voltage device technology
being developed by the Company in return for an improved royalty structure
from MEC. To date, only MEC has sold products to third parties under its
license rights.
The Company also has granted a perpetual, non-transferable license to AT&T
Microelectronics to use certain of the Company's IC processes and device
technologies in the products AT&T sells. In addition, pursuant to an agreement
with MagneTek, Inc., the Company has granted MagneTek an exclusive, perpetual
royalty-free license to manufacture lighting products that incorporate certain
of the Company's technology.
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. Any such litigation, whether or
not determined in the Company's favor or settled by the Company, would be
costly and would divert the efforts and attention of the Company's management
and technical personnel from normal business operations, which would have
material adverse effect on the Company's business, financial condition and
results of operations. Adverse determinations in litigation could result in
the loss of the Company's proprietary rights, subject the Company to
significant liabilities, require the Company to seek licenses from third
parties or prevent the Company from licensing its technology, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, the laws of certain foreign
countries in which the Company's technology is or may in the future be
licensed may not protect the Company's intellectual property rights to the
same extent as the laws of the United States, thus increasing the possibility
of infringement of the Company's intellectual property. See "Risk Factors--
Dependence on Proprietary Technology."
MANUFACTURING
The Company contracts with MEC and OKI to manufacture its wafers in Japan.
The Company's semiconductor products are assembled and packaged by independent
subcontractors in China, Malaysia and the Philippines. The Company performs
testing, finishing and shipping at its facility in Sunnyvale, California.
34
<PAGE>
This fabless manufacturing model enables the Company to focus on its
engineering and design strengths, minimize fixed costs on capital
expenditures, and still have access to high-volume manufacturing capacity. The
Company's products do not require leading edge process geometries for them to
be cost-effective and thus, the Company can use MEC's and OKI's older, low-
cost fabs for wafer manufacturing. The Company uses a proprietary and
sensitive implant process and must interact closely with MEC and OKI to
achieve satisfactory yields. Although the Company generally utilizes standard
IC packages for assembly, there are some materials and aspects that are
specific to the Company. The Company specifies a sole source high-voltage
molding compound that is difficult to process. This compound, and its required
processes, together with the other non-standard materials and processes needed
to assemble the Company's products require a more exacting level of process
control than normally required for standard packages. As a result the Company
must be involved with its contractors on an active engineering basis to
maintain and improve the process. The Company has developed process monitoring
equipment to support this effort and must provide adequate engineering
resources to provide similar support in the future.
The Company's wafer supply agreements with MEC and OKI expire in June 2000
and June 1998, respectively. Under the terms of the MEC agreement, minimum
annual and monthly purchase and sale commitments are established annually by
the mutual agreement of MEC and the Company. Pricing is also established by
the good faith agreement of MEC and the Company, subject to the Company's
right to most favored pricing. Under the terms of the OKI agreement, OKI has
agreed to reserve a specified amount of production capacity and to sell wafers
to the Company at fixed prices depending upon volume. The Company's agreements
with both MEC and OKI provide for the pricing of wafers in Japanese yen.
There can be no assurance that the Company will be able to reach an
agreement with either MEC or OKI to extend the term of their respective wafer
supply agreements. The Company's failure to reach, in a timely fashion, an
extension of either agreement or to enter into a wafer supply arrangement with
another manufacturer, could result in material disruptions in supply. Certain
contractual provisions limit the conditions under which the Company can enter
into such arrangements with other Japanese manufacturers or their subsidiaries
during the term of the agreement with MEC. In the event of a supply disruption
with OKI or MEC, if the Company were unable to qualify alternative
manufacturing sources for existing or new products in a timely manner or if
such sources were unable to produce devices with acceptable manufacturing
yields, the Company's business, financial condition and operating results
would be materially and adversely affected.
The Company typically receives shipments from MEC or OKI in approximately 12
to 14 weeks after placing orders, and lead times for new products can be
substantially longer. To provide sufficient time for assembly, testing and
finishing, the Company typically needs to receive wafers from MEC and OKI 4 to
6 weeks before the desired ship date to the Company's customers. As a result
of these factors and the fact that customers' orders can be made with little
advance notice, the Company has only a limited ability to react to
fluctuations in demand for its products, which could cause the Company to have
at any given time an excess or a shortage of inventory of a particular
product. From time to time in the past, the Company has been unable to fully
satisfy customer requests as a result of these factors. Any significant
disruptions in deliveries would materially and adversely affect the Company's
business and operating results.
The Company depends on MEC and OKI to produce wafers at acceptable yields
and to deliver them to the Company in a timely manner. As the Company
continues to increase its product output, there can be no assurance that the
Company's foundries and assemblers will not experience a decrease in yields.
Moreover, there can be no assurance that acceptable yields will be
maintainable in the future. See "Risk Factors--Risks of Outside Manufacturing
and Assembly; Sole Source Risks."
COMPETITION
The high-voltage power supply industry is intensely competitive and
characterized by extreme price sensitivity. Accordingly, the most significant
competitive factor in the target markets for the Company's products is cost
effectiveness. The Company's products face competition from alternative
technologies,
35
<PAGE>
primarily discrete switchers. The Company believes that at current pricing,
the TOPSwitch families of products offer favorable cost performance benefits
compared to discrete switchers in many high-volume applications over the power
range of approximately 0.5 watts to 150 watts. However, any significant
erosion in the price of discrete components, such as high-voltage Bipolar and
MOSFET transistors and PWM controller ICs, could adversely affect the cost
effectiveness of the TOPSwitch products. Also older alternative technologies
to switchers are more cost-effective than switchers that use the Company's
TOPSwitch products in certain power ranges for certain applications. If power
requirements for certain applications in which the Company's products are
currently utilized, such as battery chargers for cellular telephones, drop
below certain power levels, these older alternative technologies can be used
more cost effectively than TOPSwitch-based switchers. The Company is
continuing its efforts to use its extensive system level expertise to enhance
the cost effectiveness of TOPSwitch-based switchers in the lower power ranges.
There can be no assurance that the Company will be successful in these
efforts.
Recently, the Company's TOPSwitch product families have begun to meet
additional competition from hybrid and single high-voltage ICs similar to
TOPSwitch. These competing products are being developed or have been developed
and are being produced by companies such as Motorola, SGS, Samsung and Sanken.
The Company expects competition to increase as Motorola, SGS, Samsung, Sanken
and possibly other companies develop and introduce new products. To the extent
these competitors' products are lower in cost than the Company's products, the
Company's business, financial condition and results of operations could be
materially and adversely affected. Many of the Company's emerging competitors,
including Motorola, SGS, Samsung and Sanken, have significantly greater
financial, technical, manufacturing and marketing resources than the Company.
In the context of a market where a high-voltage IC is designed into a
customer's product and the provider of such ICs is therefore the sole source
of the IC for that product, greater resources and, in particular, greater
manufacturing resources, may be a significant factor in the customer's choice
of the IC because of the customer's perception of greater certainty in its
source of supply. See "Risk Factors--Customer Concentration and Competing
Products from Customers."
The Company's ability to compete in its target markets also depends on such
factors as the timing and success of new product introductions by the Company
and its competitors, the pace at which the Company's customers incorporate the
Company's products into their end user products, availability of wafer
fabrication and finished good manufacturing capability, the availability of
adequate sources of raw materials, protection of Company products by effective
utilization of intellectual property laws and general economic conditions.
There can be no assurance that the Company's products will continue to compete
favorably or that the Company will be successful in the face of increasing
competition from new products and enhancements introduced by existing
competitors or new companies entering this market. Failure of the Company to
compete successfully in the high-voltage power supply business would
materially and adversely affect the Company's business, financial condition
and results of operations. See "Risk Factors--Competition."
EMPLOYEES
As of September 30, 1997, the Company employed 120 full time personnel,
consisting of 47 in manufacturing, 33 in research and development, 28 in sales
and marketing and 12 in finance and administration.
FACILITIES
The Company's main executive, administrative, manufacturing and technical
offices are located in a 30,000 square foot facility in Sunnyvale, California
under a lease which expires in October 1998 with a conditional five year
option at fair market value to the year 2003. The Company's manufacturing
operations at this facility consist of testing wafers and ICs. The Company
believes that its existing facilities are adequate for its current needs.
36
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages, as of
September 30, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Howard F. Earhart........ 57 President, Chief Executive Officer and Director
Balu Balakrishnan........ 43 Vice President, Engineering and New Business
Development
Clements Edward Pausa.... 66 Vice President, Operations
Vladimir Rumennik........ 51 Vice President, Technology Development
Daniel M. Selleck........ 51 Vice President, Worldwide Sales
Robert G. Staples........ 49 Chief Financial Officer, Vice President, Finance
and Administration and Secretary
Clifford J. Walker....... 46 Vice President, Corporate Development
Dr. Edward C. Ross 55
(1)(2).................. Chairman of the Board of Directors
Dr. William Davidow (1).. 62 Director
E. Floyd Kvamme (1)(2)... 59 Director
Steven J. Sharp.......... 55 Director
</TABLE>
- ------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Howard F. Earhart has served as President, Chief Executive Officer and as a
Director of the Company since January 1995. From 1990 to 1995 Mr. Earhart has
served as an interim Chief Executive Officer for various high technology
companies including those discussed below. From July 1994 to March 1995, Mr.
Earhart served as Chief Executive Officer of Co-Active Computing, Inc., a
personal computer peer-to-peer network adapter company. From July 1994 to
January 1995, Mr. Earhart served as Chief Executive Officer of Reach Software,
a software company. From December 1993 to April 1994, Mr. Earhart served as
Chief Executive Officer of Quorum Software, a software company. From August
1993 to September 1994, Mr. Earhart served as acting Chief Executive Officer
of Digital-F/X, a hardware and software company. From September 1992 to April
1993, Mr. Earhart served as an advisor to the Chief Executive Officer of
Raster Graphics, an electrostatic plotter company. From August 1990 to January
1992, Mr. Earhart served as Chief Executive Officer of Springer Technologies,
a thin film magnetic head company. Mr. Earhart also served as President of the
Consumer Products Group of Memorex Corporation.
Balu Balakrishnan has served as Vice President, Engineering and New Business
Development of the Company since September 1997. From September 1994 to
September 1997, Mr. Balakrishnan served as Vice President, Engineering and
Marketing of the Company. Mr. Balakrishan served as Vice President, Design
Engineering from April 1989 to September 1994. From April 1978 to April 1989,
Mr. Balakrishnan served as Design and Development Manager of National
Semiconductor's Interface and Advanced Peripherals Group.
Clements Edward Pausa has served as Vice President, Operations of the
Company since June 1997. From October 1994 to June 1997, Mr. Pausa served as a
Vice President of Alphatec Group, a semiconductor manufacturing services
company. From October 1990 to June 1997, Mr. Pausa served as a director of
consulting at Coopers & Lybrand LLP. From August 1969 to October 1990, Mr.
Pausa served as a Vice President of National Semiconductor. Mr. Pausa has
served as a director of Coopers & Lybrand LLP, since October 1990.
37
<PAGE>
Vladimir Rumennik has served as Vice President, Technology Development of
the Company since April 1991. From February 1990 to March 1991, Mr. Rumennik
was Director of Technology Development of the Company. Prior to January 1990,
Mr. Rumennik was a manager at Signetics, a semiconductor company and a
subsidiary of Philips Semiconductor ("Signetics"). Mr. Rumennik has also held
positions at Philips Laboratories and Xerox Microelectronics Center.
Daniel M. Selleck has served as Vice President, Worldwide Sales of the
Company since May 1993. From February 1984 to May 1993, Mr. Selleck held
various sales management positions with Philips Semiconductor including
European Regional Sales Manager and Western Area Sales Manager in the United
States.
Robert G. Staples has served as Chief Financial Officer, Vice President,
Finance and Administration and Secretary of the Company since June 1995. From
October 1994 to June 1995, Mr. Staples served as Chief Financial Officer of
MIS, a software development company. From October 1993 to October 1994, Mr.
Staples served as Chief Financial Officer of Simtec Corporation, a
semiconductor company. From April 1988 to October 1993, Mr. Staples served as
Chief Financial Officer and Vice President, Finance and Administration of
Codar Technology, a defense contracting company.
Clifford J. Walker has served as Vice President, Corporate Development of
the Company since June 1995. From September 1994 to June 1995, Mr. Walker
served as Vice President of Reach Software, a software company. From December
1993 to September 1994, Mr. Walker served as President of Morgan Walker, a
consulting company. From July 1992 to December 1993, Mr. Walker served as Vice
President of Extended Length Flex, a PCB company. From October 1986 to July
1992, Mr. Walker served as Vice President of Springer Technologies, a thin
film disk head company.
Dr. Edward C. Ross has served as a Director of the Company since January
1989 and has served as the Chairman of the Board of Directors since January
1995. From January 1989 to January 1995, Dr. Ross served as President and
Chief Executive Officer of the Company. Dr. Ross has served as President,
Technology and Manufacturing Group of Cirrus Logic, Inc., a semiconductor
company, since September 1995.
Dr. William Davidow has served as a Director of the Company since its
inception. Dr. Davidow has been a general partner of Mohr, Davidow Ventures, a
venture capital company since 1985. Dr. Davidow also serves as a director of
two public companies, Rambus Inc. and The Vantive Corporation.
E. Floyd Kvamme has served as a Director of the Company since September
1989. Mr. Kvamme has been a general partner of Kleiner Perkins Caufield &
Byers, a venture capital company, since 1984. Mr. Kvamme also serves as a
director of four public companies, TriQuint Semiconductor ("TriQuint"),
Harmonic Lightwaves, Photon Dynamics and Prism Solutions.
Steven J. Sharp is a founder of the Company and has served as a Director of
the Company since its inception. Mr. Sharp has served as President, Chief
Executive Officer and Chairman of the Board of TriQuint since September 1991.
The Company's Bylaws currently authorize five directors, which number may be
changed from time-to-time by the Board of Directors. All directors hold office
until the next annual meeting of stockholders or until their successors are
duly elected and qualified. The Bylaws provide that, beginning with the first
annual meeting of stockholders, the Board of Directors will be divided into
three classes, with each class serving staggered three-year terms. There are
no family relationships among the directors or officers of the Company.
In September 1997, the Board of Directors established an Audit Committee and
a Compensation Committee. The Audit Committee oversees actions taken by the
Company's independent auditors, recommends the engagement of auditors and
reviews the Company's internal audits. The Compensation Committee makes
decisions concerning salaries and incentive compensation for employees and
consultants of the Company. The Compensation Committee also makes
recommendations regarding the Company's employee stock plans. See "--Stock
Plans."
38
<PAGE>
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the compensation paid by
the Company during the fiscal year ended December 31, 1996 to the Company's
Chief Executive Officer and each of the Company's four other executive
officers whose salary and bonus for services in all capacities to the Company
exceeded $100,000 during such year (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 1996
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-----------------
ANNUAL COMPENSATION AWARDS
---------------------------------- -----------------
NO. OF SECURITIES
NAME AND ALL OTHER UNDERLYING
PRINCIPAL POSITION SALARY(1) BONUS(1) COMPENSATION(2) OPTIONS
------------------ --------- -------- --------------- -----------------
<S> <C> <C> <C> <C>
Howard F. Earhart......... $180,000 $120,000 $536 --
President and Chief
Executive Officer
Balu Balakrishnan......... 155,000 72,000 536 --
Vice President,
Engineering and New
Business Development
Vladimir Rumennik......... 145,000 60,000 536 7,352
Vice President,
Technology Development
Daniel M. Selleck......... 140,000 72,000 536 22,058
Vice President, Worldwide
Sales
Robert G. Staples......... 120,000 48,000 536 18,382
Chief Financial Officer,
Vice President, Finance
and Administration and
Secretary
Clifford J. Walker........ 120,000 48,000 536 18,382
Vice President, Corporate
Development
</TABLE>
- --------
(1) Amounts shown are on a full year basis and include cash and noncash
compensation earned and received by executive officers.
(2) Represents premiums paid by the Company for life insurance coverage.
39
<PAGE>
The following table provides information concerning grants of stock options
to purchase the Company's Common Stock made during the fiscal year ended
December 31, 1996 to each of the Named Executive Officers:
OPTION GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(4)
OPTIONS IN FISCAL PRICE PER EXPIRATION --------------------
NAME GRANTED(1) 1996(2) SHARE(3) DATE 5% 10%
---- ---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Howard F. Earhart....... -- -- -- -- -- --
Balu Balakrishnan....... -- -- -- -- -- --
Vladimir Rumennik....... 7,352 2.3% $1.36 9/18/06 $6,288.14 $15,935.38
Daniel M. Selleck....... 22,058 6.8 1.36 9/18/06 18,866.13 47,810.49
Robert G. Staples....... 18,382 5.7 1.36 9/18/06 15,722.06 39,842.80
Clifford J. Walker...... 18,382 5.7 1.36 9/18/06 15,722.06 39,842.80
</TABLE>
- --------
(1) Options granted in fiscal 1996 are immediately available and generally
vest over fifty months, with 1/8th of the option shares becoming fully
vested six months from the grant date and 1/50th of the remainder vesting
each successive month, with full vesting occurring on the fiftieth month
from the date of grant. The Company has a repurchase right for shares not
vested. Under the terms of the Company's 1988 Stock Option Plan (the "1988
Plan"), the administrator retains discretion, subject to the 1988 Plan
limits, to modify the terms of outstanding options and to reprice
outstanding options. The options have a term of 10 years, subject to
earlier termination in certain situations related to termination of
employment. In addition, in June 1997, options to purchase 73,529 shares
of Common Stock were granted to Mr. Earhart, options to purchase 22,058
shares of Common Stock were granted to each of Messrs. Balakrishnan,
Rumennik and Selleck, options to purchase 14,705 shares of Common Stock
were granted to Mr. Staples and options to purchase 25,735 shares of
Common Stock were granted to Mr. Walker each at an exercise price of $1.70
per share. These options, granted under the Company's 1997 Stock Option
Plan (the "1997 Plan"), are immediately available and generally vest over
four years, with 1/8th of the option shares becoming fully vested six
months from the grant date and 1/48th of the remainder vesting each
successive month, with full vesting occurring four years from the date of
grant. The Company has a repurchase right for shares not vested. Under the
terms of the 1997 Plan, the administrator retains discretion, subject to
the 1997 Plan limits, to modify the terms of outstanding options and to
reprice outstanding options. The options have a term of 10 years subject
to earlier termination in certain situations related to termination of
employment. See "Stock Plans" for a description of the material payment
terms of the options.
(2) Based on a total of 323,970 options granted to all employees and
consultants during fiscal 1996.
(3) All options were granted at an exercise price equal to the fair market
value of the Common Stock as determined by the Board of Directors on the
date of grant. The Common Stock was not publicly traded at the time of the
option grants to the officers.
(4) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could
be achieved for the respective options if exercised at the end of the
option term. The assumed 5% and 10% rates of stock price appreciation are
provided in accordance with rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
the future Common Stock price. Actual gains, if any, on stock option
exercises are dependent on the future performance of the Common Stock,
overall market conditions and the option holders' continued employment
through the vesting period. This table does not take into account any
appreciation in the price of the Common Stock from the date of grant to
date.
40
<PAGE>
AGGREGATE OPTION EXERCISES AND FISCAL 1996 YEAR-END VALUES
There were no exercises of stock options by Named Executive Officers during
the year ended December 31, 1996. The following table provides the specified
information concerning unexercised options held as of December 31, 1996 by
each of the Named Executive Officers:
AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
AT 12/31/96(1) OPTIONS AT 12/31/96(2)
---------------------- -------------------------
NAME VESTED UNVESTED VESTED UNVESTED
---- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Howard F. Earhart............. 74,117 190,589 -- --
Balu Balakrishnan............. 16,470 71,764 -- --
Vladimir Rumennik............. 93,524 53,528 -- --
Daniel M. Selleck............. 56,763 53,528 -- --
Robert G. Staples............. 23,824 60,734 -- --
Clifford J. Walker............ 15,882 46,617 -- --
</TABLE>
- --------
(1) These options are immediately exercisable in full at the date of grant,
but shares purchased on exercise of unvested options are subject to
repurchase right in favor of the Company which lapses ratably over 50
months and entitles the Company to repurchase unvested shares at their
original issuance price.
(2) Calculated on the basis of the fair market value of the underlying
securities as of December 31, 1996 of $1.36 per share, as determined by
the Board of Directors, minus the aggregate exercise price.
No options to purchase Common Stock were exercised during the fiscal year
ended December 31, 1996 by the Named Executive Officers. No compensation
intended to serve as incentive for performance to occur over a period longer
than one fiscal year was paid pursuant to a long-term incentive plan during
the last fiscal year to any Named Executive Officer. The Company does not have
any defined benefit or actuarial plan under which benefits are determined
primarily by final compensation or average final compensation and years of
service with any of the Named Executive Officers.
STOCK PLANS
1988 Stock Option Plan. The 1988 Plan provides for the grant of stock
options to employees (including officers), directors and consultants of the
Company and its subsidiaries. The 1988 Plan provides for the grant of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") or nonstatutory stock options,
although incentive stock options may be granted only to employees. As of
September 30, 1997, options to purchase an aggregate 640,660 shares of Common
Stock were outstanding under the 1988 Plan. Options granted under the 1988
Plan will remain outstanding in accordance with their terms, but the Board of
Directors has determined that as of June 1997, no further options will be
granted under the 1988 Plan.
1997 Stock Option Plan. The 1997 Plan was approved by the Board of Directors
in June 1997 and by the stockholders in July 1997. The 1997 Plan provides for
the grant of incentive stock options within the meaning of section 422 of the
Code, to employees, and for grants of nonstatutory stock options to employees,
non-employee directors and consultants. As of September 30, 1997, options to
purchase an aggregate of 93,005 shares of Common Stock were outstanding under
the 1997 Plan.
The 1997 Plan is administered by the Board of Directors or a committee
thereof. Subject to the provisions of the 1997 Plan, the Board or committee
has the authority to select the persons to whom options are granted and
determine the terms of each option, including (i) the number of shares of
Common Stock
41
<PAGE>
covered by the option, (ii) when the option becomes exercisable, (iii) the
option exercise price, which, in the case of incentive stock options, must be
at least 100% of the fair market value of a share of Common Stock as of the
date of grant, and, in the case of nonstatutory stock options, must be at
least 85% of the fair market value of a share of Common Stock as of the date
of grant, and (iv) the duration of the option (which, for an incentive stock
option, may not exceed ten years). Generally, options granted under the 1997
Plan are immediately exercisable but remain subject to repurchase by the
Company until vested under a schedule established by the Board of Directors or
committee thereof. All options are non-transferable other than by will or the
laws of descent and distribution.
The 1997 Plan's maximum share reserve is 2,132,227 shares, which is
comprised of the sum of (i) 660,745 shares (new shares allocated to the 1997
Plan) and (ii) 1,471,482 (the number of shares subject to outstanding options
on June 3, 1997 granted pursuant to the 1988 Plan (the "1988 Plan Options")
which amount will automatically be increased on the first day of each fiscal
year of the Company beginning on or after January 1, 1999 by a number of
shares equal to 5% of the number of shares of the Company's Common Stock
issued and outstanding on the last day of the preceding fiscal year. The
number of shares available for issuance under the 1997 Plan, at any time, is
reduced by the number of shares remaining subject to the 1988 Plan Options. In
addition, without further stockholder approval, no more than 2,132,227 shares
may be available cumulatively for issuance upon exercise of incentive stock
options, including incentive stock options that have been granted previously.
Of the shares of Common Stock currently reserved for issuance under the 1997
Plan as of September 30, 1997, 240,363 shares have been issued upon the
exercise of options, options for the purchase of a total of 93,005 shares at a
weighted average exercise price of $4.55 per share were outstanding and a
maximum of 368,122 shares were available for future option grants.
1997 Outside Directors Stock Option Plan. A total of 200,000 shares of
Common Stock have been reserved for issuance under the Company's 1997 Outside
Directors Stock Option Plan (the "Directors Plan"). The Directors Plan
provides for the grant of nonstatutory stock options to nonemployee directors
of the Company. The Directors Plan is designed to work automatically without
administration; however, to the extent administration is necessary, it will be
performed by the Board of Directors. The Directors Plan provides that each
current and future nonemployee director of the Company will be granted an
option to purchase 15,000 shares of Common Stock on the effective date of this
offering or the date on which the optionee first becomes a nonemployee
director of the Company, as the case may be (the "Initial Grant"). Thereafter,
each nonemployee director will be granted an additional option to purchase
5,000 shares of Common Stock (an "Annual Grant") on each anniversary of (a)
the effective date of this offering (for persons serving on the Board of
Directors on the effective date of this offering) or (b) the date of initial
election or appointment to the Board of Directors (for persons first elected
or appointed to the Board of Directors after the effective date of this
offering). Subject to an optionee's continuous service with the Company,
approximately 1/3rd of an Initial Grant will become exercisable one year after
the date of grant and 1/36th of the Initial Grant will become exercisable
monthly thereafter. Each Annual Grant will become exercisable in twelve
monthly installments beginning in the 25th month after the date of grant,
subject to the optionee's continuous service. The exercise price per share of
all options granted under the Directors Plan will equal the fair market value
of a share of Common Stock on the date of grant. Options granted under the
Directors Plan have a term of ten years and are non-transferable. In the event
of certain changes in control of the Company, options outstanding under the
Directors Plan will become immediately exercisable and vested in full.
1997 Employee Stock Purchase Plan. A total of 250,000 shares of Common Stock
have been reserved for issuance under the Company's 1997 Employee Stock
Purchase Plan (the "Purchase Plan"), none of which have been issued as of the
effective date of this offering. The Purchase Plan, which is intended to
qualify under Section 423 of the Code, is administered by the Board of
Directors or by a committee thereof. Employees (including officers and
employee directors of the Company) of the Company or any subsidiary designated
by the Board of Directors for participation in the Purchase Plan are eligible
to participate in the Purchase Plan if they are customarily employed for more
than 20 hours per week and more than five months
42
<PAGE>
per year. The Purchase Plan will be implemented by overlapping 24-month
offerings, the first of which will commence on the effective date of this
offering and the initial offering period will terminate on January 31, 2000.
Each offering will generally be comprised of four six-month purchase periods,
with shares purchased on the last day of each purchase period (a "Purchase
Date"). Thereafter, offering periods will begin on February 1 and August 1 of
each year. The Board may change the dates or duration of one or more
offerings, but no offering may exceed 27 months. The Purchase Plan permits
eligible employees to purchase Common Stock through payroll deductions at a
price no less than 85% of the lower of the fair market value of the Common
Stock on the first day or the last day of each six-month purchase period.
Participants generally may not purchase more than 5,000 shares in a 24 month
offering or stock having a value (measured at the beginning of the offering)
greater than $25,000 in any calendar year. In the event of certain changes in
control of the Company, the Board may accelerate the purchase of shares under
the Purchase Plan unless the acquiring corporation assumes or replaces the
purchase rights outstanding under the Purchase Plan.
401(k) Plan. The Company maintains a tax-qualified employee savings and
retirement plan (the "401(k) Plan") which covers the Company's full-time
employees. Pursuant to the 401(k) Plan, employees may elect to reduce their
current annual compensation for at least 1% up to the lesser of 20% or the
statutorily prescribed limit ($9,500 in calendar years 1996 and 1997), and
have the amount of such reduction contributed to the 401(k) Plan. The 401(k)
Plan does not provide for any matching contributions by the Company. The
401(k) Plan is intended to qualify under Section 401 of the Internal Revenue
Code of 1986, as amended, so that contributions by employees to the 401(k)
Plan, and income earned on plan contributions, are not taxable to employees
until withdrawn from the 401(k) Plan, and so that contributions to the 401(k)
Plan, including employees' 401(k) contributions will be deductible by the
Company. Each participant may direct the investment of the assets in his or
her 401(k) account among a number of investment options offered by the 401(k)
Plan.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash for services provided as a
director. Directors are reimbursed for all travel and related expenses
incurred in connection with attending board and committee meetings. Upon
adoption of the Directors Plan, directors who are not employees of the Company
will receive yearly grants of options to purchase Common Stock. The Directors
Plan will become effective upon consummation of this offering. See "--Stock
Plans--1997 Outside Directors Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Compensation Committee is composed of William Davidow, E. Floyd Kvamme
and Edward Ross. No interlocking relationship exists between any member of the
Company's Compensation Committee and any member of any other company's board
of directors or compensation committee. The Compensation Committee makes
recommendations regarding the Company's employee stock plans and makes
decisions concerning salaries and incentive compensation for employees and
consultants of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law, the
Company's Amended Certificate of Incorporation, which will become effective
upon consummation of this offering, will provide that directors of the Company
shall not be personally liable for monetary damages to the Company or its
stockholders for a breach of fiduciary duty as a director, except for
liability as a result of (i) a breach of the director's duty of loyalty to the
Company or its stockholders, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) an act
related to the unlawful stock repurchase or payment of a dividend under
Section 174 of Delaware General Corporation Law, and (iv) transactions from
which the director derived an improper personal benefit. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission.
43
<PAGE>
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. The Company
intends to enter into separate indemnification agreements with its directors
and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers, (other
than liabilities arising from willful misconduct of a culpable nature), to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers and may indemnify its employees to the fullest extent permitted
by law. The Company believes that indemnification under its Bylaws covers at
least negligence and gross negligence on the part of the indemnified party.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding which may result in a claim for such indemnification.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AGREEMENTS AND CHANGE OF
CONTROL ARRANGEMENTS
Pursuant to an employment offer letter from the Company to Mr. Pausa dated
May 30, 1997, Mr. Pausa shall receive severance payment in the amount of
$120,000 in the event he is involuntarily terminated, other than "for cause,"
within the first eighteen months of his employment.
44
<PAGE>
CERTAIN TRANSACTIONS
Since January 1994, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which the Company was or is
to be a party in which the amount involved exceeds $60,000, and in which any
director, executive officer or holder of more than 5% any class of voting
securities of the Company and members of such person's immediate family had or
will have a direct or indirect material interest other than the transactions
described below.
On March 11, 1994, the Company sold 7,013,396 shares of Series E Preferred
Stock and warrants to purchase 132,120 shares of Series E Preferred Stock for
an aggregate cash consideration of $5,260,047. The following executive
officers, directors, beneficial holders of more than 5% of a class of the
Company's capital stock and immediate family members of such persons purchased
Series E Preferred Stock:
<TABLE>
<CAPTION>
SHARES OF
PURCHASER (1) STOCK (2)
------------- ---------
<S> <C>
The Hillman family and related entities(3)(4).................... 34,793
InterWest Partners V, L.P.(3)(5)................................. 48,097
Kleiner Perkins Caufield & Byers IV(3)........................... 83,675
MagneTek, Inc.(3)................................................ 48,113
Mohr, Davidow Ventures II(3)..................................... 83,675
</TABLE>
- --------
(1) See notes to table of beneficial ownership in "Principle and Selling
Stockholders" for information relating to the beneficial ownership of such
shares.
(2) Reflects the number of shares of Common Stock into which the Series E
Preferred Stock is convertible upon the consummation of this offering.
(3) A beneficial holder of more than 5% of the Company's capital stock.
(4) Represents an aggregate of 4,948 shares held by C. G. Grefenstette and
Thomas G. Bigley, trustees U/A/T dated 8/28/68 for Audrey Hilliard
Hillman, Henry Lea Hillman, Jr., Juliet Lea Hillman and William Talbott
Hillman. Also includes 4,157 shares held by Venhill Limited Partnership,
20,887 shares held by HCC Investments, Inc., and 4,801 shares held by
Henry L. Hillman, Elsie Hilliard Hillman and C. G. Grefenstette, trustees
of the Henry L. Hillman Trust U/A dated 11/18/85.
(5) Represents 47,862 shares held by InterWest Partners V, L.P. and 235 shares
held by InterWest Investors V.
As a result of adjustments in the conversion price of Series E Preferred
Stock, as set forth in the Company's Certificate of Incorporation, upon the
consummation of this offering, all outstanding shares of Series E Preferred
Stock will be converted into Common Stock on a 1 for 1.07 basis.
Between April 27, 1995 and May 12, 1995, the Company sold an aggregate of
9,091,000 shares of Series F Preferred Stock for an aggregate cash
consideration of $5,000,050. The following executive officers, directors,
beneficial holders of more than 5% of a class of the Company's capital stock
and immediate family members of such persons purchased Series F Preferred
Stock:
<TABLE>
<CAPTION>
SHARES OF
PURCHASER (1) STOCK (2)
------------- ----------
<S> <C>
The Hillman family and related entities(3)(4)................... 273,689
InterWest Partners V, L.P.(3)(5)................................ 280,455
Kleiner Perkins Caufield & Byers IV(3).......................... 272,331
Mohr, Davidow Ventures II(3).................................... 272,331
Dr. Edward C. Ross(6)........................................... 2,995
</TABLE>
- --------
(1) See notes to table of beneficial ownership in "Principle and Selling
Stockholders" for information relating to the beneficial ownership of such
shares.
(2) Reflects the number of shares of Common Stock into which the Series F
Preferred Stock is convertible upon the consummation of this offering.
(3) A beneficial holder of more than 5% of the Company's capital stock.
45
<PAGE>
(4) Represents an aggregate of 38,124 shares held by C. G. Grefenstette and
Thomas G. Bigley, trustees U/A/T dated 8/28/68 for Audrey Hilliard
Hillman, Henry Lea Hillman, Jr., Juliet Lea Hillman and William Talbott
Hillman. Also includes 34,041 shares held by Venhill Limited Partnership,
163,398 shares held by HCC Investments, Inc., and 38,126 shares held by
Henry L. Hillman, Elsie Hilliard Hillman and C. G. Grefenstette, trustees
of the Henry L. Hillman Trust U/A dated 11/18/85.
(5) Represents 278,703 shares held by InterWest Partners V, L.P. and 1,752
shares held by InterWest Partners V.
(6) Director of the Company.
As a result of adjustments in the conversion price of Series F Preferred
Stock, as set forth in the Company's Certificate of Incorporation, upon the
consummation of this offering, all outstanding shares of Series F Preferred
Stock will be converted into Common Stock on a 1 for 1.02 basis.
On July 25, 1997, in connection with the purchase of Common Stock upon
exercise of stock options granted to Howard Earhart, the Company loaned to Mr.
Earhart $125,000, at an interest rate of 6.65% pursuant to a Promissory Note
and Pledge Agreement due on July 25, 2002, or at the Company's option upon (i)
termination of Mr. Earhart's employment with the Company, (ii) a default in
the payment of any installment or principal and/or interest when due, (iii) a
sale of the Pledged Stock (as defined below) or (iv) acceleration being
reasonably necessary for the Company to comply with any regulations
promulgated by the Board of Governors of the Federal Reserve System affecting
the extension of credit in connection with the Company's securities. The loan
is secured by 73,529 shares of Common Stock (the "Pledged Stock").
On July 28, 1997, in connection with the purchase of Common Stock upon
exercise of stock options granted to Clements Edward Pausa, the Company loaned
to Mr. Pausa $131,250, at an interest rate of 6.65% pursuant to a Promissory
Note and Pledge Agreement due on July 28, 2002, or at the Company's option
upon (i) termination of Mr. Pausa's employment with the Company, (ii) a
default in the payment of any installment or principal and/or interest when
due, (iii) a sale of the Pledged Stock (as defined below) or (iv) acceleration
being reasonably necessary for the Company to comply with any regulations
promulgated by the Board of Governors of the Federal Reserve System affecting
the extension of credit in connection with the Company's securities. The loan
is secured by 77,205 shares of Common Stock (the "Pledged Stock").
The Company believes that all transactions with affiliates described above
were made on terms no less favorable to the Company than could have been
obtained by unaffiliated third parties.
46
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1997, and as
adjusted to reflect the sale of the shares offered hereby, assuming no
exercise of the Underwriters' over-allotment option, (i) by each person who is
known by the Company to own beneficially more than 5% of the Company's Common
Stock, (ii) by each of the Named Executive Officers and by each of the
Company's directors, (iii) by all current executive officers and directors as
a group, and (iv) by each Selling Stockholder. Except pursuant to applicable
community property laws or as indicated in the footnotes to this table, each
stockholder identified in the table possesses sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by such
stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE OWNED AFTER THE
OFFERING (1) SHARES OFFERING (1)
----------------------- BEING -----------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------- ------------ ---------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS
Howard F. Earhart(2)..... 382,352 4.0% 0 382,352 3.3%
Balu Balakrishnan(3)..... 257,352 2.7 0 257,352 2.2
Clements Edward
Pausa(4)................ 77,205 * 0 77,205 *
Vladimir Rumennik(5)..... 169,117 1.8 0 169,117 1.5
Daniel M. Selleck(6)..... 132,352 1.4 0 132,352 1.2
Robert G. Staples(7)..... 99,264 1.1 0 99,264 *
Clifford J. Walker(8).... 88,234 * 0 88,234 *
Dr. Edward C. Ross(9).... 219,465 2.3 0 219,465 1.9
Dr. William Davidow(10).. 1,019,777 10.9 0 1,019,777 8.9
E. Floyd Kvamme(11)...... 893,443 9.5 0 893,443 7.8
Steven J. Sharp(12)...... 50,646 * 0 50,646 *
All executive officers
and directors as a group
(11 persons)(13)........ 3,389,207 35.0 0 3,389,207 28.8
5% STOCKHOLDERS
Mohr, Davidow Ventures 1,109,777 10.9 0 1,109,777 8.9
II......................
3000 Sand Hill Road
Bldg. 1, Suite 240
Menlo Park, CA 94025
Funds affiliated with
Kleiner Perkins Caufield 893,443 9.5 0 893,443 7.8
& Byers(14)............
2750 Sand Hill Road
Menlo Park, CA 94025
Funds affiliated with
InterWest Partners(15).. 736,347 7.9 0 736,347 6.4
3000 Sand Hill Road
Bldg. 3, Suite 255
Menlo Park, CA 94025
MagneTek, Inc............ 700,258 7.5 700,258 0 0
26 Century Blvd.,
P. O. Box 290159
Nashville, TN 37229-0159
Henry L. Hillman, Elsie
Hilliard Hillman and
C.G. Grefenslette, 537,115 5.7 306,439 230,676 2.0
Trustees(16)...........
2000 Grant Building
Pittsburgh, PA 15219
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE OWNED AFTER THE
OFFERING (1) SHARES OFFERING (1)
----------------------- BEING -----------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------- ------------ ------------------- ------------ ----------
OTHER SELLING STOCKHOLDERS
<S> <C> <C> <C> <C> <C>
Concord Partners II,
L.P.................... 272,333 2.9 272,333 0 0
Funds Associated with
Atlas Venture Funds
(17)................... 339,582 3.6 33,957 305,625 2.7
Euroventures Switzerland
II..................... 209,211 2.2 57,883 151,328 1.3
Eklund, Klas H.......... 117,251 1.3 12,000 105,251 *
Gilde Investment Fund
B.V.................... 115,183 1.2 115,183 0 0
Other Selling
Stockholders,
Each Holding Less than
1% of the Common Stock
Prior to the Offering... 657,216 7.0 401,947 255,269 2.2
All Selling Stockholders
as a Group............. 2,948,149 31.5 1,900,000 1,048,149 9.1
</TABLE>
- --------
* Represents less than 1%.
(1) The amounts reported in this table include shares of Common Stock
issuable upon the automatic conversion of all Preferred Stock, which
conversion will occur upon consummation of this offering. Based on
9,367,036 shares of Common Stock outstanding prior to the offering. A
person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of options.
Calculations of percentages of beneficial ownership assume the exercise
by only the respective named stockholders of all options for the purchase
of Common Stock held by such stockholder which are exercisable within 60
days of September 30, 1997. Unless otherwise indicated, the address of
each of the named individuals is: c/o Power Integrations, Inc., 477 N.
Mathilda Avenue, Sunnyvale, CA 94086.
(2) Includes 83,529 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 102,941 shares issuable
upon exercise of options.
(3) Includes 77,941 shares subject to a right of repurchase in favor of the
Company which lapses over time.
(4) Includes 68,014 shares subject to a right of repurchase in favor of the
Company which lapses over time.
(5) Includes 16,324 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 54,084 shares issuable upon
exercise of options.
(6) Includes 37,646 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 22,058 shares issuable upon
exercise of options.
(7) Includes 42,499 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 18,382 shares issuable upon
exercise of options.
(8) Includes 41,813 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 18,382 shares issuable upon
exercise of options.
(9) None of Dr. Ross' shares are subject to a right of repurchase in favor of
the Company which lapses over time. Includes 98,823 shares issuable upon
exercise of options.
(10) Represents all shares held by entities affiliated with Mohr, Davidow
Ventures, II. Mr. Davidow, as a general partner of Mohr, Davidow
Ventures, may be deemed to beneficially own shares, but Mr. Davidow
disclaims beneficial ownership of all such shares except to the extent of
his proportional interest therein.
(11) Represents all shares held by entities affiliated with Kleiner Perkins
Caufield & Byers ("KPCB"). Mr. Kvamme, as a general partner of KPCB, may
be deemed to beneficially own shares, but Mr. Kvamme disclaims beneficial
ownership of all such shares except to the extent of his proportional
interest therein.
(12) Includes 2,117 shares held by Sutro & Co. Keough Custodian FBO Steven
Sharp.
48
<PAGE>
(13) See footnotes (2) through (9), and footnote (11). Includes 367,676 shares
subject to a right of repurchase in favor of the Company which lapses
over time, and 215,847 shares issuable upon exercise of options.
(14) Includes 878,468 shares held by Kleiner Perkins Caufield & Byers IV, and
14,975 shares held by KPCB Zaibatsu Fund I.
(15) Includes 731,814 shares held by InterWest Partners V, L.P. and 4,533
shares held by InterWest Investors V.
(16) Consists of 101,556 shares held by a trust for the benefit of Henry L.
Hillman (the "HLH Trust") and 435,559 shares owned by HHC Investments,
Inc., an indirect, wholly-owned subsidiary of The Hillman Company
("THC"). THC is a private company engaged in diversified investments and
operations which is controlled by the HLH Trust. The Trustees of the HLH
Trust are Henry L. Hillman, Elsie Hilliard Hillman and C.G. Grefenstette
(the "HLH Trustees"). The HLH Trustees share voting and investment power
with respect to the shares held of record by the HLH Trust and the assets
of THC. Does not include an aggregate of 101,700 shares held by four
trusts for the benefit of members of the Hillman family, as to which
shares the HLH Trustees (other than Mr. Grefenstette, who is one of the
trustees of such family trusts) disclaim beneficial ownership. Also does
not include 88,452 shares held by Venhill Limited Partnership, as to
which shares the HLH Trustees disclaim beneficial ownership. Howard B.
Hillman is the general partner of Venhill Limited Partnership and is a
step-brother of Henry L. Hillman.
(17) Includes 113,194 shares held by Atlas Venture Beheer II, BV, and 226,388
shares held by Atlas Venture Fund, L.P.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, par value $0.001
per share and 3,000,000 shares of Preferred Stock, par value $0.001 per share
after giving effect to the amendment of the Company's Certificate of
Incorporation to split each 6.8 outstanding shares of Common Stock into one
share of Common Stock and the automatic conversion of all outstanding
Preferred Stock into Common Stock upon the closing of this offering. The
following summary of certain provisions of the Common Stock and the Preferred
Stock of the Company does not purport to be complete and is subject to, and
qualified in its entirety by, the Certificate of Incorporation and Bylaws of
the Company that are included as exhibits to the Registration Statement of
which this Prospectus forms a part and by the provisions of applicable law.
COMMON STOCK
As of September 30 1997, there were approximately 9,367,036 shares of Common
Stock outstanding held of record by 233 stockholders, as adjusted to reflect
the conversion of the outstanding shares of Preferred Stock upon the closing
of the offering. The holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the holders of
Common Stock. Subject to preferences applicable to any outstanding preferred
stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preference
of any preferred stock. Holders of Common Stock have no preemptive or
subscription rights, and there are no redemption or conversion rights with
respect to such shares. All outstanding shares of Common Stock are fully paid
and non-assessable, and the shares of Common Stock to be issued upon
completion of the offering will be fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the dividend rate, voting rights and other rights, preferences
and restrictions of each series any or all of which may be greater than the
rights of the Common Stock. It is not possible to state the actual effect of
the issuance of any shares of preferred stock upon the rights of holders of
the Common Stock until the Board of Directors determines the specific rights
of the holders of such preferred stock. However, the effects might include,
among other things, restricting dividends on the Common Stock, diluting the
voting power of the Common Stock, impairing the liquidation rights of the
Common Stock and delaying or preventing a change in control of the Company
without further action by the stockholders. The Company has no present plans
to issue any shares of preferred stock.
REGISTRATION RIGHTS
Following the sale of the shares of Common Stock offered hereby, the holders
of approximately 6,258,952 shares of Common Stock (including 474,216 shares
issuable upon exercise of outstanding warrants),will have certain rights to
register those shares under the Securities Act of 1933, as amended. The
holders of approximately 5,925,946 shares of Common Stock (including 297,746
shares issuable upon exercise of outstanding warrants) are subject to rights
under the Fifth Amended and Restated Rights Agreement, as amended (the "Rights
Agreement"). Subject to certain limitations in the Rights Agreement, the
holders of at least 35% of such shares may require, on two occasions, that the
Company use its best efforts to register such shares for public resale,
subject to certain limitations. If the Company registers any of its Common
Stock either for its own account or for the account of other security holders,
the holders of such shares are entitled to include their shares of Common
Stock in the registration, subject to the ability of the underwriters to limit
the number of shares included in the offering. The holders of at least 35% of
such shares may also require the Company to register all or a portion of their
registrable securities on Form S-3 when use of such form becomes available to
the Company, provided, among other limitations, that the proposed aggregate
price to the public is at least $1,000,000. All fees, costs and expenses of
such registrations (other than underwriting discounts and commissions) will be
borne by the Company.
50
<PAGE>
A holder of approximately 176,471 shares of Common Stock issuable upon
exercise of an outstanding warrant is subject to rights under the terms of an
Investor's Rights Agreement between the Company and such holder. Subject to
certain limitations in the Investor's Rights Agreement, if the Company
registers any of its Common Stock, either for its own account or for the
account of other securityholders, the holder of such shares is entitled to
include its shares of Common Stock in the registration, subject to the ability
of the underwriters to limit the number of shares included in the offering.
All fees, costs and expenses of such registrations (other than underwriting
discounts and commissions) will be borne by the Company.
Holders of approximately 156,536 shares of Common Stock are subject to
rights under the terms of Stock Purchase Agreements between the Company and
such holders. Subject to certain limitations in the Stock Purchase Agreements,
if the Company registers any of its Common Stock, either for its own account
or for the account of other securityholders, the holders of such shares are
entitled to include their shares of Common Stock in the registration, subject
to the ability of the underwriters to limit the number of shares included in
the offering. All fees, costs and expenses of such registrations (other than
underwriting discounts and commissions) will be borne by the Company.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three (3) years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
The Company's Amended Certificate of Incorporation, which will become
effective upon consummation of this offering, will require that any action
required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of the stockholders and
may not be effected by a consent in writing. In addition, special meetings of
the stockholders of the Company may be called only by the Board of Directors
or holders of not less than 10% of all of the shares entitled to cast votes at
such meetings. The Amended Certificate of Incorporation will also provide
that, beginning upon the closing of this offering, the Board of Directors will
be divided into three classes, with each class serving staggered three-year
terms, and that certain amendments of the Company's Certificate of
Incorporation, and all amendments by the stockholders of the Company's Bylaws,
require the approval of holders of at least 66 2/3% of the voting power of all
outstanding stock. These provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston.
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Company's
Common Stock. Future sales of substantial amounts of Common Stock in the
public market could adversely affect the market price of the Common Stock.
Upon completion of this offering, the Company will have outstanding an
aggregate of 11,467,036 shares of Common Stock, assuming (i) the issuance of
2,100,000 shares of Common Stock offered hereby, (ii) no exercise of the
Underwriters' over-allotment option and (iii) no exercise of options to
purchase Common Stock after September 30, 1997. Of these shares, the 4,000,000
shares sold in the offering will be freely tradable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except for any shares purchased by "Affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act (whose
sales would be subject to certain limitations and restrictions described
below).
The remaining 7,467,036 shares of Common Stock held by existing stockholders
were issued and sold by the Company in reliance on exemptions from the
registration requirements of the Securities Act. All officers, directors and
certain other holders of Common Stock have entered into contractual "lock-up"
agreements providing that they will not, without Hambrecht & Quist's prior
written consent, offer, sell, contract to sell or grant any option to purchase
or otherwise dispose of shares of Common Stock owned by them or that could be
purchased by them through the exercise of options to purchase Common Stock of
the Company until 180 days after the effective date of this offering (the
"Effective Date"). As a result of these contractual restrictions, 7,467,036
additional shares will be eligible for sale in the public market upon
expiration of the lock-up agreements 180 days after the Effective Date,
subject in some cases to the limitations of Rule 144. In addition, outstanding
options to purchase approximately 323,056 shares will be vested and
exercisable, and the shares issuable upon exercise thereof eligible for sale,
approximately 180 days following the Effective Date, upon expiration of
certain lock-up agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
one year (including the holding period of any prior owner except an affiliate)
is entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 114,670
shares immediately after this offering) or (ii) generally, the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
the required filing of a Form 144 with respect to such sale. Sales under Rule
144 are generally subject to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been
an affiliate of the Company at any time during the 90 days preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell such shares without having to comply with the
manner of sale, public information, volume limitation or notice filing
provisions of Rule 144. Under Rule 701 under the Securities Act, persons who
purchase shares upon exercise of options granted prior to the effective date
of this offering are entitled to sell such shares 90 days after the effective
date of this offering in reliance on Rule 144, without having to comply with
the holding period and notice filing requirements of Rule 144 and, in the case
of non-affiliates, without having to comply with the public information,
volume limitation or notice filing provisions of Rule 144.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisors prior to the date the
issuer becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written
compensatory benefit plans or written contracts relating the compensation of
such persons. In addition, the Commission had indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject
to the reporting requirements of the Exchange Act, along with the shares
acquired upon exercise of such options (including exercises after the date of
this Prospectus). Securities issued in
52
<PAGE>
reliance on Rule 701 are restricted securities and, subject to the contractual
restrictions described above, beginning 90 days after the date of this
Prospectus, may be sold by persons other than Affiliates (as defined in Rule
144 under the Securities Act) subject only to the manner of sale provisions of
Rule 144 and by Affiliates under Rule 144 without compliance with its one-year
minimum holding period requirements.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering the 2,038,457 shares subject to outstanding options or
reserved for issuance under the Company's 1988 Plan, the 1997 Plan, the 1997
Purchase Plan or Directors Plan. Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to Affiliates, be available for sale in the open market, except to the extent
that such shares are subject to vesting restrictions with the Company or the
contractual restrictions described above. All of the shares issuable upon
exercise of outstanding options are subject to 180 day lock-up agreements with
the Company and/or representatives of the Underwriters. An aggregate of
323,056 shares will be issuable upon the exercise of the currently outstanding
options vested and exercisable 180 days following the date of this Prospectus.
Such shares will be freely tradable in the public market upon exercise,
pursuant to such registration statement on Form S-8. See "Management--Stock
Plans."
53
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representatives, Hambrecht & Quist
LLC, NationsBanc Montgomery Securities, Inc. and BancAmerica Robertson
Stephens (collectively, the "Representatives"), have severally agreed to
purchase from the Company and the Selling Stockholders the following
respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC............................................
NationsBanc Montgomery Securities, Inc. .........................
BancAmerica Robertson Stephens...................................
---------
Total.......................................................... 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representatives. The Representatives have
informed the Company that the Underwriters do not intend to confirm sales of
Common Stock offered hereby to any account over which they have discretionary
authority.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 600,000
additional shares of Common Stock at the initial public offering price, less
the underwriting discount, set forth on the cover page of this Prospectus. To
the extent that the Underwriters exercise this option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased
by it shown in the above table bears to the total number of shares of Common
Stock offered hereby. The Company will be obligated, pursuant to the option,
to sell shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
54
<PAGE>
The Selling Stockholders and all other stockholders of the Company,
including the executive officers and directors, who will own in the aggregate
7,467,036 shares of Common Stock after this offering, have agreed that they
will not, without the prior written consent of Hambrecht & Quist LLC, offer,
sell or otherwise dispose of any shares of Common Stock, options or warrants
to acquire shares of Common Stock or securities exercisable for or convertible
into shares of Common Stock owned by them during the 180-day period following
the effective date of the Registration Statement for this offering. The
Company has agreed that it will not, without the prior written consent of
Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock during
the 180-day period following the effective date of the Registration Statement
for this offering. See "Shares Eligible for Future Sales."
The Representatives currently anticipate that up to shares of Common
Stock may be sold at the initial public offering price to directors (or their
affiliated entities) and employees of the Company who have expressed an
interest in purchasing such shares of Common Stock in the offering. The number
of shares available for sale to the general public will be reduced to the
extent such persons purchase such shares. Any such shares not so purchased
will be offered by the Representatives to the general public on the same basis
as other shares offered hereby.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of the Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the offering. A penalty bid means an arrangement that
permits the Underwriters to reclaim a selling concession from a syndicate
member in connection with the offering when shares of Common Stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq Stock Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
On May 22, 1996, the Company entered into a series of transactions with
Hambrecht & Quist Transition Capital, LLC ("H&Q Capital"). Pursuant to these
transactions, H&Q Capital: (i) loaned $3.0 million to the Company pursuant to
a 12% subordinated secured loan agreement (the "Loan"); (ii) purchased 805,280
shares of Series C Preferred Stock of the Company for $1.00 per share; and
(iii) purchased from the Company for $12,000, a warrant to purchase 176,471
shares of Common Stock at $1.36 per share (the fair value of the Common Stock
as of that date as determined by the Board of Directors of the Company),
exercisable until May 22, 2002. The Company paid a $30,000 fee to H&Q Capital
in consideration for entering into the above-referenced transactions. The
Company anticipates that $3.0 million of the net proceeds of this offering
will be used to repay the outstanding balance of the Loan. The majority equity
holder of both H&Q Capital and Hambrecht & Quist LLC is Hambrecht & Quist
Group, a Delaware corporation.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be
determined by negotiation among the Company, the representatives of the
Selling Stockholders and the Representatives. Among the factors to be
considered in determining the initial public offering price are prevailing
market and economic conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The estimated initial public offering price range set
forth on the cover of this preliminary prospectus is subject to change as a
result of market conditions and other factors.
55
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby and general corporate legal
matters will be passed upon for the Company by Gray Cary Ware & Freidenrich, A
Professional Corporation ("GCWF"), Palo Alto, California. As of September 30,
1997, an investment partnership of GCWF beneficially owned an aggregate of
8,441 shares of the Company's Common Stock. Wilson Sonsini Goodrich & Rosati,
Professional Corporation, is acting as counsel for the Underwriters in
connection with certain legal matters relating to the sale of the Common Stock
offered hereby.
EXPERTS
The financial statements included in this Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, to the extent and for the
periods indicated in their report and are included herein in reliance upon the
authority of said firm as experts in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act, with respect to the Common Stock offered hereby.
This Prospectus which constitutes a part of the Registration Statement does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. For further information with respect to
the Company and such Common Stock, reference is made to the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or any other document referred
to are not necessarily complete. In each instance, reference is made to the
copy of such contract or document filed as an exhibit to the Registration
Statement, and each such statement is qualified in all respects by such
reference. Copies of the Registration Statement, including exhibits and
schedule thereto, may be inspected without charge at the Commission's
principal office in Washington, D.C., or obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 7
World Trade Center, Suite 1300, New York, New York 10048 and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information filed electronically with the
Commission. The address of the site is http://www.sec.gov.
56
<PAGE>
POWER INTEGRATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Shareholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Power Integrations, Inc.:
We have audited the accompanying consolidated balance sheets of Power
Integrations, Inc. (a California corporation--see Note 7) and subsidiaries as
of December 31, 1995 and 1996 and September 30, 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996 and for the
nine-month period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Power Integrations, Inc.
and subsidiaries as of December 31, 1995 and 1996 and September 30, 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996 and for the nine-month period
ended September 30, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Jose, California
October 15, 1997
F-2
<PAGE>
POWER INTEGRATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
DECEMBER 31, PRO FORMA
------------------ SEPTEMBER 30, SHAREHOLDERS'
1995 1996 1997 EQUITY
-------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.... $ 3,003 $ 3,282 $ 5,813
Short-term investments....... 797 4,410 4,462
Accounts receivable, net of
allowances of $150, $285 and
$994, respectively.......... 3,086 2,777 6,912
Inventories.................. 4,381 3,938 4,600
Prepaid expenses and other
current assets.............. 166 300 383
-------- -------- --------
Total current assets....... 11,433 14,707 22,170
-------- -------- --------
PROPERTY AND EQUIPMENT, AT
COST:
Machinery and equipment...... 6,638 8,920 10,845
Leasehold improvements....... 609 636 676
-------- -------- --------
7,247 9,556 11,521
Less: Accumulated
depreciation and
amortization................ (2,951) (4,728) (6,341)
-------- -------- --------
4,296 4,828 5,180
-------- -------- --------
$ 15,729 $ 19,535 $ 27,350
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Current portion of
capitalized lease
obligations................. $ 803 $ 1,566 $ 1,874
Current portion of note
payable to a shareholder.... -- 251 1,303
Accounts payable............. 1,980 1,476 4,322
Accrued payroll and related
expenses.................... 588 829 1,141
Taxes payable and other
accrued liabilities......... 35 82 893
Deferred income on sales to
distributors................ 592 734 1,561
-------- -------- --------
Total current liabilities.. 3,998 4,938 11,094
-------- -------- --------
CAPITALIZED LEASE OBLIGATIONS,
NET OF CURRENT PORTION........ 2,219 2,750 2,463
-------- -------- --------
NOTE PAYABLE TO A SHAREHOLDER,
NET OF CURRENT PORTION........ -- 2,749 1,697
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
(NOTE 5)
SHAREHOLDERS' EQUITY:
Convertible Preferred Stock,
no par value, aggregate
liquidation preference of
$36,869 as of September 30,
1997
Authorized--54,000,000
shares
Outstanding (Series A, B, C,
D, E, and F)--45,058,516
shares in 1995, 45,863,796
shares in 1996 and at
September 30, 1997;
3,000,000 shares
authorized, none issued and
outstanding pro forma (Note
6)......................... 34,478 35,271 35,271 --
Common Stock, no par value
Authorized--100,000,000
shares
Outstanding--830,547 shares
in 1995, 873,644 shares in
1996 and 1,920,113 at
September 30, 1997;
40,000,000 shares
authorized, 9,367,036
shares outstanding pro
forma...................... 438 565 2,113 37,384
Common Stock warrants........ -- 12 12 12
Shareholder notes
receivable.................. -- -- (405) (405)
Deferred compensation........ -- -- (495) (495)
Cumulative translation
adjustment.................. (8) (13) (33) (33)
Accumulated deficit.......... (25,396) (26,737) (24,367) (24,367)
-------- -------- -------- --------
Total shareholders'
equity.................... 9,512 9,098 12,096 $ 12,096
-------- -------- -------- ========
$ 15,729 $ 19,535 $ 27,350
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- -------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES:
Product sales.............. $ 5,027 $17,406 $23,324 $16,646 $29,668
License fees and
royalties................. 2,099 1,009 619 409 790
------- ------- -------- -------- -------
Total net revenues....... 7,126 18,415 23,943 17,055 30,458
------- ------- -------- -------- -------
COST OF REVENUES............. 4,324 12,371 15,546 11,324 17,602
------- ------- -------- -------- -------
GROSS PROFIT................. 2,802 6,044 8,397 5,731 12,856
------- ------- -------- -------- -------
OPERATING EXPENSES:
Research and development... 2,366 2,044 3,519 2,559 3,696
Sales and marketing........ 2,098 2,744 3,905 2,746 4,408
General and administra-
tive...................... 1,061 1,619 1,558 1,192 1,460
------- ------- -------- -------- -------
Total operating ex-
penses.................. 5,525 6,407 8,982 6,497 9,564
------- ------- -------- -------- -------
INCOME (LOSS) FROM
OPERATIONS.................. (2,723) (363) (585) (766) 3,292
------- ------- -------- -------- -------
OTHER INCOME (EXPENSE):
Interest income............ 80 93 204 139 225
Interest expense........... (72) (183) (780) (565) (626)
Other expense, net......... (31) (316) (150) (79) (148)
------- ------- -------- -------- -------
Total other income (ex-
pense).................. (23) (406) (726) (505) (549)
------- ------- -------- -------- -------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME TAXES.. (2,746) (769) (1,311) (1,271) 2,743
PROVISION FOR INCOME TAXES... 6 34 30 16 373
------- ------- -------- -------- -------
NET INCOME (LOSS)............ $(2,752) $ (803) $ (1,341) $ (1,287) $ 2,370
======= ======= ======== ======== =======
PRO FORMA NET INCOME (LOSS)
PER SHARE................... $ (0.14) $ (0.13) $ 0.23
======== ======== =======
PRO FORMA WEIGHTED AVERAGE
COMMON AND COMMON EQUIVALENT
SHARES...................... 9,580 9,556 10,468
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------- -------------
SHAREHOLDER CUMULATIVE TOTAL
NOTES DEFERRED TRANSLATION ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT WARRANTS RECEIVABLE COMPENSATION ADJUSTMENT DEFICIT EQUITY
------- -------- ------ ------ -------- ----------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31,
1993............ 27,201 $ 22,839 340 $ 70 $ 38 $ -- $ -- $ (3) $(21,841) $ 1,103
Issuance of
Series E
Preferred
Stock.......... 7,013 4,934 -- -- -- -- -- -- -- 4,934
Issuance of
Common Stock
under employee
stock option
plan........... -- -- 42 27 -- -- -- -- -- 27
Translation
adjustment..... -- -- -- -- -- -- -- (6) -- (6)
Net loss........ -- -- -- -- -- -- -- -- (2,752) (2,752)
------- -------- ----- ------ ---- ----- ----- ---- -------- -------
BALANCE AT
DECEMBER 31,
1994............ 34,214 27,773 382 97 38 -- -- (9) (24,593) 3,306
Issuance of
Series F
Preferred
Stock.......... 9,091 4,947 -- -- -- -- -- -- -- 4,947
Issuance of
Common Stock
under employee
stock option
plan........... -- -- 427 233 -- -- -- -- -- 233
Issuance of
Common Stock
upon exercise
of warrant..... -- -- 22 108 (33) -- -- -- -- 75
Issuance of
Series C
Preferred Stock
upon exercise
of warrants.... 1,754 1,756 -- -- (3) -- -- -- -- 1,753
Expiration of
unexercised
warrants to
purchase Series
A, C and D
Preferred
Stock.......... -- 2 -- -- (2) -- -- -- -- --
Translation
adjustment..... -- -- -- -- -- -- -- 1 -- 1
Net loss........ -- -- -- -- -- -- -- -- (803) (803)
------- -------- ----- ------ ---- ----- ----- ---- -------- -------
BALANCE AT
DECEMBER 31,
1995............ 45,059 34,478 831 438 -- -- -- (8) (25,396) 9,512
Issuance of
Series C
Preferred Stock
upon exercise
of warrants.... 805 793 -- -- -- -- -- -- -- 793
Issuance of
Common Stock
under employee
stock option
plan, net of
repurchases.... -- -- 28 27 -- -- -- -- -- 27
Issuance of
Common Stock
upon exercise
of warrants.... -- -- 15 100 -- -- -- -- -- 100
Issuance of
warrants to
purchase Common
Stock.......... -- -- -- -- 12 -- -- -- -- 12
Translation
adjustment..... -- -- -- -- -- -- -- (5) -- (5)
Net loss........ -- -- -- -- -- -- -- (1,341) (1,341)
------- -------- ----- ------ ---- ----- ----- ---- -------- -------
BALANCE AT
DECEMBER 31,
1996............ 45,864 35,271 874 565 12 -- -- (13) (26,737) 9,098
Issuance of
Common Stock
under employee
stock option
plan........... -- -- 1,046 982 -- (405) -- -- -- 577
Deferred
compensation... -- -- -- 566 -- -- (566) -- -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- 71 -- -- 71
Translation
adjustment..... -- -- -- -- -- -- -- (20) -- (20)
Net income...... -- -- -- -- -- -- -- -- 2,370 2,370
------- -------- ----- ------ ---- ----- ----- ---- -------- -------
BALANCE AT
SEPTEMBER 30,
1997 ........... 45,864 $ 35,271 1,920 $2,113 $ 12 $(405) $(495) $(33) $(24,367) $12,096
======= ======== ===== ====== ==== ===== ===== ==== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------- -------------------
1994 1995 1996 1996 1997
------- -------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING AC-
TIVITIES:
Net income (loss)............ $(2,752) $ (803) $(1,341) $(1,287) $ 2,370
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortiza-
tion....................... 485 1,036 1,887 1,277 1,613
Deferred compensation ex-
pense...................... -- -- -- -- 71
Provision for accounts re-
ceivable and other allow-
ances...................... 48 95 143 119 709
Change in operating assets
and liabilities:
Accounts receivable......... (992) (1,883) 166 542 (4,844)
Inventories................. (769) (3,239) 443 (1,535) (662)
Prepaid expenses and other
current assets............. 483 (80) (134) (123) (83)
Accounts payable............ (75) 1,321 (504) (831) 2,846
Accrued liabilities......... 48 23 285 110 1,103
Deferred income on sales to
distributors............... -- 592 142 142 827
------- -------- ------- ------- -------
Net cash provided by (used
in) operating activi-
ties..................... (3,524) (2,938) 1,087 (1,586) 3,950
------- -------- ------- ------- -------
CASH FLOWS FROM INVESTING AC-
TIVITIES:
Purchases of property and
equipment.................. (570) (1,316) (537) (165) (712)
Purchases of short-term in-
vestments.................. (390) (406) (3,613) (1,430) (52)
------- -------- ------- ------- -------
Net cash used in investing
activities............... (960) (1,722) (4,150) (1,595) (764)
------- -------- ------- ------- -------
CASH FLOWS FROM FINANCING AC-
TIVITIES:
Net proceeds from issuance
of Preferred Stock......... 4,934 6,700 793 793 --
Net proceeds from issuance
of Common Stock............ 27 308 127 121 577
Net proceeds from issuance
of warrants to purchase
common stock............... -- -- 12 12 --
Principal payments under
capitalized lease obliga-
tions...................... (215) (505) (590) (418) (1,232)
Proceeds from issuance of
note payable to a share-
holder..................... -- -- 3,000 3,000 --
------- -------- ------- ------- -------
Net cash provided by (used
in) financing activi-
ties..................... 4,746 6,503 3,342 3,508 (655)
------- -------- ------- ------- -------
NET INCREASE IN CASH AND CASH
EQUIVALENTS................. 262 1,843 279 327 2,531
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD......... 898 1,160 3,003 3,003 3,282
------- -------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD............... $ 1,160 $ 3,003 $ 3,282 $ 3,330 $ 5,813
======= ======== ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Capitalized lease obliga-
tions incurred for property
and equipment.............. $ 607 $ 2,838 $ 1,883 $ 1,883 $ 1,253
======= ======== ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest...... $ 72 $ 183 $ 780 $ 565 $ 626
======= ======== ======= ======= =======
Cash paid for income taxes.. $ -- $ 6 $ 45 $ 38 $ 7
======= ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(ALL INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED)
1. THE COMPANY:
Power Integrations, Inc. (the "Company"), which was incorporated in
California on March 25, 1988 (see Note 7), designs, develops, manufactures and
markets proprietary, high-voltage, analog integrated circuits for use in AC to
DC power conversion primarily for the cellular telephone, personal computer,
cable and direct broadcast satellite and various consumer electronics markets.
The Company is subject to a number of risks including, among others, the
volume and timing of orders received by the Company from its customers;
competitive pressures on selling prices; the volume and timing of orders
placed by the Company with its foundries; the availability of raw materials;
fluctuations in manufacturing yields, whether resulting from the transition to
new foundries or from other factors; changes in product mix including the
impact of new product introductions on existing products; the Company's
ability to develop and bring to market new products and technologies on a
timely basis; the introduction of products and technologies by the Company's
competitors; market acceptance of the Company's and its customers' products;
the timing of investments in research and development and sales and marketing;
cyclical semiconductor conditions; fluctuations in exchange rates,
particularly exchange rates between the U.S. dollar and the Japanese yen;
changes in the international business climate and economic conditions;
reliance on a limited number of key customers; dependence on key individuals;
the ability to secure adequate financing to support future growth, if and when
required; and the successful development and marketing of its products in an
emerging and rapidly changing market.
All of the wafers are manufactured by two offshore independent foundries.
Although there are a number of other suppliers that could provide similar
services, a change in suppliers could cause a delay in manufacturing and
possible loss of sales, which could affect operating results adversely.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation and Foreign Currency Translation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of intercompany
transactions and balances. The functional currencies of the Company's
subsidiaries are the local currencies. Accordingly, all assets and liabilities
are translated into U.S. dollars at the current exchange rates as of the
applicable balance sheet date. Revenues and expenses are translated at the
average exchange rate prevailing during the period. Cumulative gains and
losses from the translation of the foreign subsidiaries financial statements
have been included in shareholders' equity.
Unaudited Interim Financial Data
The unaudited financial statement data as of and for the nine months ended
September 30, 1996 has prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial information set forth therein, in accordance with
generally accepted accounting principles.
Cash and Cash Equivalents and Short-Term Investments
The Company considers cash invested in highly liquid financial instruments
with an original maturity of three months or less to be cash equivalents. Cash
investments in highly liquid financial instruments with original maturities
greater than three months but less than one year are classified as short-term
investments. As of December 31, 1995 and 1996 and September 30, 1997, the
Company's short-term investments consist of U.S. Government backed securities,
which are classified as held to maturity and are valued using the amortized
cost method which approximates market.
F-7
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories
Inventories (which consist of costs associated with the purchases of wafers
from offshore foundries and of packaged components from several offshore
assembly manufacturers, as well as internal labor and overhead associated with
the testing of both wafers and packaged components) are stated at the lower of
cost (first-in, first-out) or market. Provisions, when required, are made to
reduce excess and obsolete inventories to their estimated net realizable
values. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Raw materials.................................. $ 706 $ 264 $ 746
Work-in-process................................ 1,450 2,451 3,394
Finished goods................................. 2,225 1,223 460
------ ------ ------
$4,381 $3,938 $4,600
====== ====== ======
</TABLE>
Property and Equipment
Depreciation and amortization of property and equipment are provided using
the straight-line method over the shorter of the estimated useful lives of the
assets over a period of one to four years or over the applicable lease term.
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $4.3 million, $6.2 million
and $7.5 million, as of December 31, 1995 and 1996 and September 30, 1997,
respectively. Related accumulated amortization on these leased assets was
approximately $772,000, $2.1 million and $3.5 million, as of December 31, 1995
and 1996 and September 30, 1997, respectively.
Pro Forma Net Income (Loss) Per Share (Unaudited)
Pro forma net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares consist of Preferred Stock (using the "if converted"
method) and stock options and warrants (using the treasury stock method).
Common equivalent shares are excluded from the computation if their effect is
anti-dilutive except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins and staff policy, such computations include all
common and common equivalent shares issued within the 12 months preceding the
initial filing date as if they were outstanding for all periods presented
(using the treasury stock method and an assumed initial public offering price
of $11.00 per share). In addition, Preferred Stock is included in the
computation (using the "if converted" method) even when the effect of their
inclusion is anti-dilutive. Pro forma net loss per share data prior to fiscal
1996 as well as historical earnings per share data (all periods) have not been
presented since such amounts are not deemed meaningful due to the significant
change in the Company's capital structure that will occur in connection with
the proposed offering.
New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share." The
requirements of SFAS No. 128 will become effective for the Company's year
ending December 31, 1997. If SFAS No. 128 had been applied by the Company, pro
forma basic income (loss) per share would have been $(0.14), $(0.13) and $0.23
for the year ended December 31, 1996, and for the nine-month periods ended
September 30, 1996 and 1997, respectively, and pro forma diluted income (loss)
per share of $(0.14), $(0.13) and $0.23, respectively.
F-8
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Product revenues consist of sales to OEMs and merchant power supply
manufacturers and to distributors. Revenues from product sales to OEM and
merchant power supply manufacturers are recognized upon shipment. The Company
provides for estimated sales returns and allowances related to such sales at
the time of shipment. During 1994, 1995 and 1996, and for the nine months
ended September 30, 1996 and 1997 sales to distributors of the Company's
products accounted for approximately 51%, 54%, 52%, 51% and 49% of net
revenues, respectively. 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. Pursuant to the Company's
distributor agreements, the Company protects its distributors' exposures
related to the impact of price reductions as well as products at distributors
that are slow moving or have been discontinued. These agreements, which may be
canceled by either party on a specified notice, generally contain a provision
for the return of the Company's product in the event the agreement with the
distributor is terminated. Accordingly, the Company defers recognition of
revenue and the proportionate costs of revenues derived from sales to
distributors until such distributors resell the Company's products to their
customers. The margin deferred as a result of this policy is reflected as
"deferred income on sales to distributors" in the accompanying consolidated
balance sheets.
The Company has entered into separate wafer supply and technology license
agreements with three separate unaffiliated companies (the "Foundries"). As of
September 30, 1997, all wafers are supplied by two foundries. The wafer supply
agreements, which are renewable and expire at various dates through June 2000,
require certain purchase commitments to be made over the term of the
agreements which are significant. In connection with the technology license
agreements, the Company is entitled to receive a royalty on sales of products
by the Foundries which incorporate the Company's technology into their own
products. Initial license fees received under the agreements are non-
refundable. For fiscal years 1994, 1995 and 1996 and for the nine months ended
September 30, 1996 and 1997, revenue recognized under these agreements was
approximately $2.1 million, $1.0 million, $619,000, $409,000 and $790,000,
respectively.
The Company's end user base is highly concentrated and a relatively small
number of OEMs, directly or indirectly through merchant power supply
manufacturers, accounted for a significant portion of the Company's revenue.
For fiscal years 1994, 1995, 1996, and for the nine months ended September 30,
1996 and 1997, ten customers accounted for approximately 75%, 77%, 64%, 63%
and 75% of net revenues, respectively.
The following customers accounted for more than 10% of total net revenues:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- ----------------
CUSTOMER 1994 1995 1996 1996 1997
- -------- ---- ---- ---- ----------- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
A............................................... 11% 21% * * *
B............................................... 12% * * * *
C............................................... 24% * * * *
D............................................... * 20% * * *
E............................................... * 12% * * *
F............................................... * * * * 16%
G............................................... * * * * 23%
H............................................... * * * 12% *
</TABLE>
- --------
* less than 10% or no sales
F-9
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Export Sales
The Company markets its products in North America and in foreign countries
through its sales personnel and a worldwide network of independent sales
representatives and distributors. Export sales, which consist of domestic
sales to customers in foreign countries are comprised of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- ----------------
1994 1995 1996 1996 1997
---- ---- ---- ----------- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Japan........................................... 31% 28% 16% 16% 5%
Taiwan.......................................... 5% 14% 13% 13% 29%
Hong Kong....................................... -- 4% 12% 9% 27%
Western Europe.................................. 12% 9% 19% 18% 11%
Other........................................... 9% 10% 12% 13% 9%
--- --- --- --- ---
Total foreign................................... 57% 65% 72% 69% 81%
=== === === === ===
</TABLE>
Foreign Currency Risk
During 1995, the Company opened a Japanese yen bank account with a U.S. bank
for payments to suppliers and for cash receipts from Japanese suppliers and
customers denominated in yen. For the years ended December 31, 1995 and 1996
and for the nine months ended September 30, 1997, the Company realized foreign
exchange losses of approximately $164,000, $77,000, and $70,000, respectively,
which are included in "other expense, net," in the accompanying consolidated
statements of operations.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash investments and trade receivables.
The Company has cash investment policies that limit cash investments to short-
term, low risk investments. With respect to trade receivables, the Company
performs ongoing credit evaluations of its customers' financial condition and
requires letters of credit whenever deemed necessary. Additionally, the
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends related
to past losses and other information. As of December 31, 1995 and 1996 and
September 30, 1997, approximately 82%, 85% and 82% of accounts receivable,
respectively, were concentrated with ten customers.
3. BANK LINE OF CREDIT:
The Company has an $8.0 million revolving line of credit agreement (the
"Agreement") with a bank. Advances under the agreement bear interest at the
bank's prime lending rate (8.5% at September 30, 1997). All advances under the
agreement are limited to 75% of eligible accounts receivable and the lesser of
40% or
F-10
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$4.0 million of eligible domestic finished goods inventory. Additionally, the
Agreement contains certain limitations, including an $8.0 million limit on
advances for commercial letters of credit and a $3.0 million limit on advances
for foreign currency contracts, if any, provided that at no time will the
aggregate sum of the limits exceed $8.0 million. As of September 30, 1997,
there were outstanding letters of credit totaling 379,797,061 Japanese yen
(approximately $3.2 million). The agreement, which expires August 11, 1998,
restricts the Company from entering into certain transactions and contains
certain financial covenants, including maintaining a minimum current ratio of
1.0 to 1.0, a maximum debt to net worth of 1.0 to 1.0 and quarterly net
income. As of September 30, 1997, there were no borrowings outstanding under
the agreement.
4. NOTES PAYABLE TO A SHAREHOLDER:
In May 1996, the Company issued a $3.0 million note payable to a holder of
Series C Preferred Stock, which matures in October 1999. Interest, which is
payable monthly, is 12%. The note is subordinated in rights of payment to all
existing and future indebtedness of the Company. Principal payments become due
beginning November 1997 and are to be paid monthly through maturity. Principal
obligations relating to this note are approximately $251,000 for the remaining
3 months of 1997, and $1,424,000 and $1,325,000 for 1998 and 1999,
respectively.
5. COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities under noncancellable operating leases
which expire at various dates through August 1999. Rent expense under all
operating leases was approximately $159,000, $159,000, $223,000, and $226,000
in 1994, 1995 and 1996 and for the nine months ended September 30, 1997,
respectively.
A significant portion of the Company's machinery and equipment is leased
under agreements accounted for as capital leases. The Company leased
approximately $2.8 million, $1.9 million, $1.9 million and $1.3 million of
equipment during 1995 and 1996 and for the nine months ended September 30,
1996 and 1997, respectively, under various capital leasing arrangements. In
May 1997, the Company entered into a new capital lease line of credit
agreement (the "Capital Leasing Agreement"), which allows for combined
borrowings up to $3.0 million to finance the acquisition of property and
equipment. The Capital Leasing Agreement, which expires March 31, 1998, bears
interest at a fixed rate established at the time of borrowing which was
approximately 12.0% as of September 30, 1997. Approximately $1.9 million was
available under the Capital Leasing Agreement.
Future minimum lease payments under all noncancellable operating and capital
lease agreements as of September 30, 1997 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING CAPITAL
----------- --------- -------
<S> <C> <C>
1997 (three months)..................................... $ 78 $ 609
1998.................................................... 266 2,133
1999.................................................... 11 1,632
2000.................................................... -- 543
2001.................................................... -- 50
---- -------
Total minimum lease payments.......................... $355 4,967
====
Less: Amounts representing interest on capital leases
(10.5%-14.9%).......................................... (630)
-------
4,337
Less: Current portion (twelve months)................... (1,874)
-------
Long-term portion....................................... $ 2,463
=======
</TABLE>
F-11
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
From time to time, the Company is involved in various disputes which have
arisen in the ordinary course of business. Management believes that the
ultimate resolution of these disputes will not have a material adverse impact
on the Company's financial position or its results of operations.
6. CONVERTIBLE PREFERRED STOCK:
Preferred Stock outstanding consists of the following (in thousands, except
share information):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Series A, 8,400,000 shares authorized,
7,900,000 shares outstanding in 1995, 1996
and 1997, liquidation preference of
$3,950.................................... $ 3,079 $ 3,079 $ 3,079
Series B, 8,000,000 shares authorized,
7,489,000 shares outstanding in 1995, 1996
and 1997, liquidation preference of
$7,489.................................... 7,435 7,435 7,435
Series C, 11,392,900 shares authorized,
10,365,120 shares outstanding in 1995 and
11,170,400 shares outstanding in 1996 and
1997, liquidation preference of $11,170... 10,164 10,957 10,957
Series D, 3,280,000 shares authorized,
3,200,000 shares outstanding in 1995, 1996
and 1997, liquidation preference of
$4,000.................................... 3,919 3,919 3,919
Series E, 12,300,000 shares authorized,
7,013,396 shares outstanding in 1995, 1996
and 1997, liquidation preference of
$5,260.................................... 4,934 4,934 4,934
Series F, 10,091,000 shares authorized,
9,091,000 shares outstanding in 1995, 1996
and 1997, liquidation preference of
$5,000.................................... 4,947 4,947 4,947
------- ------- -------
$34,478 $35,271 $35,271
======= ======= =======
</TABLE>
As of September 30, 1997, 536,100 shares of Preferred Stock are authorized
and unissued. The rights, privileges and preferences of Series A, B, C, D, E
and F Preferred Stock include:
Dividends
The holders of each outstanding share of Series A, B, C, D, E and F
Preferred Stock are entitled to receive annual, non-cumulative dividends of
$.04, $.08, $.08, $.08, $.06 and $.04 per share, respectively, when and as
declared by the Board of Directors, in preference to any distribution to the
holders of the Common Stock. To date, no dividends have been declared.
Liquidation Preference
In the event of a liquidation, dissolution or winding up of the affairs of
the Company, the holders of Series A, B, C, D, E and F Preferred Stock shall
be entitled to receive $.50, $1.00, $1.00, $1.25, $.75 and $.55 per share,
respectively, plus any declared and unpaid dividends in preference to any
distribution to the holders of the Common Stock. Preferred shareholders also
participate fully in any distributions to common shareholders on an as
converted basis.
F-12
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Conversion
Each share of Series A, B, C, D, E and F Preferred Stock is convertible, at
the option of the shareholder, into one share of Common Stock, subject to
adjustments for certain corporate changes such as the reverse stock split (see
Note 7) and dilutive events. Each share shall automatically convert upon the
earlier of (i) the closing of an underwritten registered public offering of
the Company's Common Stock with an aggregate offering price to the public of
at least $5.0 million and a price per share not less than the greater of (a)
$1.00 per share and (b) the then effective conversion price of the Series D
Preferred Stock (in both cases adjusted to reflect stock splits, reverse stock
splits, stock dividends and stock recapitalizations) or (ii) the vote or
written consent of over 50% of the holders of the Series A, B, C, D, E and F
Preferred Stock voting together as a single class (except as otherwise
required by law) approving the conversion of the Series A, B, C, D, E and F
Preferred Stock into Common Stock.
Voting Rights
The Series A, B, C, D, E and F Preferred Stock have full voting rights
equivalent to the number of Common Stock into which they are convertible.
Each share of Preferred Stock is entitled to the number of votes equal to
the number of shares of Common Stock into which shares of Preferred Stock
could be converted. Additionally, so long as 1,000,000 shares of Series D
Preferred Stock are outstanding, the holders of Series D Preferred Stock,
voting as a separate class, are entitled to elect one director to the Board of
Directors.
Registration Rights
The Series A, B, C, D, E and F preferred shareholders have certain
registration rights under the Securities Act of 1933.
Pro Forma Shareholders' Equity
In September 1997, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
the Company to sell shares of its Common Stock in connection with the proposed
Initial Public Offering ("IPO"). If the offering is consummated under the
terms presently anticipated, all of the currently outstanding convertible
Preferred Stock will automatically convert to 7,446,923 shares of Common Stock
upon the closing of the IPO. The effect of the above has been reflected in the
accompanying unaudited pro forma shareholders' equity as of September 30,
1997.
7. COMMON STOCK:
Reincorporation and Reverse Stock Split
In September 1997, the Board of Directors approved the reincorporation of
the Company in Delaware to be effective upon the completion of the proposed
IPO. Upon completion of the proposed IPO, the Company will be authorized to
issue 40,000,000 shares of $0.001 par value Common Stock, and 48,863,796
shares of $0.001 par value Preferred Stock. Upon conversion of the outstanding
Preferred Stock, such Preferred Stock will be retired, and the authorized
shares of Preferred Stock will be 3,000,000.
In September 1997, the Company's Board of Directors approved a one-for-6.8
reverse split of its Common Stock. All common and per share amounts in the
accompanying consolidated financial statements have been adjusted
retroactively to give effect to this reverse stock split (see Note 6).
F-13
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1988 Stock Option Plan
In June 1988, the Board of Directors approved the 1988 Stock Option Plan
(the "1988 Plan"), whereby the Board of Directors may grant options to key
employees, directors and consultants to purchase the Company's Common Stock at
exercise prices of not less than 85% of the fair value of the shares at the
date of grant. Through September 30, 1997, the Board of Directors has
authorized a total of 2,078,195 shares of Common Stock for issuance under the
Plan. Options expire ten years after the date of grant (five years if the
option is granted to a ten percent owner optionee) and generally vest over 50
months. Options granted under the 1988 Plan will remain outstanding in
accordance with their terms, but, effective July 1997, the Board of Directors
had determined that no further options will be granted under the 1988 Plan.
1997 Stock Option Plan
In June 1997, the Board of Directors approved the 1997 Stock Option Plan
(the "1997 Plan"), whereby the Board of Directors may grant options to key
employees, directors and consultants to purchase the Company's Common Stock at
exercise prices of not less than 85% of the fair value (as determined by the
Board of Directors) of the shares at the date of grant. The 1997 Plan's
maximum share reserve is 2,132,227 shares, which is comprised of the sum of
(i) 660,745 shares (new shares allocated to the 1997 Plan) and (ii) 1,471,482
(the number of shares subject to outstanding options on September 30, 1997
granted pursuant to the 1988 Plan (the "1988 Plan Options")). The number of
shares available for issuance under the 1997 Plan, at any time, is reduced by
the number of shares remaining subject to the 1988 Plan Options. Of the shares
of Common Stock currently reserved for issuance under the 1997 Plan as of
September 30, 1997, 240,363 shares have been issued upon the exercise of
options, options for the purchase of a total of 93,005 shares at a weighted
average exercise price of $4.56 per share were outstanding and a maximum of
365,828 shares were available for future option grants. Options expire ten
years after the date of grant (five years if the option is granted to a ten
percent owner optionee) and generally vest over 48 months.
1997 Outside Directors Stock Option Plan
In September 1997, the Board of Directors approved an Outside Directors
Stock Option Plan (the "Directors Plan"). A total of 200,000 shares of Common
Stock have been reserved for issuance under the Directors Plan. The Directors
Plan provides for the grant of nonstatutory stock options to nonemployee
directors of the Company. The Directors Plan is designed to work automatically
without administration; however, to the extent administration is necessary, it
will be performed by the Board of Directors. The Directors Plan provides that
each current and future nonemployee director of the Company will be granted an
option to purchase 15,000 shares of Common Stock on the effective date or the
date on which the optionee first becomes a nonemployee director of the Company
after the effective date as the case may be (the "Initial Grant"). Thereafter,
each nonemployee director who has served on the Board of Directors
continuously for 6 months will be granted an additional option to purchase
5,000 shares of Common Stock (an "Annual Grant"). Subject to an optionee's
continuous service with the Company, approximately 1/3rd of an Initial Grant
will become exercisable one year after the date of grant and 1/36th of the
Initial Grant will become exercisable monthly thereafter. Each Annual Grant
will become exercisable in twelve monthly installments beginning in the 25th
month after the date of grant, subject to the optionee's continuous service.
The exercise price per share of all options granted under the Directors Plan
will equal the fair market value of a share of Common Stock on the date of
grant. Options granted under the Directors Plan have a term of ten years and
are non-transferable. In the event of certain changes in control of the
Company, options outstanding under the Directors Plan will become immediately
exercisable and vested in full.
1997 Employee Stock Purchase Plan
In September 1997, the Board adopted the 1997 Employee Stock Purchase Plan
(the "Purchase Plan"). The Company has reserved 250,000 shares of Common Stock
for issuance under the Purchases Plan. The
F-14
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Purchase Plan will enable eligible employees to purchase Common Stock at 85%
of the lower of the fair market value of the Company's Common Stock on the
first or the last day of each offering period.
The following table summarizes option activity under the 1988 and 1997
Plans:
<TABLE>
<CAPTION>
OPTIONS OPTIONS EXERCISE WEIGHTED AVERAGE
AVAILABLE OUTSTANDING PRICES EXERCISE PRICE
--------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding at December
31, 1994............... 86,615 676,941 $ .34-$.85 $ .75
Authorized............ 882,353 -- -- --
Granted............... (951,346) 951,346 .51-1.36 .59
Exercised............. -- (426,506) .34-.85 .54
Canceled.............. 69,524 (69,524) .51-.85 .68
-------- ---------- ---------- -----
Outstanding at December
31, 1995............... 87,146 1,132,257 .34-1.36 .70
Authorized............ 294,118 -- -- --
Granted............... (323,970) 323,970 1.36 1.36
Exercised............. -- (27,847) .51-1.36 .94
Cancelled............. 131,954 (131,954) .51-1.36 1.16
-------- ---------- ---------- -----
Outstanding at December
31, 1996............... 189,248 1,296,426 .34-1.36 .80
Authorized............ 659,775 -- -- --
Granted............... (513,692) 513,692 1.36-8.84 2.21
Exercised............. -- (1,045,662) .34-1.70 .94
Cancelled............. 30,497 (30,497) .51-1.70 1.31
-------- ---------- ---------- -----
Outstanding at September
30, 1997 .............. 365,828 733,959 $.34-$8.84 $1.50
======== ========== ========== =====
Exercisable at December
31, 1996............... 527,782 $.34-$1.36 $ .75
========== ========== =====
Exercisable at September
30, 1997 .............. 266,206 $.34-$8.84 $ .73
========== ========== =====
</TABLE>
As of September 30, 1997, an aggregate of 503,361 shares of common stock are
subject to repurchase by the Company at $.51 to $1.70 per share and a weighted
average repurchase price of $1.19 per share.
The Company accounts for its Plans under APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, compensation expense is generally not
recognized. Had compensation expense for the Plans been determined consistent
with SFAS No. 123, "Accounting for Stock Based Compensation," the Company's
net income (loss) would have been decreased (increased) to the following pro
forma amounts (in thousands, except per share information):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------- SEPTEMBER 30,
1995 1996 1997
------ -------- -------------
<S> <C> <C> <C>
Net income (loss):
As Reported................................ $ (803) $ (1,341) $2,370
Pro Forma.................................. $ (841) $ (1,401) $2,177
Net income (loss) per share:
Pro Forma (see Note 2)..................... $ (0.14) $ 0.23
Adjusted Pro Forma......................... $ (0.15) $ 0.21
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
expense may not be representative of that to be expected in future years.
F-15
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------ -----------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE SEPTEMBER 30, REMAINING EXERCISE SEPTEMBER 30, EXERCISE
PRICES 1997 LIFE PRICE 1997 PRICE
-------- -------------- --------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ .34 - $.51 168,488 7.29 $ .51 61,001 $ .50
$ .68 - $1.36 349,270 8.11 $1.11 182,988 $ .90
$1.70 164,442 9.76 $1.70 22,217 $1.70
$5.10 - $8.84 51,759 9.85 $6.86 -- --
------- ---- ----- ------- -----
$ .34 - $8.84 733,959 8.42 $1.50 266,206 $ .88
======= ==== ===== ======= =====
</TABLE>
The weighted-average grant date fair value of options granted during fiscal
years 1995 and 1996 and for the nine months ended September 30, 1997 was $.14,
$.27 and $1.61, respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1995, 1996 and 1997:
risk-free interest rates of 6.3, 6.2 and 6.2 percent, respectively; expected
dividend yields of zero percent; expected lives of 4 years; expected
volatility of zero percent.
Deferred Compensation
In connection with the issuance of stock options to employees and
consultants, the Company has recorded deferred compensation in the aggregate
amount of approximately $566,000, representing the difference between the fair
market value of the Company's Common Stock and the exercise price of the stock
options at the date of grant. The Company is amortizing the deferred
compensation expense over the applicable vesting period, which is typically
over 48 months. For the nine-month period ended September 30, 1997,
amortization expense was approximately $71,000. No compensation expense
related to any other periods presented has been recorded.
In July 1997, in connection with the purchase of Common Stock upon exercise
of stock options granted to certain officers and employees of the Company, the
Company loaned to these officers an aggregate of $405,000, at an interest rate
of 6.65% pursuant to a Promissory Note and Pledge Agreement due in July 2002,
or at the Company's option upon (i) termination of employment with the
Company, (ii) a default in the payment of any installment or principal and/or
interest when due, (iii) a sale of the Pledged Stock (as defined below) or
(iv) acceleration being reasonably necessary for the Company to comply with
any regulations promulgated by the Board of Governors of the Federal Reserve
System affecting the extension of credit in connection with the Company's
securities. The loan is secured by 238,231 shares of Common Stock.
Warrants
In connection with an equipment lease agreement entered into during 1988
with a leasing company, the Company issued a warrant for the purchase of up to
22,059 shares of the Company's Common Stock at an exercise price of $3.40 per
share. This warrant was exercised in June 1995. The Company leased additional
equipment during 1989 from the same company and, as part of this lease, a
warrant for the purchase of up to an additional 14,705 shares of the Company's
Common Stock at an exercise price of $6.80 per share was issued. This warrant
was exercised in July 1996.
In connection with the issuance of Series C Preferred Stock during 1991, the
Company issued warrants for the purchase of up to 2,780,968 shares of the
Company's Series C Preferred Stock at an exercise price of $1.00 per share. In
1995, warrants to purchase 1,753,188 shares of Series C Preferred Stock were
exercised, 222,500 warrants expired during 1995, and the remaining 805,280
warrants were exercised during May 1996.
F-16
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the issuance of Series E Preferred Stock in 1994, the
Company issued warrants for the purchase of up to 132,120 shares of the
Company's Series E Preferred Stock at an exercise price of $.90 per share. The
warrants are currently exercisable and expire four years from the date of
issuance or 6 months after initial public offering of the Company's Common
Stock with a price per share of $2.00 or more and with a total offering price
of at least $5 million.
In connection with an equipment lease agreement entered into during 1993
with a leasing company, the Company issued a warrant for the purchase of
80,000 shares of Series D Preferred Stock at an exercise price of $.75 per
share. This warrant is currently exercisable and expires the latter of
December 29, 2003 or five years after the closing of an initial public
offering of the Company's Common Stock. The Company leased additional
equipment during 1994 from the same company and, as part of this lease,
warrants for the purchase of 160,000 shares of Series E Preferred Stock at an
exercise price of $.75 per share were issued. These warrants are currently
exercisable and expire the latter of December 27, 2004 or five years after the
closing of an initial public offering of the Company's Common Stock. In 1995,
the Company leased additional equipment from the same company and issued a
warrant to purchase 163,636 shares of the Company's Series F Preferred Stock
at $.55 per share. The warrant is currently exercisable and expires the latter
of December 27, 2005 or five years after the closing of an initial public
offering of the Company's Common Stock.
In connection with an equipment leasing agreement entered into during 1995
with a leasing company, the Company issued a warrant to purchase 40,428 shares
of the Company's Common Stock at $6.46 per share. The warrant is exercisable
upon issuance and expires November 20, 2002.
In connection with obtaining the revolving line of credit agreement with a
bank in 1995 (see Note 3), the Company issued the bank warrants to purchase
980,000 shares of the Company's Series F Preferred Stock, at $.55 per share.
The warrants are exercisable upon issuance and expire between February 26,
2002 and August 6, 2002. In connection with the renewal of the line of credit
agreement in 1996, the Company issued the bank warrants to purchase 22,736
shares of Common Stock at $6.46 per share. These warrants are exercisable upon
issuance and expire on April 14, 2003.
In connection with the issuance of a note payable to a shareholder in 1996
(see Note 4), the Company issued a warrant to purchase 176,471 shares of the
Company's Common Stock at $1.36 per share. The warrant is exercisable upon
issuance and expires May 22, 2002.
Shares Reserved
As of September 30, 1997, the Company has shares of Common Stock reserved
for future issuance as follows:
<TABLE>
<S> <C>
Convertible Series A, B, C, D, E and F Preferred Stock............. 7,446,923
Stock Option Plan.................................................. 1,099,787
Warrants:
Convertible Series D, E and F Preferred Stock.................... 234,581
Common Stock..................................................... 239,635
---------
9,020,926
=========
</TABLE>
F-17
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES:
The Company accounts for income taxes under SFAS No. 109 "Accounting for
Income Taxes." SFAS No. 109 provides for a liability approach to accounting
for income taxes under which deferred income taxes are provided based upon
enacted tax laws and rates applicable to the periods in which taxes become
payable.
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
-------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Current Payable:
Federal....................................... $-- $14 $ 5 $340
State......................................... -- 13 3 25
Foreign....................................... 6 7 22 8
---- --- --- ----
$ 6 $34 $30 $373
==== === === ====
</TABLE>
The provision for income taxes differs from the amount which would result by
applying the applicable Federal income tax rate to loss before provision for
income taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
--------------------- SEPTEMBER 30,
1994 1995 1996 1997
----- ----- ----- ---------
<S> <C> <C> <C> <C> <C>
Provision (benefit) computed at
Federal statutory rate............ (34.0)% (34.0)% (34.0)% 34.0%
Benefit of operating loss
carryforwards..................... -- -- -- (56.9)
Change in valuation allowance...... 34.0 34.0 34.0 35.3
Alternative minimum tax............ -- 3.2 0.6 0.9
Nondeductible expenses and other... -- 0.2 -- --
Foreign tax........................ -- 1.0 1.7 0.3
----- ----- ----- -------
-- 4.4% 2.3% 13.6%
===== ===== ===== =======
</TABLE>
The components of the net deferred income tax asset were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Net operating loss carryforwards.......... $ 8,295 $ 8,215 $6,653
Tax credit carryforwards.................. 1,044 1,164 1,308
Inventory reserves........................ 362 750 1,158
Accounts receivable allowances............ 60 114 427
Accrued vacation.......................... 67 87 90
Other cumulative temporary differences.... 202 190 292
-------- -------- ------
10,030 10,520 9,928
Valuation allowance....................... (10,030) (10,520) (9,928)
-------- -------- ------
$ -- $ -- $ --
======== ======== ======
</TABLE>
A valuation allowance has been recorded for the entire deferred tax asset as
a result of uncertainties regarding the realization of the asset balance, the
variability of operating results and taxable income.
F-18
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of September 30, 1997, the Company has net cumulative operating loss
carryforwards for Federal and state income tax reporting purposes of
approximately $18.6 million and $2.5 million, respectively. In addition, as of
September 30, 1997, the Company has research and development tax credit
carryforwards of approximately $1.3 million. These carryforwards expire in
various periods from 2004 to 2011. The United States Tax Reform Act of 1986
contains provisions that limit the net operating loss carryforwards and
research and development credits available to be used in any given year upon
the occurrence of certain events, including a significant change in ownership,
such as the proposed IPO.
F-19
<PAGE>
(GRAPHIC OF INTEGRATED CIRCUIT APPEARS HERE)
(LOGO OF POWER INTEGRATIONS, INC. APPEARS HERE)
POWER INTEGRATIONS
TECHNOLOGY COMBINES HIGH-
VOLTAGE POWER TRANSISTORS
WITH ANALOG CIRCUITS ON
THE SAME SILICON CHIP.
THE COMPANY HAS BEEN
ISSUED 23 U.S. AND 33
FOREIGN PATENTS.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UN-
LAWFUL. NEITHER THE DELIVER OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 27
Management............................................................... 37
Certain Transactions..................................................... 45
Principal and Selling Stockholders....................................... 47
Description of Capital Stock............................................. 50
Shares Eligible for Future Sale.......................................... 52
Underwriting............................................................. 54
Legal Matters............................................................ 56
Experts.................................................................. 56
Additional Information................................................... 56
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
[POWER INTEGRATIONS LOGO]
COMMON STOCK
------------
PROSPECTUS
------------
HAMBRETCH & QUIST
NATIONSBANC MONTGOMERY SECURITIES, INC.
BANCAMERICA ROBERTSON STEPHENS
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the Common Stock being registered. Pursuant to the Fifth Amended and
Restated Rights Agreement dated April 27, 1995, as amended, the Company is
paying all of the expenses incurred on behalf of the Selling Stockholders
(other than underwriting discounts and commissions). All amounts shown are
estimates except for the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
-------------
<S> <C>
Registration fee.............................................. $ 16,728.00
NASD filing fee............................................... 6,020.00
Nasdaq National Market application fee........................ 43,718.00
Blue sky qualification fees and expenses...................... 12,500.00
Printing and engraving expenses............................... 200,000.00
Legal fees and expenses....................................... 300,000.00
Accounting fees and expenses.................................. 225,000.00
Director and Officer liability insurance...................... 100,000.00
Transfer agent and registrar fees............................. 10,000.00
Fee for Custodian for Selling Stockholders.................... 10,000.00
Miscellaneous expenses........................................ 76,034.00
-------------
Total....................................................... $1,000,000.00
=============
</TABLE>
- --------
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors, and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's Certificate of
Incorporation and Bylaws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition,
the Registrant intends to enter into separate indemnification agreements with
its directors, officers and certain employees which would require the
Registrant, among other things, to indemnify them against certain liabilities
which may arise by reason of their status or service (other than liabilities
arising from willful misconduct of a culpable nature) and to maintain
directors' and officers' liability insurance, if available on reasonable
terms.
These indemnification provisions and the indemnification agreement to be
entered into between the Registrant and its officers and directors may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act.
The Underwriting Agreement, filed as Exhibit 1.1 to this Registration
Statement, provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act, or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since June 30, 1994, the Registrant has sold and issued the following
unregistered securities (as adjusted where appropriate for the proposed
reverse stock split whereby each 6.8 outstanding shares of Common Stock will
be converted into one share of Common Stock):
(1) On December 27, 1994, in connection with an equipment lease, the
Registrant issued a warrant to an equipment lessor to purchase 80,000
shares of Series E Preferred Stock at an exercise price of $0.75 per share.
(2) On February 27, 1995, in connection with the extension of a line of
credit, the Registrant issued a warrant to a bank to purchase 200,000
shares of Series F Preferred Stock at an exercise price of $0.55 per share.
(3) In April 1995, the Registrant issued and sold an aggregate of
7,218,575 shares of Series F Preferred Stock to a group of private
investors for aggregate cash consideration of $3,970,216.25.
(4) In May 1995, the Registrant issued and sold an aggregate of 1,872,425
shares of Series F Preferred Stock to a group of private investors for
aggregate cash consideration of $1,029,833.75.
(5) On June 16, 1995, the Registrant issued and sold 22,058 shares of
Common Stock to a single investor for aggregate cash consideration of
$75,000, upon exercise of a warrant granted in connection with an equipment
lease.
(6) On July 13, 1995, in connection with an equipment lease, the
Registrant issued a warrant to an equipment lessor to purchase 163,636
shares of Series F Preferred Stock at an exercise price of $0.55 per share.
(7) On August 7, 1995, in connection with the extension of a line of
credit, the Registrant issued a warrant to a bank to purchase 780,000
shares of Series F Preferred Stock at an exercise price of $0.75 per share.
(8) On August 22, 1995, the Registrant issued and sold 1,265,692 shares
of Series C Preferred Stock to a group of investors for aggregate
consideration of $1,265,692, upon exercise of warrants granted in
connection with the sale of the Registrant's Series C Preferred Stock.
(9) On November 11, 1995, the Registrant issued and sold 487,500 shares
of Series C Preferred Stock to a group of investors for aggregate
consideration of $487,500, upon exercise of warrants granted in connection
with the sale of the Registrant's Series C Preferred Stock.
(10) On November 17, 1995, in connection with an equipment lease, the
Registrant issued a warrant to an equipment lessor to purchase 40,428
shares of Common Stock at an exercise price of $6.46.
(11) On April 15, 1996, in connection with the extension of a line of
credit, the Registrant issued a warrant to a bank to purchase 22,735 shares
of Common Stock at an exercise price of $6.46 per share.
(12) On May 22, 1996, in connection with the extension of a line of
credit, the Registrant issued a warrant to an investment bank to purchase
176,470 shares of Common Stock at an exercise price of $1.36 per share.
(13) On May 22, 1996, the Registrant issued and sold 805,280 shares of
Series C Preferred Stock to an investment bank for aggregate consideration
of $805,280, upon exercise of warrants granted in connection with the sale
of the Registrant's Series C Preferred Stock.
(14) On July 10, 1996, the Registrant issued and sold 16,989 shares of
Common Stock to a single investor for aggregate cash consideration of
$100,000, upon exercise of a warrant granted in connection with an
equipment lease.
(15) From July 1, 1994 to September 30, 1997, the Registrant issued and
sold an aggregate of 1,283,508 shares of Common Stock to employees,
directors and consultants of the Registrant for aggregate consideration of
$846,753.17, upon exercise of stock options granted pursuant to the
Registrant's 1988 Stock Option Plan.
II-2
<PAGE>
(16) From June 3, 1997 to September 30, 1997, the Registrant issued and
sold an aggregate of 240,363 shares of Common Stock to employees, directors
and consultants of the Registrant for aggregate consideration of
$408,617.10, upon exercise of stock options granted pursuant to the
Registrant's 1997 Stock Option Plan.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of Prospectus included herein.
The issuances described in Items 15(1) through 15(14) were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving a public
offering. In addition, certain issuances described in Item 15(15) and 15(16)
were deemed exempt from registration under the Securities Act in reliance on
Rule 701 promulgated thereunder as transactions pursuant to compensatory
benefit plans and contracts relating to compensation. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates and other instruments issued in such transactions.
All recipients either received adequate information about the Registrant or
had access, through employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1+ Form of Agreement and Plan of Merger between Power Integrations,
Inc., a California corporation and Power Integrations, Inc., a
Delaware corporation.
3.1A+ Certificate of Incorporation of Power Integrations, Inc., a Delaware
corporation.
3.1B+** Form of Certificate of Amendment of Certificate of Incorporation of
Power Integrations, Inc., a Delaware corporation.
3.2+ Bylaws of Power Integrations, Inc., a Delaware corporation.
4.1 Fifth Amended and Restated Rights Agreement dated April 27, 1995, as
amended, by and among the Company and the investors named therein.
4.2+ Rights Agreement dated May 22, 1996 between the Company and
Hambrecht & Quist Transition Capital, LLC.
5.1* Opinion of Gray Cary Ware & Freidenrich, A Professional Corporation.
10.1+ Form of Indemnification Agreement for directors and officers.
10.2+ 1988 Stock Option Plan and forms of agreements thereunder.
10.3+ 1997 Stock Option Plan and forms of agreements thereunder.
10.4+ 1997 Outside Directors Stock Option Plan and forms of agreements
thereunder.
10.5+ 1997 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.6+*** Amended Technology License Agreement dated June 29, 1995, as amended
on April 1, 1997 between the Company and MEC.
10.7+*** Amended Wafer Foundry Agreement dated June 29, 1997 between the
Company and MEC.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.8+*** Licensing and Wafer Supply Agreement dated June 17, 1993, as amended
on September 21, 1995, between the Company and OKI.
10.9+ Master Equipment Lease Agreement dated February 11, 1997 between the
Company and Finova Technology Finance, Inc.
10.10+ Master Lease Agreement dated September 3, 1996 between the Company
and Leasing Technologies International, Inc.
10.11+ Master Equipment Lease Agreement dated November 17, 1995 between the
Company and Lighthouse Capital Partners, L.P.
10.12+ Master Equipment Lease Agreement dated December 29, 1993, as
amended, between the Company and MMC/GATX Partnership No. 1.
10.13+ Sublease dated June 15, 1995 between the Company and Intermedics,
Inc.
10.14+ Founder Stock Purchase Agreement between the Company and Steven J.
Sharp dated April 13, 1988.
10.15+ Founder Stock Purchase Agreement between the Company and Klas H.
Eklund dated April 13, 1988.
10.16+ Founder Stock Purchase Agreement between the Company and Arthur E.
Fury dated April 13, 1988.
10.17 Security and Loan Agreement dated August 12, 1997 between the
Company and Imperial Bank.
11.1 Statements of Computation of Pro Forma Common Shares and
Equivalents.
21.1 List of subsidiaries.
23.1 Consent of Independent Public Accountants.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1+ Power of Attorney (see page II-6 of Registration Statement No. 333-
35421 filed on September 11, 1997).
27.1 Financial Data Schedule (available in EDGAR format only).
</TABLE>
- --------
+ Filed previously.
* To be filed by amendment.
** As proposed to be filed with the Secretary of State of the State of
Delaware prior to the effectiveness of the offering.
*** This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
(b) Financial Statement Schedules.
All schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial statements
or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the
II-4
<PAGE>
Securities Act, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SUNNYVALE, COUNTY OF
SANTA CLARA, STATE OF CALIFORNIA, ON THE 21ST DAY OF OCTOBER 1997.
Power Integrations, Inc.
/s/ Howard F. Earhart
By: _________________________________
HOWARD F. EARHART PRESIDENT, CHIEF
EXECUTIVE OFFICER AND DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 1 HAS
BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Howard F. Earhart President, Chief October 20, 1997
- ------------------------------------- Executive Officer
HOWARD F. EARHART and Director
(Principal
Executive Officer)
/s/ Robert G. Staples Chief Financial October 20, 1997
- ------------------------------------- Officer and Vice
ROBERT G. STAPLES President--Finance
and Administration
(Principal
Financial &
Accounting Officer)
Edward C. Ross* Director October 20, 1997
- -------------------------------------
DR. EDWARD C. ROSS
Wiliam Davidow* Director October 20, 1997
- -------------------------------------
DR. WILLIAM DAVIDOW
E. Floyd Kvamme* Director October 20, 1997
- -------------------------------------
E. FLOYD KVAMME
Steven J. Sharp* Director October 20, 1997
- -------------------------------------
STEVEN J. SHARP
/s/ Howard F. Earhart
*By: ___________________________
HOWARD F. EARHART
(ATTORNEY-IN-FACT)
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1+ Form of Agreement and Plan of Merger between Power Integrations,
Inc., a California corporation and Power Integrations, Inc., a
Delaware corporation.
3.1A+ Certificate of Incorporation of Power Integrations, Inc., a Delaware
corporation.
3.1B+** Form of Certificate of Amendment of Certificate of Incorporation of
Power Integrations, Inc., a Delaware corporation.
3.2+ Bylaws of Power Integrations, Inc., a Delaware corporation.
4.1 Fifth Amended and Restated Rights Agreement dated April 27, 1995, as
amended, by and among the Company and the investors named therein.
4.2+ Rights Agreement dated May 22, 1996 between the Company and
Hambrecht & Quist Transition Capital, LLC.
5.1* Opinion of Gray Cary Ware & Freidenrich, A Professional Corporation.
10.1+ Form of Indemnification Agreement for directors and officers.
10.2+ 1988 Stock Option Plan and forms of agreements thereunder.
10.3+ 1997 Stock Option Plan and forms of agreements thereunder.
10.4+ 1997 Outside Directors Stock Option Plan and forms of agreements
thereunder.
10.5+ 1997 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.6+*** Amended Technology License Agreement dated June 29, 1995, as amended
on April 1, 1997 between the Company and MEC.
10.7+*** Amended Wafer Foundry Agreement dated June 29, 1997 between the
Company and MEC.
10.8+*** Licensing and Wafer Supply Agreement dated June 17, 1993, as amended
on September 21, 1995, between the Company and OKI.
10.9+ Master Equipment Lease Agreement dated February 11, 1997 between the
Company and Finova Technology Finance, Inc.
10.10+ Master Lease Agreement dated September 3, 1996 between the Company
and Leasing Technologies International, Inc.
10.11+ Master Equipment Lease Agreement dated November 17, 1995 between the
Company and Lighthouse Capital Partners, L.P.
10.12+ Master Equipment Lease Agreement dated December 29, 1993, as
amended, between the Company and MMC/GATX Partnership No. 1.
10.13+ Sublease dated June 15, 1995 between the Company and Intermedics,
Inc.
10.14+ Founder Stock Purchase Agreement between the Company and Steven J.
Sharp dated April 13, 1988.
10.15+ Founder Stock Purchase Agreement between the Company and Klas H.
Eklund dated April 13, 1988.
10.16+ Founder Stock Purchase Agreement between the Company and Arthur E.
Fury dated April 13, 1988.
10.17 Security and Loan Agreement dated August 12, 1997 between the
Company and Imperial Bank.
11.1 Statements of Computation of Pro Forma Common Shares and
Equivalents.
21.1 List of subsidiaries.
23.1 Consent of Independent Public Accountants.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1+ Power of Attorney (see page II-6 of Registration Statement No. 333-
35421 filed on September 11, 1997).
27.1 Financial Data Schedule (available in EDGAR format only).
</TABLE>
- -------
+ Filed previously.
* To be filed by amendment.
** As proposed to be filed with the Secretary of State of the State of
Delaware prior to the effectiveness of the offering.
*** This Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk.
<PAGE>
EXHIBIT 1.1
POWER INTEGRATIONS, INC.
4,000,000 SHARES/1/
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
_____ __, 1997
HAMBRECHT & QUIST LLC
NATIONSBANC MONTGOMERY SECURITIES, INC.
ROBERTSON, STEPHENS & COMPANY LLC
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Power Integrations, Inc., a Delaware corporation (the "Company"), proposes
to issue and sell 2,100,000 shares of its authorized but unissued Common Stock,
$0.001 par value per share ("Common Stock") of the Company, and the stockholders
of the Company named in Schedule II hereto (collectively, the "Selling
Securityholders") propose to sell an aggregate of 1,900,000 shares of Common
Stock of the Company (together, the "Underwritten Stock"). The Company proposes
to grant to the Underwriters (as defined below) an option to purchase up to
600,000 additional shares of Common Stock (the "Option Stock" and, together with
the Underwritten Stock, the "Stock"). The Common Stock is more fully described
in the Registration Statement and the Prospectus hereinafter mentioned.
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (collectively,
the "Underwriters," which term shall also include any underwriter purchasing
Stock pursuant to Section 3(b) hereof). You represent and warrant that you have
been authorized by each of the other Underwriters to enter into this Agreement
on its behalf and to act for it in the manner herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1 (No.
333-35421), including the related preliminary prospectus, for the registration
under the Securities Act of 1933, as amended (the "Securities Act") of the
Stock. Copies of such registration statement and of each amendment thereto, if
any, including the related preliminary prospectus (meeting the requirements of
Rule 430A of the rules and regulations of the Commission) heretofore filed by
the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (a "Rule 462(b)
registration statement"),
- ---------------------------
/1/ Plus an option to purchase from the Company up to 600,000 additional
shares to cover over-allotments, if any.
<PAGE>
and, in the event of any amendment thereto after the effective date of such
registration statement (the "Effective Date"), shall also mean (from and after
the effectiveness of such amendment) such registration statement as so amended
(including any Rule 462(b) registration statement). The term Prospectus as used
in this Agreement shall mean the prospectus relating to the Stock first filed
with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing
is required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall also
mean (from and after the filing with the Commission of such supplement or the
effectiveness of such amendment) such prospectus as so supplemented or amended.
The term Preliminary Prospectus as used in this Agreement shall mean each
preliminary prospectus included in such registration statement prior to the time
it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company hereby represents and warrants as follows:
(i) The Company and each of its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own or lease its properties and conduct its business
as described in the Registration Statement and the Prospectus and as being
conducted, and is duly qualified as a foreign corporation and in good
standing in all jurisdictions in which the character of the property owned
or leased or the nature of the business transacted by it makes
qualification necessary (except where the failure to be so qualified would
not have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole).
(ii) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition
or results of operations of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business, other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of
business, neither the Company nor any of its subsidiaries has entered into
any material transaction not referred to in the Registration Statement and
the Prospectus.
(iii) The Registration Statement and the Prospectus comply, and on
the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the rules
and regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties in this
subparagraph (iii) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.
(iv) The Stock is duly and validly authorized, is (or, in the case
of shares of the Stock to be sold by the Company, will be, when issued and
sold to the Underwriters as provided herein) duly and validly issued, fully
paid and nonassessable and conforms to the description thereof in the
Prospectus. No further approval or authority of the stockholders or the
Board of Directors of the Company will be required for the transfer and
sale of the Stock to be sold by the Selling Securityholders or the issuance
and sale of the Stock as contemplated herein.
-2-
<PAGE>
(v) The Stock to be sold by the Selling Securityholders is listed
and duly admitted to trading on the Nasdaq National Market, and prior to
the Closing Date the Stock to be issued and sold by the Company will be
authorized for listing by the Nasdaq National Market upon official notice
of issuance.
(b) Each of the Selling Securityholders hereby represents and warrants as
follows:
(i) Such Selling Securityholder has good and marketable title to
all the shares of Stock to be sold by such Selling Securityholder
hereunder, free and clear of all liens, encumbrances, equities, security
interests and claims whatsoever, with full right and authority to deliver
the same hereunder, subject, in the case of each Selling Securityholder, to
the rights of BankBoston, N.A., as Custodian (herein called the Custodian),
and that upon the delivery of and payment for such shares of the Stock
hereunder, the several Underwriters will receive good and marketable title
thereto, free and clear of all liens, encumbrances, equities, security
interests and claims whatsoever.
(ii) Certificates in negotiable form for the shares of the Stock
to be sold by such Selling Securityholder have been placed in custody under
a Custody Agreement for delivery under this Agreement with the Custodian;
such Selling Securityholder specifically agrees that the shares of the
Stock represented by the certificates so held in custody for such Selling
Securityholder are subject to the interests of the several Underwriters and
the Company, that the arrangements made by such Selling Securityholder for
such custody, including the Power of Attorney provided for in such Custody
Agreement, are to that extent irrevocable, and that the obligations of such
Selling Securityholder shall not be terminated by any act of such Selling
Securityholder or by operation of law, whether by the death or incapacity
of such Selling Securityholder (or, in the case of a Selling Securityholder
that is not an individual, the dissolution or liquidation of such Selling
Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur
before the delivery of such shares of the Stock hereunder, certificates for
such shares of the Stock shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death,
incapacity, dissolution, liquidation or other event had not occurred,
regardless of whether the Custodian shall have received notice of such
death, incapacity, dissolution, liquidation or other event.
(iii) Such Selling Securityholder who is a director or executive
officer of the Company (including such Selling Securityholder who is an
affiliate of a director or executive officer of the Company) has reviewed
the Registration Statement and Prospectus and, although such Selling
Securityholder has not independently verified the accuracy or completeness
of all the information contained therein, nothing has come to the attention
of such Selling Securityholder that would lead such Selling Securityholder
to believe that on the Effective Date, the Registration Statement contained
any untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading; and, on the Effective Date the
Prospectus contained and, on the Closing Date, contains any untrue
statement of a material fact or omitted or omits to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
2,100,000 shares of the Underwritten Stock to the several Underwriters, each
Selling Securityholder agrees to sell to the several Underwriters the number of
shares of the Underwritten Stock set forth in Schedule II opposite the name of
-----------
such Selling Securityholder, and each of the Underwriters agrees to purchase
from the Company and the Selling Securityholders the respective aggregate number
of shares of Underwritten Stock set forth opposite its name in Schedule I. The
----------
price at which such shares of Underwritten Stock shall be sold by the Company
and the Selling Securityholders and purchased by the several Underwriters shall
be $___ per share. The obligation of each Underwriter to the Company and each
of the Selling Securityholders shall be to purchase from the Company and the
Selling Securityholders that number of shares of the Underwritten Stock which
represents the same proportion of the total number of shares of the Underwritten
Stock to be sold by each of the Company and the Selling Securityholders pursuant
to this Agreement as the number of shares of the Underwritten Stock set forth
opposite the name of such Underwriter in Schedule I hereto represents
----------
-3-
<PAGE>
of the total number of shares of the Underwritten Stock to be purchased by all
Underwriters pursuant to this Agreement, as adjusted by you in such manner as
you deem advisable to avoid fractional shares. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is
to purchase only the respective number of shares of the Underwritten Stock
specified in Schedule I.
----------
(b) If for any reason one or more of the Underwriters shall fail or refuse
(otherwise than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for
the number of shares of the Stock agreed to be purchased by such Underwriter or
Underwriters, the Company or the Selling Securityholders shall immediately give
notice thereof to you, and the non-defaulting Underwriters shall have the right
within 24 hours after the receipt by you of such notice to purchase, or procure
one or more other Underwriters to purchase, in such proportions as may be agreed
upon between you and such purchasing Underwriter or Underwriters and upon the
terms herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
provided, however, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Securityholders shall have the right, within 24 hours
next succeeding the 24-hour period above referred to, to make arrangements with
other underwriters or purchasers satisfactory to you for purchase of such shares
and portion on the terms herein set forth. In any such case, either you or the
Company and the Selling Securityholders shall have the right to postpone the
Closing Date determined as provided in Section 5 hereof for not more than seven
business days after the date originally fixed as the Closing Date pursuant to
said Section 5 in order that any necessary changes in the Registration
Statement, the Prospectus or any other documents or arrangements may be made.
If neither the non-defaulting Underwriters nor the Company and the Selling
Securityholders shall make arrangements within the 24-hour periods stated above
for the purchase of all the shares of the Stock which the defaulting Underwriter
or Underwriters agreed to purchase hereunder, this Agreement shall be terminated
without further act or deed and without any liability on the part of the Company
or the Selling Securityholders to any non-defaulting Underwriter and without any
liability on the part of any non-defaulting Underwriter to the Company or the
Selling Securityholders. Nothing in this paragraph (b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the Company
grants an option to the several Underwriters to purchase, severally and not
jointly, up to 600,000 shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
-4-
<PAGE>
(b) The information set forth in the last paragraph on the front cover page
and under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Stock filed by the Company
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriters to the Company for inclusion in the
Registration Statement, any Preliminary Prospectus, and the Prospectus, and you
on behalf of the respective Underwriters represent and warrant to the Company
that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock and
the Option Stock (if the option granted by Section 3(c) hereof shall have been
exercised not later than 7:00 A.M., San Francisco time, on the date two business
days preceding the Closing Date), and payment therefor, shall be made at the
office of Gray Cary Ware & Friedenrich, 400 Hamilton Avenue, Palo Alto, CA
94301, at 7:00 a.m., San Francisco time, on the fourth business day after the
date of this Agreement, or at such time on such other day, not later than seven
full business days after such fourth business day, as shall be agreed upon in
writing by the Company, the Selling Securityholders and you. The date and hour
of such delivery and payment (which may be postponed as provided in Section 3(b)
hereof) are herein called the "Closing Date".
(b) If the option granted by Section 3(c) hereof shall be exercised after
7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Gray Cary Ware & Friedenrich,
400 Hamilton Avenue, Palo Alto, CA 94301, at 7:00 a.m., San Francisco time, on
the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to the
Company or its order, and payment for the Stock purchased from the Selling
Securityholders shall be made to the Custodian, for the account of the Selling
Securityholders, in each case by one or more certified or official bank check or
checks in same day funds. Such payment shall be made upon delivery of
certificates for the Stock to you for the respective accounts of the several
Underwriters against receipt therefor signed by you. Certificates for the Stock
to be delivered to you shall be registered in such name or names and shall be in
such denominations as you may request at least one business day before the
Closing Date, in the case of Underwritten Stock, and at least one business day
prior to the purchase thereof, in the case of the Option Stock. Such
certificates will be made available to the Underwriters for inspection, checking
and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New
York, New York 10004 on the business day prior to the Closing Date or, in the
case of the Option Stock, by 3:00 p.m., New York time, on the business day
preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any later
date on which Option Stock is purchased for the account of such Underwriter.
Any such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS.
Each of the Company and the Selling Securityholders respectively covenants and
agrees as follows (with the covenants of the Selling Securityholders being
limited to those set in forth paragraphs (i) through (l)):
(a) The Company will (i) prepare and timely file with the Commission under
Rule 424(b) a Prospectus containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A and (ii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of (i)
the request by the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by
-5-
<PAGE>
it of notice of the initiation or threatening of any proceeding for such
purpose. The Company and the Selling Securityholders will make every reasonable
effort to prevent the issuance of such a stop order and, if such an order shall
at any time be issued, to obtain the withdrawal thereof at the earliest possible
moment.
(c) The Company will (i) on or before the Closing Date, deliver to you a
signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each post-
effective amendment, if any, to the Registration Statement (together with, in
each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time
to time, prepare and file such statements, reports, and other documents as are
or may be required to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
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(i) The Company and the Selling Securityholders jointly and severally agree
to pay all costs and expenses incident to the performance of their obligations
under this Agreement, including all costs and expenses incident to (i) the
preparation, printing and filing with the Commission and the National
Association of Securities Dealers, Inc. ("NASD") of the Registration Statement,
any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the
Underwriters of copies of any Preliminary Prospectus and of the several
documents required by paragraph (c) of this Section 6 to be so furnished, (iii)
the printing of this Agreement and related documents delivered to the
Underwriters, (iv) the preparation, printing and filing of all supplements and
amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v)
the furnishing to you and the Underwriters of the reports and information
referred to in paragraph (g) of this Section 6 and (vi) the printing and
issuance of stock certificates, including the transfer agent's fees. The
Selling Securityholders will pay any transfer taxes incident to the transfer to
the Underwriters of the shares the Stock being sold by the Selling
Securityholders.
(j) The Company and the Selling Securityholders jointly and severally agree
to reimburse you, for the account of the several Underwriters, for blue sky fees
and related disbursements (including counsel fees and disbursements and cost of
printing memoranda for the Underwriters) paid by or for the account of the
Underwriters or their counsel in qualifying the Stock under state securities or
blue sky laws and in the review of the offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this Section 6 are intended
to relieve the Underwriters from the payment of the expenses and costs which the
Company and the Selling Securityholders hereby agree to pay and shall not affect
any agreement which the Company and the Selling Securityholders may make, or may
have made, for the sharing of any such expenses and costs.
(l) The Company and each of the Selling Securityholders hereby agrees that,
without the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, the Company or such Selling Securityholder, as the case may be,
will not, for a period of 180 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (i) sell,
offer, contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this
Agreement, (B) the issuance of shares of Common Stock by the Company upon the
exercise of options granted under the stock option plans of the Company (the
"Option Plans") or upon the exercise of warrants outstanding as of the date
hereof, all as described in footnote (2) to the table under the caption
"Capitalization" in the Preliminary Prospectus, and (C) options to purchase
Common Stock granted under the Option Plans.
(m) The Company agrees to use its best efforts to cause all directors,
officers, and stockholders to agree that, without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will
not, for a period of 180 days following the commencement of the public offering
of the Stock by the Underwriters, directly or indirectly, (i) sell, offer,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock or (ii) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise.
(n) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
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7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the
Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or the common law or otherwise, and the Company agrees to reimburse each
such Underwriter and controlling person for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto, and (2) the
indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of
the Company contained in this paragraph (a) and the representations and
warranties of the Company contained in Section 2 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and payment
for the Stock.
(b) Subject to the provisions of paragraph (g) of this Section 7, each
Selling Securityholder, severally and not jointly, agrees to indemnify and hold
harmless each Underwriter and each person (including each partner or officer
thereof) who controls any Underwriter within the meaning of Section 15 of the
Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Exchange Act, or the common law
or otherwise, and such Selling Securityholder agrees to reimburse each such
Underwriter and controlling person for any legal or other expenses (including,
except as otherwise hereinafter provided, reasonable fees and disbursements of
counsel) incurred by the respective indemnified parties in connection with
defending against any such losses, claims, damages or liabilities or in
connection with any investigation or inquiry of, or other proceeding which may
be brought against, the respective indemnified parties, in each case arising out
of or based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (including the Prospectus
as part thereof and any Rule 462(b) registration statement) or any post-
effective amendment thereto (including any Rule 462(b) registration statement),
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus or the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
thereof or supplement thereto) or the omission or alleged omission to state
therein a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading; but
only if such untrue statement or alleged untrue statement or omission or alleged
omission relates directly to (A) information pertaining to such Selling
Securityholder furnished in writing by or on behalf of such Selling
Securityholder expressly for use in any Preliminary Prospectus or the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto or (B) facts that would constitute a breach of any
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<PAGE>
representation or warranty of such Selling Securityholder set forth in Section
2(b) hereof; provided, however, that the indemnity agreement contained in this
paragraph (b) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages, liabilities or expenses purchased the Stock which is the
subject thereof (or to the benefit of any person controlling such Underwriter)
if at or prior to the written confirmation of the sale of such Stock a copy of
the Prospectus (or the Prospectus as amended or supplemented) was not sent or
delivered to such person and the untrue statement or omission of a material fact
contained in such Preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as amended or supplemented) unless the failure is the result of
noncompliance by the Company with paragraph (c) of Section 6 hereof. The
indemnity agreements of the Selling Securityholders contained in this paragraph
(b) and the representations and warranties of the Selling Securityholders
contained in Section 2(b) hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any indemnified
party and shall survive the delivery of and payment for the Stock.
(c) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, and the Selling Securityholders from and against any
and all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of such indemnifying
Underwriter for use in the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto. The indemnity agreement of each
Underwriter contained in this paragraph (c) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Stock.
(d) Each party indemnified under the provision of paragraphs (a), (b) and
(c) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its
own expense to participate in the defense of any action, suit or proceeding
against, or investigation or inquiry of, an indemnified party. Any indemnifying
party shall be entitled, if it so elects within a reasonable time after receipt
of the Notice by giving written notice (herein called the Notice of Defense) to
the indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party
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<PAGE>
or parties in conducting the defense of such action, suit, investigation,
inquiry or proceeding or that there may be legal defenses available to such
indemnified party or parties different from or in addition to those available to
the indemnifying party or parties, then counsel for the indemnified party or
parties shall be entitled to conduct the defense to the extent reasonably
determined by such counsel to be necessary to protect the interests of the
indemnified party or parties and (ii) in any event, the indemnified party or
parties shall be entitled to have counsel chosen by such indemnified party or
parties participate in, but not conduct, the defense. If, within a reasonable
time after receipt of the Notice, an indemnifying party gives a Notice of
Defense and the counsel chosen by the indemnifying party or parties is
reasonably satisfactory to the indemnified party or parties, the indemnifying
party or parties will not be liable under paragraphs (a) through (c) of this
Section 7 for any legal or other expenses subsequently incurred by the
indemnified party or parties in connection with the defense of the action, suit,
investigation, inquiry or proceeding, except that (A) the indemnifying party or
parties shall bear the legal and other expenses incurred in connection with the
conduct of the defense as referred to in clause (i) of the proviso to the
preceding sentence and (B) the indemnifying party or parties shall bear such
other expenses as it or they have authorized to be incurred by the indemnified
party or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(e) If the indemnification provided for in this Section 7 is unavailable or
insufficient to hold harmless an indemnified party under paragraph (a), (b) or
(c) of this Section 7, then each indemnifying party, in lieu of indemnifying
such indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a), (b) or (c) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Securityholders on the one hand and the Underwriters on
the other shall be deemed to be in the same respective proportions as the total
net proceeds from the offering of the Stock received by the Company and the
Selling Securityholders and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Stock. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (e) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (e). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (e). Notwithstanding the provisions of this paragraph
(e), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (e) to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (d) of this Section 7).
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(f) No indemnifying party will, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not such indemnified
party or any person who controls such indemnified party within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to
such claim, action, suit or proceeding) unless such settlement, compromise or
consent includes an unconditional release of such indemnified party and each
such controlling person from all liability arising out of such claim, action,
suit or proceeding.
(g) The liability of each Selling Securityholder under such Selling
Securityholder's representations and warranties contained in paragraph (b) of
Section 2 hereof and under the indemnity and reimbursement agreements contained
in the provisions of this Section 7 and Section 11 hereof shall be limited to an
amount equal to the initial public offering price of the stock sold by such
Selling Securityholder to the Underwriters. The Company and the Selling
Securityholders may agree, as among themselves and without limiting the rights
of the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in major hostilities or an escalation of major hostilities by the
United States or the declaration of war or a national emergency by the United
States on or after the date hereof, (ii) any outbreak of hostilities or other
national or international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, calamity, crisis or material change
in economic or political conditions in the financial markets of the United
States would, in the Underwriters' reasonable judgment, make it impracticable or
inadvisable to proceed with completion of the sale of and payment for the Stock,
(iii) suspension of trading in securities generally or a material adverse
decline in value of securities generally on the New York Stock Exchange, the
American Stock Exchange, or The Nasdaq Stock Market, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which materially and
adversely affects or will materially or adversely affect the business or
operations of the Company, (v) declaration of a banking moratorium by either
federal or New York State authorities or (vi) the taking of any action by any
federal, state or local government or agency in respect of its monetary or
fiscal affairs which has a material adverse effect on the securities markets in
the United States. If this Agreement shall be terminated pursuant to this
Section 8, there shall be no liability of the Company or the Selling
Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; provided, however, that in the event of
any such termination the Company and the Selling Securityholders agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and to the following further conditions:
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder and the
validity and form of the certificates representing the Stock, all corporate
proceedings and other legal matters incident to the foregoing, and the form of
the Registration Statement and of the Prospectus (except as to the financial
statements contained therein), shall have been approved at or prior to the
Closing Date by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters.
(c) You shall have received from (i) Gray Cary Ware & Friedenrich, counsel
for the Company, certain Selling Securityholders and Power Integrations
International Holdings, Inc., (ii) from ________, counsel to MagnaTek, Inc.,
(iii)
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from ________, counsel to [Hillman Family Holdings], (iv) from Komatsu,
Koma & Nishikawa, counsel for Power Integrations KK, (v) from Cameron Markby
Hewitt, counsel for Power Integrations U.K. Limited, and (vi) from *
, patent counsel for the Company, opinions, addressed to the Underwriters and
dated the Closing Date, covering the matters set forth in Annex A, Annex B,
------- -------
Annex C, Annex D, Annex E and Annex F hereto, respectively, and if Option Stock
- ------- ------- ------- -------
is purchased at any date after the Closing Date, additional opinions from each
such counsel, addressed to the Underwriters and dated such later date,
confirming that the statements expressed as of the Closing Date in such opinions
remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
of the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus, (vi)
there are not any franchises, contracts, leases or other documents which are
required to be filed as exhibits to the Registration Statement which have not
been filed as required, (vii) the representations and warranties of the Company
herein are true and correct in all material respects as of the Closing Date or
any later date on which Option Stock is to be purchased, as the case may be, and
(viii) there has not been any material change in the market for securities in
general or in political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment to make a
public offering of the Stock, or a material adverse change in market levels for
securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date on
which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (vii) of paragraph (d) of this Section 9 are true and
correct.
(f) You shall have received from Arthur Andersen LLP, a letter or letters,
addressed to the Underwriters and dated the Closing Date and any later date on
which Option Stock is purchased, confirming that they are independent public
accountants with respect to the Company within the meaning of the Securities Act
and the applicable published rules and regulations thereunder and based upon the
procedures described in their letter delivered to you concurrently with the
execution of this Agreement (the "Original Letter"), but carried out to a date
not more than three business days prior to the Closing Date or such later date
on which Option Stock is purchased (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date, as the case may be, and (ii) setting forth
any revisions and additions to the statements and conclusions set forth in the
Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of the Original Letter or to
reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company or any of its subsidiaries which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Stock or
the purchase of the Option Stock as contemplated by the Prospectus.
-12-
<PAGE>
(g) You shall have received from Arthur Andersen LLP a letter stating that
their review of the Company's system of internal accounting controls, to the
extent they deemed necessary in establishing the scope of their examination of
the Company's financial statements as at * , 19 * , did not disclose
any weakness in internal controls that they considered to be material
weaknesses.
(h) You shall have been furnished evidence in usual written or telegraphic
form from the appropriate authorities of the several jurisdictions, or other
evidence satisfactory to you, of the qualification referred to in paragraph (f)
of Section 6 hereof.
(i) The Stock to be sold by the Selling Securityholders is listed and duly
admitted to trading on the Nasdaq National Market, and prior to the Closing
Date, the Stock to be issued and sold by the Company shall have been duly
authorized for listing on the Nasdaq National Market upon official notice of
issuance.
(j) On or prior to the Closing Date, you shall have received from all
directors, officers, and stockholders agreements, in form reasonably
satisfactory to Hambrecht & Quist LLC, stating that without the prior written
consent of Hambrecht & Quist LLC on behalf of the Underwriters, such person or
entity will not, for a period of 180 days following the commencement of the
public offering of the Stock by the Underwriters, directly or indirectly, (i)
sell, offer, contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel for the Underwriters, shall be satisfied that they comply
in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that (i) in the event of such
termination, the Company and the Selling Securityholders agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in paragraphs
(i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company or the
Selling Securityholders to perform any agreement herein, to fulfill any of the
conditions herein, or to comply with any provision hereof other than by reason
of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; provided, however, that in the event of any such termination
-------- -------
the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof.
-13-
<PAGE>
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement (and subject, in the case of a
Selling Securityholder, to the provisions of paragraph (g) of Section 7), (i)
the Company agrees to reimburse on a quarterly basis the Underwriters for all
reasonable legal and other expenses incurred in connection with investigating or
defending any claim, action, investigation, inquiry or other proceeding arising
out of or based upon any statement or omission, or any alleged statement or
omission, described in paragraph (a) of Section 7 of this Agreement, and (ii)
the Selling Securityholders hereby severally agree to reimburse on a quarterly
basis the Underwriters for all reasonable legal and other expenses incurred in
connection with investigating or defending any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in paragraph (b) of
Section 7 of this Agreement, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligations under
this Section 11 and the possibility that such payments might later be held to be
improper; provided, however, that (i) to the extent any such payment is
-----------------
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, 477 North Mathilda Avenue,
Sunnyvale, CA 94086, Attention: Howard F. Earhart; and if to the Selling
Securityholders, shall be mailed, telegraphed or delivered to the Selling
Securityholders in care of Howard F. Earhart at 477 North Mathilda Avenue,
Sunnyvale, CA 94086. All notices given by telegraph shall be promptly confirmed
by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or the Selling Securityholders or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
provided, however, that if this Agreement is terminated prior to the Closing
- -----------------
Date, the provisions of paragraphs (l), (m) and (n) of Section 6 hereof shall be
of no further force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
-14-
<PAGE>
Please sign and return to the Company and to the Selling Securityholders in
care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.
Very truly yours,
POWER INTEGRATIONS, INC.:
By:
----------------------------------------
Howard F. Earhart
President and Chief Executive Officer
SELLING SECURITYHOLDERS:
[List Names]
By:
----------------------------------------
[Attorney-in-Fact]
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
NATIONSBANC MONTGOMERY SECURITIES, INC.
ROBERTSON, STEPHENS & COMPANY LLC
By Hambrecht & Quist LLC
By: _________________________________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
----------
-15-
<PAGE>
SCHEDULE I
UNDERWRITERS
NUMBER OF
SHARES
UNDERWRITERS TO BE
------------ PURCHASED
---------
Hambrecht & Quist LLC
Nationsbanc Montgomery Securities, Inc.
Robertson, Stephens & Company LLC
-------
Total .....................................
=======
-16-
<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
NUMBER OF
NAME AND ADDRESS SHARES TO
OF SELLING SECURITYHOLDERS BE SOLD
-------------------------- ------------
-------
Total.............................................
=======
-17-
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF GRAY CARY WARE & FRIEDENRICH
COUNSEL FOR THE COMPANY, POWER INTEGRATIONS INTERNATIONAL
HOLDINGS, INC. AND CERTAIN SELLING SECURITYHOLDERS
(i) Each of the Company and Power Integrations International Holdings,
Inc. has been duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, is duly
qualified as a foreign corporation and in good standing in each state of the
United States of America in which its ownership or leasing of property requires
such qualification (except where the failure to be so qualified would not have a
material adverse effect on the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole),
and has full corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement; all the issued
and outstanding capital stock of Power Integrations International Holdings, Inc.
has been duly authorized and validly issued and is fully paid and nonassessable,
and is owned by the Company free and clear of all liens, encumbrances and
security interests, and to the best of such counsel's knowledge, no options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests in Power Integrations International Holdings, Inc. are
outstanding;
(ii) the authorized capital stock of the Company consists of 3,000,000
shares of Preferred Stock, $0.001 par value per share, of which no shares are
outstanding and 40,000,000 shares of Common Stock, $0.001 par value per share,
of which there are outstanding * shares (including the Underwritten Stock
plus the number of shares of Option Stock issued on the date hereof); proper
corporate proceedings have been taken to validly authorize such authorized
capital stock; all of the outstanding shares of such capital stock (including
the Underwritten Stock and the shares of Option Stock issued, if any) have been
duly and validly issued and are fully paid and nonassessable; any Option Stock
purchased after the Closing Date, when issued and delivered to and paid for by
the Underwriters as provided in the Underwriting Agreement, will have been duly
and validly issued and be fully paid and nonassessable; and no preemptive rights
of, or rights of refusal in favor of, stockholders exist with respect to the
Stock, or the issue and sale thereof, pursuant to the Certificate of
Incorporation or Bylaws of the Company and, to the knowledge of such counsel,
there are no contractual preemptive rights that have not been waived, rights of
first refusal or rights of co-sale which exist with respect to the Stock being
sold by the Selling Securityholders or the issue and sale of the Stock;
(iii) the Registration Statement has become effective under the
Securities Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the use
of the Prospectus is in effect and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and with the rules
and regulations of the Commission thereunder;
(v) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel) and
11(c) of Form S-1 is to the best of such counsel's knowledge accurately and
adequately set forth therein in all material respects or no response is required
with respect to such Items, and the description of the Company's stock option
plans and the options granted and which may be granted thereunder set forth or
incorporated by reference in the Prospectus accurately and fairly presents the
information required to be shown with respect to said plans and options to the
extent required by the Securities Act and the rules and regulations of the
Commission thereunder;
<PAGE>
(vi) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(vi) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company;
(vi) based insofar as factual matters are concerned solely upon
certificates of the Selling Securityholders (other than MagnaTek, Inc. and
[Hillman Family Holdings]), the accuracy of which we have no reason to question,
(A) the Underwriting Agreement has been duly executed and delivered by or on
behalf of each of the Selling Securityholders; (B) the Custodian Agreement
between the Selling Securityholders and BankBoston, N.A., as Custodian, and the
Power of Attorney referred to in such Custody Agreement have been duly executed
and delivered by such Selling Securityholder; (C) the Custodian Agreement
entered into by, and the Power of Attorney given by, such Selling Securityholder
is valid and binding on such Selling Securityholder; and (D) each Selling
Securityholder has full legal right and authority to enter into the Underwriting
Agreement and to sell, transfer and deliver in the manner provided in the
Underwriting Agreement the shares of Stock sold by such Selling Securityholder
hereunder;
(ix) the issue and sale by the Company of the shares of Stock sold by
the Company as contemplated by the Underwriting Agreement will not conflict
with, or result in a breach of, the Certificate of Incorporation or Bylaws of
the Company or Power Integrations International Holdings, Inc. or any agreement
or instrument known to such counsel to which the Company or Power Integrations
International Holdings, Inc. is a party or any applicable law or regulation, or
so far as is known to such counsel, any order, writ, injunction or decree, of
any jurisdiction, court or governmental instrumentality;
(x) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company (of which counsel has
knowledge) have waived such rights with respect to the Registration Statement or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement or such rights have been
satisfied;
(xi) good and marketable title to the shares of Stock sold by the
Selling Securityholders (other than MagnaTek, Inc. and [Hillman Family
Holdings]) under the Underwriting Agreement, free and clear of all liens,
encumbrances, equities, security interests and claims (of which counsel has
knowledge) (other than any liens, encumbrances, equities, security interests and
claims that result from actions taken against the Underwriters), has been
transferred to the Underwriters who have severally purchased such shares of
Stock under the Underwriting Agreement, assuming for the purpose of this opinion
that the Underwriters purchased the same in good faith without notice of any
adverse claims;
(xii) based insofar as factual matters with respect to the Stock to be
sold by the Selling Securityholders (other than MagnaTek, Inc. and [Hillman
Family Holdings]) are concerned solely upon certificates of the Selling
Securityholders, the accuracy of which we have no reason to question, no
consent, approval, authorization or order of any court or governmental agency or
body is required for the consummation of the transactions contemplated in the
Underwriting Agreement, except such as have been obtained under the Securities
Act and such as may be required under state securities or blue sky laws in
connection with the purchase and distribution of the Stock by the Underwriters;
and
(xiii) the Stock sold by the Selling Securityholders is listed and duly
admitted to trading on the Nasdaq National Market and the Stock issued and sold
by the Company will have been duly authorized for listing on the Nasdaq National
Market upon official notice of issuance.
____________________________________
-2-
<PAGE>
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States, the State of California, or the
Delaware General Corporation Law upon opinions of local counsel satisfactory in
form and scope to counsel for the Underwriters. Copies of any opinions so
relied upon shall be delivered to the Representatives and to counsel for the
Underwriters and the foregoing opinion shall also state that counsel knows of no
reason the Underwriters are not entitled to rely upon the opinions of such local
counsel.
In addition to the matters set forth above, counsel rendering the foregoing
opinion shall also include a statement to the effect that nothing has come to
the attention of such counsel that leads them to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial data contained or incorporated by reference therein, as to which such
counsel need not express any opinion or belief) at the Effective Date contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus (except as to the financial statements and
schedules and other financial data contained or incorporated by reference
therein, as to which such counsel need not express any opinion or belief) as of
its date or at the Closing Date (or any later date on which Option Stock is
purchased), contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
-3-
<PAGE>
ANNEX B
MATTERS TO BE COVERED IN THE OPINION OF KOMATSU, KOMA & NISHIKAWA
COUNSEL FOR POWER INTEGRATIONS KK
(i) The Subsidiary has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation, is duly qualified as a foreign corporation and in good standing
in each state of the United States of America in which its ownership or leasing
of property requires such qualification (except where the failure to be so
qualified would not have a material adverse effect on the business, properties,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole), and has full corporate power and authority to
own or lease its properties and conduct its business as described in the
Registration Statement; all the issued and outstanding capital stock of the
Subsidiary has been duly authorized and validly issued and is fully paid and
nonassessable, and is owned by the Company free and clear of all liens,
encumbrances and security interests, and to the best of such counsel's
knowledge, no options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into shares of
capital stock or ownership interests in Power Integrations International
Holdings, Inc. are outstanding;
(ii) the issue and sale by the Company of the shares of Stock sold by
the Company as contemplated by the Underwriting Agreement will not conflict
with, or result in a breach of, the Certificate of Incorporation or Bylaws of
the Subsidiary or any agreement or instrument known to such counsel to which the
Subsidiary is a party or any applicable law or regulation, or so far as is known
to such counsel, any order, writ, injunction or decree, of any jurisdiction,
court or governmental instrumentality;
-4-
<PAGE>
ANNEX C
MATTERS TO BE COVERED IN THE OPINION OF CAMERON MARKBY HEWITT
COUNSEL FOR POWER INTEGRATIONS U.K. LIMITED
(i) The Subsidiary has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation, is duly qualified as a foreign corporation and in good standing
in each state of the United States of America in which its ownership or leasing
of property requires such qualification (except where the failure to be so
qualified would not have a material adverse effect on the business, properties,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole), and has full corporate power and authority to
own or lease its properties and conduct its business as described in the
Registration Statement; all the issued and outstanding capital stock of the
Subsidiary has been duly authorized and validly issued and is fully paid and
nonassessable, and is owned by the Company free and clear of all liens,
encumbrances and security interests, and to the best of such counsel's
knowledge, no options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into shares of
capital stock or ownership interests in Power Integrations International
Holdings, Inc. are outstanding;
(ii) the issue and sale by the Company of the shares of Stock sold by
the Company as contemplated by the Underwriting Agreement will not conflict
with, or result in a breach of, the Certificate of Incorporation or Bylaws of
the Subsidiary or any agreement or instrument known to such counsel to which the
Subsidiary is a party or any applicable law or regulation, or so far as is known
to such counsel, any order, writ, injunction or decree, of any jurisdiction,
court or governmental instrumentality;
-5-
<PAGE>
ANNEX D
MATTERS TO BE COVERED IN THE OPINION OF __________________________
COUNSEL FOR MAGNATEK, INC.
(i) The Underwriting Agreement has been duly executed and delivered by
or on behalf of MagnaTek, Inc. and the Custodian Agreement between the Selling
Securityholders and BankBoston, N.A., as Custodian, and the Power of Attorney
referred to in such Custodian Agreement have been duly executed and delivered by
MagnaTek, Inc.;
(ii) good and marketable title to the shares of Stock sold by MagnaTek,
Inc. under the Underwriting Agreement, free and clear of all liens,
encumbrances, equities, security interests and claims (other than any liens,
encumbrances, equities, security interests and claims that result from actions
taken against the Underwriters), has been transferred to the Underwriters who
have severally purchased such shares of Stock under the Underwriting Agreement,
assuming for the purpose of this opinion that the Underwriters purchased the
same in good faith without notice of any adverse claims;
(iii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Stock by
the Underwriters.
-6-
<PAGE>
ANNEX E
MATTERS TO BE COVERED IN THE OPINION OF ________________________
COUNSEL FOR [HILLMAN FAMILY HOLDINGS]
(i) The Underwriting Agreement has been duly executed and delivered by
or on behalf of [Hillman Family Holdings] and the Custodian Agreement between
the Selling Securityholders and BankBoston, N.A., as Custodian, and the Power of
Attorney referred to in such Custodian Agreement have been duly executed and
delivered by [Hillman Family Holdings];
(ii) good and marketable title to the shares of Stock sold by [Hillman
Family Holdings] under the Underwriting Agreement, free and clear of all liens,
encumbrances, equities, security interests and claims (other than any liens,
encumbrances, equities, security interests and claims that result from actions
taken against the Underwriters), has been transferred to the Underwriters who
have severally purchased such shares of Stock under the Underwriting Agreement,
assuming for the purpose of this opinion that the Underwriters purchased the
same in good faith without notice of any adverse claims;
(iii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Stock by
the Underwriters.
-7-
<PAGE>
ANNEX F
MATTERS TO BE COVERED IN THE OPINION OF *
PATENT COUNSEL FOR THE COMPANY
Such counsel are familiar with the technology used by the Company in
its business and the manner of its use thereof and have read the Registration
Statement and the Prospectus, including particularly the portions of the
Registration Statement and the Prospectus referring to patents, trade secrets,
trademarks, service marks or other proprietary information or materials and:
(i) such counsel have no reason to believe that the Registration
Statement or the Prospectus (A) contains any untrue statement of a
material fact with respect to patents, trade secrets, trademarks,
service marks or other proprietary information or materials owned or
used by the Company, or the manner of its use thereof, or any allegation
on the part of any person that the Company is infringing any patent
rights, trade secrets, trademarks, service marks or other proprietary
information or materials of any such person or (B) omits to state any
material fact relating to patents, trade secrets, trademarks, service
marks or other proprietary information or materials owned or used by the
Company, or the manner of its use thereof, or any allegation of which
such counsel have knowledge, that is required to be stated in the
Registration Statement or the Prospectus or is necessary to make the
statements therein not misleading;
(ii) to the best of such counsel's knowledge [and except as set forth
in the Prospectus under the caption " * ,"] there are no legal or
governmental proceedings pending relating to patent rights, trade
secrets, trademarks, service marks or other proprietary information or
materials [of the Company], and to the best of such counsel's knowledge
no such proceedings are threatened or contemplated by governmental
authorities or others;
(iii) such counsel do not know of any contracts or other documents,
relating to [governmental regulation affecting the Company or] the
Company's patents, trade secrets, trademarks, service marks or other
proprietary information or materials of a character required to be filed
as an exhibit to the Registration Statement or required to be described
in the Registration Statement or the Prospectus that are not filed or
described as required;
(iv) [except as set forth in the Prospectus,] to the best of such
counsel's knowledge, the Company is not infringing or otherwise
violating any patents, trade secrets, trademarks, service marks or other
proprietary information or materials, of others, and to the best of such
counsel's knowledge there are no infringements by others of any of the
Company's patents, trade secrets, trademarks, service marks or other
proprietary information or materials which in the judgment of such
counsel could affect materially the use thereof by the Company; and
(v) to the best of such counsel's knowledge, the Company owns or
possesses sufficient licenses or other rights to use all patents, trade
secrets, trademarks, service marks or other proprietary information or
materials necessary to conduct the business now being or proposed to be
conducted by the Company as described in the Prospectus.
<PAGE>
EXHIBIT 4.1
FIFTH
AMENDED AND RESTATED
RIGHTS AGREEMENT
----------------
THIS FIFTH AMENDED AND RESTATED RIGHTS AGREEMENT is entered into as of the
27th day of April 1995, by and among Power Integrations, Inc., a California
corporation (the "Company"), the undersigned holders of common stock of the
Company (the "Common Shareholders"), the undersigned holders of Preferred Stock
of the Company (the "Preferred Shareholders") and the undersigned purchasers of
Series F Preferred Stock (the "Purchasers").
RECITALS:
--------
A. The Company, the Common Shareholders and the Preferred Shareholders
are parties to that certain Fourth Amended and Restated Rights Agreement dated
as of March 11, 1994, as amended (the "Prior Rights Agreement"), pursuant to
which the Common Shareholders, the holders of outstanding shares of Series A
Preferred Stock of the Company, the holders of outstanding shares of Series B
Preferred Stock of the Company, the holders of outstanding shares of or warrants
to purchase Series C Preferred Stock of the Company, the holders of outstanding
shares of Series D Preferred Stock of the Company, and the holders of
outstanding shares of Series E Preferred Stock of the Company (the "Prior
Holders") have been granted by the Company certain registration rights (the
"Prior Registration Rights") and a right of first refusal (the "Right of First
Refusal") and pursuant to which certain of the Prior Holders have agreed as to
the voting of their shares of the Company with respect to the number of
authorized directors of the Company and the election of certain designees to the
Company's Board of Directors.
B. The Company and the Purchasers are entering into a Series F Preferred
Stock Purchase Agreement (the "Series F Agreement") of even date herewith
pursuant to which the Company is selling and issuing up to 9,091,000 shares of
Series F Preferred Stock and, in connection therewith, the parties hereto desire
that (i) the Prior Rights Agreement be forever waived and terminated and be
superseded and replaced in its entirety by this Agreement; (ii) the Company
grant the parties certain registration rights and rights of first refusal as set
forth herein; (iii) the Common Shareholders, the Preferred Shareholders and the
Purchasers enter into the voting agreements set forth herein; and (iv) all such
rights be conformed and coordinated upon the terms hereinafter set forth. The
outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock, all
shares of Series C Preferred Stock issuable upon exercise of any outstanding
warrant to purchase Series C Preferred Stock, and the shares of Series F
Preferred Stock to be issued pursuant to the Series F Agreement are hereinafter
collectively referred to as the "Preferred Shares".
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<PAGE>
C. The Company has agreed to grant to two equipment lessors, the
placement agent for its March 1994 Series E Preferred Stock financing, and a
bank certain registration rights, in the case of one lessor, with respect to
shares of Common Stock issuable upon exercise of warrants held by such lessor,
and in the case of the other lessor, the placement agent and the bank, with
respect to shares of Common Stock issuable upon conversion of shares of
Preferred Stock issuable upon exercise of warrants held by them.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and covenants herein contained, the parties hereby agree as follows:
1. Waiver and Termination of Prior Rights and Prior Voting Agreement.
-----------------------------------------------------------------
(a) Upon the execution and delivery of this Agreement by the Company
and the holders of more than 50% of the Registrable Securities (as that term is
defined in the Prior Rights Agreement and not as defined in Section 2 below),
Section 2 of the Prior Rights Agreement shall be terminated and shall be of no
further force and effect. Each holder of Registrable Securities (as that term
is defined in the Prior Rights Agreement) who has not executed and delivered
this Agreement (including without limitation Comdisco, Inc. and MMC/GATX
Partnership No. 1) shall be entitled to all rights of a Holder hereunder as if
such holder of Registrable Securities had executed and delivered this Agreement,
and the only registration rights of the Prior Holders (and any other holders of
such Registrable Securities) shall be as set forth in this Agreement.
(b) Upon the execution and delivery of this Agreement by the Company
and holders of more than 50% of the outstanding Preferred Shares held by the
Prior Holders having rights under Section 3 of the Prior Rights Agreement and
more than 50% of the Company's stock held by the Common Shareholders, all rights
under Section 3 of the Prior Rights Agreement of all of the Common Shareholders
and all of the Prior Holders (and all other persons, if any, having rights under
Section 3 of the Prior Rights Agreement), including (i) the right to buy shares
of Series F Preferred Stock issuable under the Series F Agreement (or the
securities issuable upon conversion thereof), and (ii) any right to acquire a
warrant issued to Imperial Bank in connection with its establishment of a
secured line of credit for the Company (or the Imperial Warrant Shares or the
securities issuable upon conversion thereof), shall be waived and terminated and
shall be of no further force and effect. Each Prior Holder who has not executed
and delivered this Agreement shall be entitled to all rights of a Prior Holder
hereunder as if such person had executed this Agreement and the only right of
first refusal of the Prior Holders and the Common Shareholders shall be as set
forth in this Agreement.
(c) Upon the execution and delivery of this Agreement by the Company
and holders of more than 50% of the outstanding Series A Preferred Stock,
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Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock of the Company and the holders of more than 50% of the
Company's stock held by the Common Shareholders, the terms of Section 4 of the
Prior Rights Agreement shall be terminated and superseded in their entirety by
Section 4 of this Agreement.
2. Registration Rights.
-------------------
2.1 Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following respective meanings:
(a) "Commission" shall mean the Securities and Exchange
----------
Commission or any other federal agency at the time administering the Securities
Act.
(b) "Exchange Act" shall mean the Securities Exchange Act of
------------
1934, as amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
(c) "Holder" shall mean any holder of Registrable Securities
------
which have not been sold to the public.
(d) "Initiating Holders" shall mean any Holder or Holders who in
------------------
the aggregate are Holders of not less than 35% of the aggregate of the
Registrable Securities.
(e) "Securities Act" shall mean the Securities Act of 1933, as
--------------
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
(f) "Registrable Securities" means (i) any shares of common
----------------------
stock of the Company issued or issuable upon conversion of the Preferred Shares,
(ii) shares of common stock of the Company issuable upon exercise of warrants
dated July 31, 1989 and June 8, 1988 issued to Comdisco, Inc. (the "Comdisco
Warrant Shares"), (iii) shares of common stock of the Company issuable upon
conversion of the shares of Series D Preferred Stock and Series E Preferred
Stock issuable upon exercise of warrants dated December 29, 1993 and December
27, 1994 issued to MMC/GATX Partnership No. 1 (the "MMC/GATX Warrant Shares"),
(iv) for purposes of all of Section 2 of this Agreement other than subsection
2.3 ("The Company Registration"), shares of common stock of the Company issuable
upon conversion of a total of 132,120 shares of Series E Preferred Stock
issuable upon exercise of warrants dated March 11, 1994 issued to Brean Murray,
Foster Securities, Inc. and related persons (the "BMFSI Warrant Shares"), (v)
for purposes of all of Section 2 of this Agreement other than subsection 2.2
("Requested Registrations") and subsection 2.4 ("Form S-3"), shares of common
stock of the Company issuable upon
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conversion of the shares of Series E Preferred Stock or Series F Preferred Stock
issuable upon exercise of a warrant dated February 27, 1995 issued to Imperial
Bank (the "Imperial Warrant Shares"), and (vi) any shares of common stock of the
Company issued as (or issuable upon the exercise or conversion of any warrant,
right or other security which is issued as) a dividend or other distribution
with respect to or in replacement of the Preferred Shares, the Comdisco Warrant
Shares, the MMC/GATX Warrant Shares, the BMFSI Warrant Shares (subject to the
limitations set forth above), the Imperial Warrant Shares (subject to the
limitations set forth above), or common stock issued upon conversion of the
Preferred Shares.
(g) The terms "register", "registered" and "registration" refer
-------- ---------- ------------
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
(h) "Registration Expenses" shall mean all expenses incurred or
---------------------
assumed by the Company in complying with Section 2 hereof, including, without
limitation, all registration, qualification and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, reasonable fees
and disbursements of one special counsel for the Holders for each such
registration, blue sky fees and expenses and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company and excluding the fees of counsel other than one special counsel for the
Holders).
(i) "Selling Expenses" shall mean all underwriting discounts and
----------------
selling commissions applicable to the sale of the Registrable Securities and all
fees and expenses of legal counsel for a Holder, other than the special counsel
referred to in section 2.1(h) above.
2.2 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive
------------------------
from the Initiating Holders a written request that the Company effect any
registration with respect to at least 25% of the Registrable Securities
(provided that all securities to be included in the offering, including all
shares included by the Company, shall have an aggregate proposed offering price
to the public of at least $5,000,000) the Company will:
(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its diligent best efforts
to effect all such registrations, qualifications, or compliances (including,
without
4
<PAGE>
limitation, the execution of an undertaking to file post-effective amendments,
appropriate qualification under applicable blue sky or other state securities
laws and appropriate compliance with applicable requirements or regulations) as
may be so requested and as would permit or facilitate the sale and distribution
of all or such portion of such Registrable Securities as are specified in such
request, together with all or such portion of the Registrable Securities of any
Holder or Holders joining in such request as are specified in a written request
received by the Company within fifteen (15) business days after such written
notice from the Company is given; provided that the Company shall not be
obligated to take any action to effect any such registration, qualification or
compliance pursuant to this subsection 2.2:
(A) Prior to six (6) months after the effective date of the
Company's first registered offering to the general public of its securities for
its own account;
(B) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(C) After the Company has effected two (2) such
registrations pursuant to this subsection 2.2, which have been declared or
ordered effective and the securities offered pursuant to such registrations have
been sold; or
(D) Within one (1) year of the effective date of a prior
registration effected pursuant to this subsection 2.2 or within six (6) months
of the effective date of a prior registration effected pursuant to subsection
2.3 or 2.4.
Subject to the foregoing clauses the Company shall file a registration
statement as soon as practicable after receipt of the request or requests of the
Initiating Holders but in any event within ninety (90) days of receipt of such
request; provided, however, that if the Company shall furnish to such Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company it would be seriously
detrimental to the Company and its shareholders for such registration statement
to be filed on or before the date filing would be required and it is therefore
essential to defer the filing of such registration statement, the Company shall
have the right to defer such filing for a single additional period of not more
than one hundred eighty (180) days after receipt of the request of the
Initiating Holders.
(b) Underwriting. If the Initiating Holders intend to distribute the
------------
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this
5
<PAGE>
subsection 2.2 and the Company shall include such information in the written
notice referred to in subsection 2.2(a)(i). In such event, the Company shall
select a nationally-recognized underwriter or underwriters (the "Underwriter"),
reasonably acceptable to a majority in interest of the Initiating Holders, with
regard to the underwriting of such requested registration. The right of any
Holder to registration pursuant to subsection 2.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. The
Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the Underwriter. Notwithstanding any other provision of this
subsection 2.2, if the Underwriter advises the Initiating Holders in writing
that marketing factors require a limitation of the number of shares to be
underwritten, the Initiating Holders shall so advise all Holders, and the number
of shares of Registrable Securities that may be included in the registration and
underwriting shall be allocated among all Holders thereof in proportion, as
nearly as practicable, as the respective amounts of Registrable Securities held
by such Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the Underwriter's
marketing limitation shall be included in such registration.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the Underwriter and the Initiating Holders. The Registrable
Securities and/or other securities so withdrawn shall also be withdrawn from
registration; provided, however, that, if by the withdrawal of such Registrable
Securities a greater number of Registrable Securities held by other Holders may
be included in such registration (up to the maximum of any limitation imposed by
the Underwriter), then the Company shall offer to all Holders who have included
Registrable Securities in the registration the right to include additional
Registrable Securities in the same proportion used in determining the
underwriter limitation in this subsection 2.2.
If the Underwriter has not limited the number of Registrable Securities to
be underwritten, the Company may, and employees and other holders of the
Company's Common Stock may, include securities for their own accounts (with such
shareholders who have rights to "piggyback" on the registration being given
first priority to include their shares) in such registration if the Underwriter
so agrees and if the number of Registrable Securities which would otherwise have
been included in such registration and underwriting will not thereby be limited.
However, nothing herein shall be interpreted as granting any registration rights
to any person who is not a party to this Agreement or expressly granted such
rights, even though not a party to this Agreement in Section 2.
6
<PAGE>
2.3 The Company Registration.
------------------------
(a) If at any time or from time to time, the Company shall
determine to register any of its securities, other than (i) a registration
relating solely to employee benefit plans on Form S-1, S-8 or similar forms
which may be promulgated in the future, or (ii) a registration on Form S-4 or
similar forms which may be promulgated in the future relating solely to a
Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof;
and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within thirty (30) days after receipt of such written notice
from the Company, by any Holder or Holders, except as set forth in subsection
2.3(b).
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an the Company shall so
advise the Holders as a part of the written notice given pursuant to subsection
2.3(a)(i). In such event the right of any Holder to registration pursuant to
this subsection 2.3 shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Registrable Securities in
the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other shareholders, if any, distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the Underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this subsection 2.3, after the first sale
by the Company of its securities to the public in a firmly underwritten public
offering (from which offering any or all shares of Registrable Securities and
other shareholders' securities may be excluded by the Underwriter if the
Underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten), if the Underwriter determines that marketing
factors require a limitation of the number of shares to be underwritten, the
Underwriter may limit the amount of securities to be included in the
registration and underwriting by the Company's shareholders; provided, however,
the number of shares to be included in such registration and underwriting by the
Holders and other shareholders possessing registration rights shall not be
reduced to less than 20% of the aggregate securities included therein without
the prior written consent of all of such shareholders requesting inclusion of
their shares therein. The number of shares that may be included in the
registration and underwriting shall be allocated first among the Holders in
proportion to the number of Registrable Securities then held by each, and
thereafter among all other shareholders in proportion, as nearly as
7
<PAGE>
practicable, to the respective amounts of securities entitled to inclusion in
such registration held by such shareholders at the time of filing of the
registration statement. If any such shareholder disapproves of the terms of any
such underwriting, he may elect to withdraw therefrom by written notice to the
Company and the Underwriter. Any Registrable Securities excluded or withdrawn
from such underwriting shall be excluded from such registration.
2.4 Form S-3. After the Company has qualified for the use of Form S-3
--------
or a successor form, Holders of Registrable Securities shall have, in addition
to the rights set forth in subsection 2.2 above, the right to request an
unlimited number of registrations on Form S-3 (such requests shall be made by
the Initiating Holders, shall be in writing and shall state the number of shares
of Registrable Securities to be disposed of and the intended method of
disposition of shares by such Holders), subject only to the following:
(1) The Company shall not be required to effect a registration
pursuant to this subsection 2.4 within one (1) year of the effective date of a
prior registration effected pursuant to subsections 2.2, 2.3 or 2.4.
(2) The Company shall not be required to effect a registration
pursuant to this subsection 2.4 unless the Holder or Holders requesting
registration propose to dispose of shares of Registrable Securities having an
aggregate price to the public (before deduction of underwriting discounts and
expenses of sale) of at least $1,000,000.
The Company shall give written notice to all Holders of Registrable
Securities of the receipt of a request for registration pursuant to this
subsection 2.4 and shall provide a reasonable opportunity for other Holders to
participate in the registration and in any event at least fifteen (15) days
after receipt of such notice by such Holders, provided that if the registration
is for an underwritten offering, the terms of subsection 2.2(b) shall apply to
all participants in such offering. Subject to the foregoing, the Company will
use its best efforts to effect promptly the registration of all shares of
Registrable Securities on Form S-3 to the extent requested by the Holder or
Holders thereof for purposes of disposition.
2.5 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to
subsections 2.2 or 2.3 or with respect to the first two registrations under
subsection 2.4 shall be borne by the Company; provided, however, that the
Registration Expenses for any registration proceeding begun pursuant to
subsection 2.2 or 2.4 and subsequently withdrawn by the Holders registering
shares therein, unless such withdrawal results from a material adverse change in
the Company which is not within the control of such Holders, shall be borne by
such Holders, unless the Holders holding a majority of the Registrable
Securities agree to
8
<PAGE>
forfeit their right to one demand registration pursuant to subsection 2.2 or
2.4, respectively. All Registration Expenses incurred in connection with any
registration, qualification or compliance pursuant to subsection 2.4 after two
registrations have been effected pursuant to subsection 2.4 shall be borne by
the Holders pro rata on the basis of the number of Registrable Securities
included by each in the registration. Unless otherwise stated, all other
Registration Expenses and all Selling Expenses relating to securities registered
by the Holders shall be borne by the Holders of such securities pro rata on the
basis of the number of Registrable Securities so registered.
2.6 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will, upon request, inform each Holder as to the status of each such
registration, qualification and compliance. At its expense the Company will:
(a) Keep such registration, and any qualification or compliance
under state securities laws which the Company determines to obtain, effective
for a period of one hundred eighty (180) days or until the Holder or Holders
have completed the distribution described in the registration statement relating
thereto, whichever first occurs;
(b) Furnish such number of prospectuses and other documents
incident thereto as a Holder from time to time may reasonably request;
(c) Supply to each Holder who is named in the prospectus and who
is or will be the beneficial owner of five percent (5%) or more of any class of
the Company's voting securities as of the effective date of the registration
statement, drafts of the registration statement for its review and each such
Holder shall have the right to approve the portions of the registration
statement which relate, either directly or indirectly, to such Holder, prior to
filing, provided that such approval is not to be unreasonably withheld;
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions; and
(e) Notify each Holder of Registrable Securities covered by such
registration statement, when a prospectus relating thereto is required to be
delivered under the Securities Act, at any time that the Company becomes aware
of the happening of any event as a result of which the prospectus included in
such registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to be stated therein
or necessary to
9
<PAGE>
make the statements therein not misleading in the light of the circumstances
then existing.
2.7 Delay of Registration. No Holder shall have any right to take any
---------------------
action to restrain, enjoin or otherwise delay any registration pursuant to
subsection 2.3 hereof as a result of any controversy that may arise with respect
to the interpretation or implementation of this Agreement.
2.8 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its
officers, directors, employees, partners, legal counsel and accountants, and
each person controlling such Holder within the meaning of Section 15 of the
Securities Act, with respect to which any registration, qualification or
compliance has been effected pursuant to this Agreement, and each underwriter,
if any, and each person who controls any underwriter within the meaning of
Section 15 of the Securities Act, against all expenses, claims, losses, damages
and liabilities (or action in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
other document, or any amendment or supplement thereof, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of any rule or regulation promulgated under the Securities Act, Exchange
Act or state securities laws applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each such Holder, each of its
officers, directors, employees, partners, legal counsel and accountants, and
each person controlling such Holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission made in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by or on behalf of such
Holder or underwriter and stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors, officers, employees, partners, legal counsel and accountants,
each underwriter, if any, of the Company's securities covered by such a
registration statement, each person who
10
<PAGE>
controls the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers, directors,
employees, partners, legal counsel and accountants, and each person controlling
such Holder within the meaning of Section 15 of the Securities Act, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement of a material fact contained in any such
registration statement, prospectus, offering circular or other document, or any
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Holders, such directors, officers, employees, partners, legal
counsel, accountants, persons, underwriters or control persons for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent that such untrue statement or omission is made in
such registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by or on behalf of such Holder and stated
to be specifically for use therein. Notwithstanding the foregoing, in no event
shall a Holder be liable for any such claims, losses, damages, or liabilities in
excess of the proceeds, net of underwriting discounts and commissions, received
by such Holder in the offering, except in the event of intentional fraud by such
Holder.
(c) Each party entitled to indemnification under this subsection
2.8 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, provided
that the failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this
Agreement, unless such failure is prejudicial to the Indemnifying Party in
defending such claim or litigation. The Indemnified party shall permit the
Indemnifying Party to assume the defense of any such claim or any litigation
resulting therefrom, provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be approved by the
Indemnified Party (whose approval shall not unreasonably be withheld), and the
Indemnified Party may participate in such defense at such party's expense
provided that if the named parties to a proceeding include both the Indemnified
Party and the Indemnifying Party and representation of both parties would be
inappropriate due to actual different interests between them, then the
Indemnified Party may retain its own counsel (who is reasonably satisfactory to
the Indemnifying Party) at the Indemnifying Party's expense, but, despite the
foregoing, an Indemnifying Party will have no obligation in any proceeding or
related proceedings to pay for more than one additional counsel for all
Indemnified Parties. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified
11
<PAGE>
Party of a release from all liability in respect to such claim or litigation.
Subject to the foregoing, the Indemnifying Party shall promptly advance all
expenses incurred by the Indemnified party in connection with the investigation
and defense of any claim as to which indemnity may be sought pursuant to this
Agreement after written request therefor (but no earlier than incurred) by the
Indemnified Party to the Indemnifying Party. The Indemnified Party shall repay
such amounts advanced if and to the extent that it is ultimately determined that
the Indemnified Party is not entitled to indemnification or contribution under
this Agreement.
(d) If the indemnification provided for in this subsection 2.8
is held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party thereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall be controlling.
2.9 Lockup Agreement. In consideration for the Company agreeing to
----------------
its obligations under this Section 2, each Holder of one percent (1%) or more of
the Company's voting securities agrees in connection with the initial
registration of the Company's securities, upon the request of the Company or the
Underwriter, not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any Registrable Securities (other than
those included in the registration) without the prior written consent of the
Company or Underwriter, as the case may be, for a period of 120 days after the
effective date of such registration; provided, however, that such Holder shall
have no obligation to enter into the agreement described herein unless all
executive officers, directors and other 1% shareholders of the Company enter
into similar agreements.
12
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2.10 Information by Holder. As a condition to the inclusion of their
---------------------
Registrable Securities, the Holder or Holders of Registrable Securities included
in any registration shall furnish to the Company such information regarding such
Holder or Holders and the distribution proposed by such Holder or Holders as the
Company may reasonably request in writing and as shall be required in connection
with any registration, qualification or compliance referred to in subsections
2.2, 2.3 or 2.4 of this Agreement.
2.11 Rule 144 Reporting. With a view to making available to the
------------------
Holders the benefits of certain rules and regulations of the Commission which at
any time permit the sale of the Registrable Securities to the public without
registration, the Company agrees to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
after the effective date of the first registration statement under the
Securities Act filed by the Company for an offering of its securities to the
general public;
(b) Use its best efforts to then file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements);
(c) So long as a Holder owns any unregistered Registrable
Securities, furnish to such Holder upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time after 90 days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
of the Company as such Holder may reasonably request in availing itself of any
rule or regulation of the Commission allowing a Purchaser to sell any such
securities without registration.
2.12 Transfer of Registration Rights. Subject to any limitations on
-------------------------------
transfer of stock set forth in any written agreement between any of the Holders
and the Company, the rights to cause the Company to register their Registrable
Securities granted to the Holders by the Company under subsections 2.2, 2.3 and
2.4 may be assigned by a Holder (i) to an affiliate of the Holder (including any
Partner of a Holder) or (ii) to a transferee or assignee of at least 50,000
shares, as adjusted for any stock split, stock dividend or other
recapitalization, of the Holder's Registrable Securities; provided, that the
Company is given written notice by the Holder at the time of or within a
reasonable time after said transfer, stating the name and address
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of said transferee or assignee and identifying the securities with respect to
which such registration rights are being assigned.
2.13 Termination of Registration Rights. The obligations of the
----------------------------------
Company pursuant to this Section 2 shall terminate ten years after the effective
date of the Company's first registered offering to the general public of its
securities.
2.14 Limitations on Subsequent Registration Rights. The Company may
---------------------------------------------
extend registration rights under this Agreement to future issuees of Equity
Securities (as hereinafter defined) which are exempt from the right of first
refusal set forth in Section 3 below by virtue of subsections 3.5(b) or (c)
below. The issuees of such Equity Securities may become parties to this
Agreement by execution of this Agreement or an addendum to this Agreement, as
required by the Company, without the consent of the Holders. Other than such
grants of registration rights, from and after the date of this Agreement, the
Company shall not, without the prior written consent of the Holders of a
majority of the outstanding Registrable Securities, enter into any agreement
with any holder or prospective holder of any securities of the Company which
would allow such holder or prospective holder (a) to include such securities in
any registration filed under Section 2.2 or 2.3 hereof, unless under the terms
of such agreement, such holder or prospective holder may include such securities
in any such registration only to the extent that the inclusion of his securities
will not reduce the amount of the Registrable Securities of the Holders which is
included or (b) to make a demand registration which could result in such
registration statement being declared effective prior to the date set forth in
subsection 2.2(a)(ii)(A). The Holders understand that the Company may grant
"piggyback" registration rights to officers, directors, employees and
consultants who purchase at least 100,000 shares of the Company's stock. Such
rights shall be subordinate to the rights granted herein and shall not result in
a reduction of the amount of Registrable Securities of the Holders that may be
included in a registration under this Agreement.
2.15 Amendment. Any modification, amendment, or waiver of this
---------
Section 2 or any provision hereof shall be in writing and executed by Holders
(as defined in subsection 2.1 hereof) of not less than a majority of the
Registrable Securities; provided, however, that no such modification, amendment
or waiver shall reduce the aforesaid percentage of Registrable Securities
without the consent of all of the Holders of the Registrable Securities.
3. Right of First Refusal.
----------------------
3.1 Subsequent Issuances, Right to Purchase. If, at any time prior to
---------------------------------------
the expiration of the period set forth in Section 3.7 below, the Company should
desire to issue any Equity Securities (as hereinafter defined), it shall give
each Purchaser, Prior Holder, Common Shareholder and Additional Shareholder (as
14
<PAGE>
defined below), who then owns at least 250,000 shares of the Company's common
stock (including all securities issued or issuable upon conversion of the
Preferred Shares or exchange of the Preferred Shares and as adjusted for stock
dividends, stock splits, recapitalizations and the like), the first right to
purchase the Purchaser's or such Prior Holder's, Common Shareholder's and
Additional Shareholder's pro rata share (or any part thereof) of all of such
Equity Securities on the same terms as the Company is willing to sell such
Equity Securities to any other person. Each of the Purchaser's or each Prior
Holder's, Common Shareholder's and Additional Shareholder's pro rata share of
the Equity Securities shall be equal to that percentage determined by dividing
(i) all shares of common stock of the Company owned by the Purchaser or such
Prior Holder, Common Shareholder and Additional Shareholder on the date of the
Company's written notification referred to in Section 3.2 below (including all
securities issued or issuable upon conversion of any shares of preferred stock
of the Company held by such person or issuable to such person upon exercise of
warrants held by such person and as adjusted for stock splits, stock dividends,
recapitalization and the like) by (ii) the "Fully Diluted" common stock of the
Company. For purposes of the prior sentence, the Fully Diluted common stock of
the Company shall include all outstanding common stock of the Company as
adjusted for stock dividends, stock splits, recapitalizations and the like, and
shall include all shares of common stock of the Company ultimately issuable upon
exercise, exchange and conversion of all outstanding securities of the Company
directly or indirectly exercisable or exchangeable or convertible into shares of
the Company's common stock (including, without limitation, all outstanding
options, warrants and shares of preferred stock). For purposes of this Section
3, the term "Additional Shareholder" shall mean any shareholder who then owns at
least 250,000 shares of the Company's common stock (including all securities
issuable upon conversion of the Company's preferred stock and as adjusted for
stock dividends, stock splits, recapitalizations and the like) and to whom the
Company has granted the right of first refusal set forth in this Section 3.
3.2 Notice. Prior to any sale or issuance by the Company of any
------
Equity Securities, the Company shall notify each of the Purchaser and each Prior
Holder, Common Shareholder and Additional Shareholder who qualifies under
Section 3.1 above in writing, of its intention to sell and issue such
securities, setting forth the terms under which it proposes to make such sale,
including the number of shares and the price therefor. Within twenty (20) days
after delivery of such notice, each of the Purchasers and each Prior Holder,
Common Shareholder and Additional Shareholder shall notify the Company whether
he or it will purchase his or its pro rata share (or any part thereof) of the
Equity Securities so offered.
3.3 Company's Right to Sell. If, within twenty (20) days after
-----------------------
delivery of aforesaid notice, the Purchasers, Prior Holders, Common Shareholders
and Additional Shareholders do not notify the Company that they desire, or
notify the Company that they do not desire, to purchase all of their pro rata
portion of the
15
<PAGE>
Equity Securities described in such notice upon the terms and conditions set
forth in such notice, the Company may, during a period of sixty (60) days
following the end of such twenty (20) day period, sell and issue such securities
as to which the Purchasers, Prior Holders, Common Shareholders and Additional
Shareholders do not indicate a desire to purchase to another person upon the
same terms and conditions as those set forth in the notice to the Purchasers,
the Prior Holders, Common Shareholders and Additional Shareholders. In the event
the Company has not sold the Equity Securities within said sixty (60) day
period, the Company shall not thereafter issue or sell any Equity Securities
without first offering such securities to the Purchasers, Prior Holders, Common
Shareholders and Additional Shareholders who qualify under Section 3.1 above in
the manner provided above.
3.4 Payment. If a Purchaser, Prior Holder, Common Shareholder or
-------
Additional Shareholder gives the Company notice that he or it desires to
purchase any of the Equity Securities offered by the Company, payment for the
Equity Securities shall be by check or wire transfer against delivery of the
securities at the closing for the sale of such Equity Securities.
3.5 Exceptions. The right of first refusal contained in this Section
----------
3 shall not apply to (a) the issuance by the Company of Equity Securities to
directors, officers, employees or consultants of the Company pursuant to any
employee stock option or stock purchase plan or agreement approved by the
Company's Board of Directors or the Compensation Committee thereof, (b) the
issuance by the Company of up to 500,000 shares of an existing or newly created
series of Preferred Stock having a purchase price per share greater than or
equal to $1.25 (appropriately adjusted for stock splits, stock dividends,
recapitalizations and the like) (c) the issuance by the Company of Equity
Securities in a transaction not covered under clause (a) or (b) above pursuant
to equipment leasing arrangements or other arrangements to acquire equipment or
other capital assets for use in the Company's operations approved by the
Company's Board of Directors, (d) the issuance of Equity Securities or any
Common shares upon conversion of any Preferred Shares, (e) the issuance by the
Company of Equity Securities for any consideration other than cash, cancellation
of indebtedness or services, (f) the issuance of Equity Securities in a public
offering registered under the Securities Act or in connection with a merger or
acquisition, (g) Equity Securities issued in connection with any stock split,
stock dividend or recapitalization or (h) the issuance of any shares upon
exercise of any outstanding warrants of the Company listed in Section 3.4 of the
Series F Agreement.
3.6 Termination Upon Decrease in Shares Held. The right of first
----------------------------------------
refusal contained in this Section 3 shall terminate as to a Purchaser or a Prior
Holder, Common Shareholder or Additional Shareholder when he or it, together
with his or its affiliates, ceases to own at least 250,000 shares of common
stock (calculated as provided in the first sentence of Section 3.1).
16
<PAGE>
3.7 Termination Upon Public Offering. The right of first refusal
--------------------------------
contained in this Section 3 shall terminate upon the closing of the issuance of
Equity Securities with an aggregate offering price of at least Five Million
Dollars ($5,000,000) in an underwritten public offering registered under the
Securities Act.
3.8 Definition of Equity Securities. The term "Equity Securities"
-------------------------------
mean (i) common stock, preferred stock, rights, options or warrants to purchase
common stock or preferred stock; or (ii) any security convertible into or
exchangeable for common stock or preferred stock.
3.9 Waivers and Amendments. With the written consent of the Company,
----------------------
the record or beneficial holders of a majority of the outstanding Preferred
Shares held by persons having rights under this Section 3 and the record or
beneficial owners of at least a majority of the Company's stock then owned by
the Common Shareholders and Additional Shareholders having rights under this
Section 3 (including in both cases any Common Stock or any and all securities
obtained upon conversion of the Preferred Shares or exchange of the Preferred
Shares or Common Stock and as adjusted for stock dividends, stock splits,
recapitalizations and the like), any provision of this Section 3 may be waived
(either generally or in a particular instance, either retroactively or
prospectively and either for a specified period of time or indefinitely), or
amended. Any waiver or amendment to which such consents are obtained will be
binding upon all holders having rights under this Section 3. Upon the
effectuation of each such waiver or amendment, the Company shall promptly give
written notice thereof to the record holders of the Preferred Shares and the
Common Shareholders and Additional Shareholders who have not previously received
notice thereof or consented thereto in writing. In addition, each holder, as to
such holder only, may consent in writing to any such waiver or amendment, which
will be binding upon such holder. No amendment or waiver to this Section 3 will
be effective unless agreed to in writing by the party against whom enforcement
is sought or, in the case of any holder, by such holder or holders of more than
the minimum amounts of shares described above in this Section 3.9.
3.10 Aggregation of Stock. All Preferred Shares and Common shares
--------------------
held or by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Section 3.
4. Voting Agreement.
----------------
4.1 Agreement. The Common Shareholders, the Preferred Shareholders
---------
and the Purchasers will use their best efforts to cause the Company's Board of
Directors to consist of seven directors. Each of the Common Shareholders, the
Preferred Shareholders (other than MagneTek, Inc. ("MagneTek")) and the
Purchasers agrees to vote his or its shares of the Company's stock to elect six
persons to the Board of Directors, four of whom shall be nominated by the
Preferred
17
<PAGE>
Shareholders owning a majority of the outstanding Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock taken together (including Common Stock issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock), and two
of whom shall be nominated by Common Shareholders owning a majority of the
Company's stock held by the Common Shareholders. The seventh authorized director
will be (i) elected by the holders of the Company's Series D Preferred Stock
pursuant to the Company's Articles of Incorporation or (ii) nominated pursuant
to Section 4.2 (a) below if the conditions to the effectiveness of Section 4.2
(a) pertain.
4.2 Alternate Voting Agreements.
---------------------------
(a) In the event of a conversion of all of the Preferred Shares
to Common Stock of the Company other than in consequence of the closing of the
issuance of equity securities with an aggregate offering price of at least Five
Million Dollars ($5,000,000) in an underwritten public offering registered under
the Securities Act, then for so long as MagneTek is a Qualified Purchaser within
the meaning of Section 6.1 of the Series D Preferred Stock Purchase Agreement
dated February 19, 1993 ("the Series D Agreement") the second sentence of
Section 4.1 above shall be deemed amended to read in full as follows:
MagneTek and each of the other Preferred Shareholders, Common
Shareholders, and Purchasers agree to vote his or its shares of the Company's
stock to elect seven persons to the Board of Directors, five of whom shall be
nominated by the Preferred Shareholders and Purchasers owning a majority of the
outstanding Common Stock issued upon conversion of the Series A Preferred Stock,
the Series B Preferred Stock, the Series C Preferred Stock, the Series D
Preferred Stock, the Series E Preferred Stock, and the Series F Preferred Stock,
and two of whom shall be nominated by Common Shareholders owning a majority of
the Company's stock held by the Common Shareholders.
(b) In the event that neither the provisions of Section 4.1 nor
Section 4.2 (a) are in effect and the holders of the Series D Preferred Stock,
voting separately a series, are not entitled to elect at least one director of
the Company pursuant to the provisions of the Company's Articles of
Incorporation, as amended, then, for so long as MagneTek is a Qualified
Purchaser within the meaning of Section 6.1 of the Series D Agreement, neither
the Company with any of the other Preferred Shareholders or the Purchasers nor
any of the other Preferred Shareholders or Purchasers with any of the other
Preferred Shareholders will enter into an agreement respecting the voting of the
Preferred Shareholders' or Purchasers' shares of the Company's Stock with
respect to the size of the Company's Board of Directors or the election or
nomination of persons to serve on the Company's Board of Directors without the
prior written consent of MagneTek. Despite the provisions of Section 4.4
18
<PAGE>
below, the provisions of this Section 4.2 (b) cannot be waived, amended or
terminated without the prior written consent of MagneTek.
4.3 Termination of Agreement. The provisions of Sections 4.1 and 4.2
------------------------
(a) shall terminate upon termination of the right of first refusal pursuant to
Section 3.7.
4.4 Waivers and Amendments. With the written consent of the Company
----------------------
and the record or beneficial holders of a majority of the outstanding shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock,
and the record or beneficial owners of a majority of the Company's stock then
owned by the Common Shareholders (including in each case any Common Stock or any
and all securities obtained upon conversion of the Preferred Shares or exchange
of the Preferred Shares or Common Stock and as adjusted for stock dividends,
stock splits, recapitalization and the like), subject to the provisions of
Section 4.2 (b), any provision of this Section 4 may be waived (either generally
or in a particular instance, either retroactively or prospectively and either
for a specified period of time or indefinitely), or amended. Any waiver or
amendment to which such consents are obtained will be binding upon all holders
having rights under this Section 4. Upon the effectuation of each such waiver or
amendment, the Company shall promptly give written notice thereof to the record
holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock, and the Common Shareholders who have not previously received
notice thereof or consented thereto in writing. In addition, each holder, as to
such holder only, may consent in writing to any such waiver or amendment, which
will be binding upon such holder. No amendment or waiver to this Section 4 will
be effective unless agreed to in writing by the party against whom enforcement
is sought or, in the case of any holder, by such holder or, subject, in the case
of MagneTek, to Section 4.2(b) above, holders of more than the minimum amounts
of shares described above in this Section 4.4.
4.5 Common Shareholders. Notwithstanding any other provision of this
-------------------
Agreement, pursuant to Section 2.1.4 of an agreement dated as of April __, 1994
between Klas Eklund and the Company, Dr. Eklund will not be a "Common
Shareholder" for any purpose of Section 4 of this Agreement.
5. Governing Law. This Agreement shall be governed in all respects by the
-------------
laws of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within
California.
6. Successors and Assigns. Except as otherwise expressly provided herein,
----------------------
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
19
<PAGE>
7. Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement between the parties with regard to the subject
matter hereof and supersedes any and all prior agreements or understandings,
including, without limitation, the Prior Rights Agreement and any term sheets or
other summaries of proposed terms delivered to any party hereto.
8. Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be either mailed by air mail,
certified mail or registered mail, postage prepaid, or personally delivered by
courier, in each case addressed (a) if to a Purchaser, a Holder, Common
Shareholder, or Prior Holder, as the case may be, at such person's address set
forth in the records of the Company or at such other address as such person
shall have furnished to the Company in writing, or (b) if to the Company: Power
Integrations, Inc., 411 Clyde Avenue, Mountain View, California 94040,
Attention: President, or at such other address as the Company shall have
furnished to the parties in writing. If a Purchaser, a Holder, Common
Shareholder or Prior Holder has provided a facsimile transmission number to the
Company, the Company will also deliver any notice given to such person by
facsimile transmission to the facsimile transmission number provided by such
person.
9. Severability. If any provision of this Agreement, or the application
------------
thereof, is for any reason and to any extent determined by a court of competent
jurisdiction to be invalid or unenforceable, the remainder of this Agreement and
the application of such provision to other persons or circumstances will be
interpreted so as best to reasonably effect the intent of the parties hereto.
The parties agree to use their best efforts to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
which will achieve, to the extent greatest possible, the economic, business and
other purposes of the void or unenforceable provision.
10. Titles and Subtitles. The titles of the sections and subsections of
--------------------
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
11. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument. If any signatory executes a signature page to
this Agreement as a previous shareholder rather than as a new investor, or as a
new investor rather than as a previous shareholder, or in only one such
capacity when both are applicable, the signatory will be deemed for all purposes
to have executed and delivered a signature page to this Agreement in all
capacities applicable to such signatory.
20
<PAGE>
12. Effectiveness of Agreement. This Agreement, even if executed and
--------------------------
delivered by all of the parties hereto, shall be of no force and effect unless
the First Closing (as defined in the Series F Agreement) has occurred. No
person executing and delivering this Agreement as a Purchaser in connection with
any Closing (as defined in the Series F Agreement) shall have any rights
hereunder unless such person has purchased shares of the Company's Series F
Preferred Stock at such Closing.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed themselves or by their respective representatives thereunto duly
authorized as of the day and year first above written.
21
<PAGE>
AMENDMENT NUMBER 1 TO
FIFTH AMENDED AND RESTATED RIGHTS AGREEMENT
THIS AMENDMENT NUMBER 1 (the "Amendment") is dated as of August 22, 1995,
to the Fifth Amended and Restated Rights Agreement dated as of April 27, 1995
(the "Rights Agreement") by and among Power Integrations, Inc., a California
corporation (the "Company"), and the undersigned holders of Common Stock of the
Company (the "Common Shareholders"), the undersigned holders of Preferred Stock
of the Company (the "Preferred Shareholders") and the undersigned holders of
Series F Preferred Stock of the Company (the "Series F Holders"). Unless
specifically designated otherwise, capitalized terms used herein shall have the
same meanings given them in the Rights Agreement.
RECITALS
A. The Company, the Common Shareholders, the Preferred Shareholders and
the Series F Holders are parties to the Rights Agreement pursuant to which the
Company has granted the Common Shareholders, the Preferred Shareholders and the
Series F Holders certain registration rights and a right of first refusal, and
the Common Shareholders, the Preferred Shareholders and the Series F Holders
have agreed to vote their shares of the Company with respect to the authorized
directors of the Company and the election of certain designees to the Company's
Board of Directors.
B. The Company, the Common Shareholders, the Preferred Shareholders and
the Series F Holders wish to amend the Rights Agreement in order to provide that
the Common Shareholders, the Preferred Shareholders and the Series F Holders
will use their best efforts to cause the Company's Board of Directors to consist
of six (6) directors.
AGREEMENT
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto agree to amend certain
provisions of the Rights Agreement as set forth below:
1. Section 4.1 of the Rights Agreement shall be amended and restated
to read in full as follows:
"4.1 Agreement. The Common Shareholders, the Preferred Shareholders and the
---------
Series F Holders will use their best efforts to cause the Company's Board of
Directors to consist of six directors. Each of the Common Shareholders, the
Preferred Shareholders (other than MagneTek, Inc. ("MagneTek")) and the Series F
Holders agrees to vote his or its shares of the Company's stock to elect five
persons to the Board of Directors, three
1
<PAGE>
of whom shall be nominated by the Preferred Shareholders owning a majority of
the outstanding Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock taken
together (including Common Stock issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock), and two of whom shall be
nominated by Common Shareholders owning a majority of the Company's stock held
by the Common Shareholders. The sixth authorized director will be (i) elected by
the holders of the Company's Series D Preferred Stock pursuant to the Company's
Articles of Incorporation or (ii) nominated pursuant to Section 4.2 (a) below if
the conditions to the effectiveness of Section 4.2 (a) pertain."
2. This Amendment may be executed in multiple counterparts, each of
which when so executed shall be deemed an original, and all counterparts shall
constitute but one and the same instrument.
3. Except as amended hereby, the Rights Agreements remains in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
and year first above written.
POWER INTEGRATIONS, INC.
By:____________________________________
(Please print or type)
Title:_________________________________
(Please print or type)
Signature:_____________________________
2
<PAGE>
AMENDMENT NUMBER 2 TO
FIFTH AMENDED AND RESTATED RIGHTS AGREEMENT
THIS AMENDMENT NUMBER 2 (the "Amendment") is dated as of September 9, 1997,
to the Fifth Amended and Restated Rights Agreement dated as of April 27, 1995,
as amended by Amendment Number 1 to Fifth Amended and Restated Rights Agreement
dated August 22, 1995 (the "Rights Agreement"), by and among Power Integrations,
Inc., a California corporation (the "Company"), and the undersigned Holders.
Unless specifically designated otherwise, capitalized terms used herein shall
have the same meanings given them in the Rights Agreement.
RECITALS
A. The Company and the Holders are parties to the Rights Agreement
pursuant to which the Company has granted the Holders, among other things,
certain registration rights.
B. The Company is currently contemplating filing a registration statement
on Form S-1 in order to register shares of its Common Stock (the "Offering").
Hambrecht & Quist LLC, Montgomery Securities and Robertson, Stephens & Company
LLC have agreed to act as managing underwriters (the "Managing Underwriters") of
the Offering.
C. The Managing Underwriters have requested that each of the Company's
shareholders agrees not to sell or otherwise dispose of any stock, or rights to
acquire stock (other than those included in the Offering), within one hundred
eighty (180) days after the effective date of the Offering.
D. The Company and the Holders wish to amend the Rights Agreement in order
to provide that the Holders agree not to sell any of their Registrable
Securities (other than those included in the Offering) for a period of one
hundred eighty (180) days after the effective date of the Offering.
AGREEMENT
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto, pursuant to Section 2.15
of the Rights Agreement, agree to amend certain provisions of the Rights
Agreement as set forth below:
1. Section 2.9 of the Rights Agreement shall be amended and restated to
read in full as follows:
"2.9 Lockup Agreement. In consideration for the Company agreeing to its
----------------
obligations under this Section 2, each Holder agrees in connection with the
initial registration of the Company's securities, upon the request of the
Company or the Underwriter, not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any Registrable Securities
(other than those included in the registration) without the written consent of
the Company or
<PAGE>
Underwriter, as the case may be, for a period of 180 days after the effective
date of such registration."
2. This Amendment may be executed in multiple counterparts, each of which
when so executed shall be deemed an original, and all counterparts shall
constitute but one and the same instrument.
3. Except as amended hereby, the Rights Agreement remains in full force
and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day
and year first written above.
POWER INTEGRATIONS, INC.
By:
------------------------------
HOLDER:
By:
------------------------------
(Please print or type)
Title:
---------------------------
(Please print or type)
Signature:
-----------------------
-2-
<PAGE>
EXHIBIT 10.17
ADDENDUM TO SECURITY AND LOAN AGREEMENT
("SECURITY AND LOAN AGREEMENT") BETWEEN
POWER INTEGRATIONS, INC. AND IMPERIAL BANK
DATED AUGUST 12, 1997
This Addendum is made and entered into August 12, 1997, between Power
Integrations, Inc. ("Borrower") and Imperial Bank ("Bank"). This Addendum
amends and supplements the Security and Loan Agreement. In the event of any
inconsistency between the terms herein and the terms of the Security and Loan
Agreement, the terms herein shall in all cases govern and control. All
capitalized terms herein, unless otherwise defined herein, shall have the
meaning set forth in the Security and Loan Agreement.
1. Any commitment of Bank, pursuant to the terms of the Security and Loan
Agreement, to make advances against Eligible Accounts and Inventory shall expire
on August 11, 1998, subject to Bank's right to renew said commitment in its sole
discretion. Any such renewal of the commitment shall not be binding upon Bank
unless it is in writing and signed by an officer of the Bank. All amounts
outstanding under the Security and Loan Agreement shall be due and payable in
full on the earlier of (i) the occurrence of a default under the Security and
Loan Agreement or this Addendum, or (ii) August 11, 1998.
2. Subject to the availability of the Borrowing Base and in reliance of the
representations and warranties of Borrower set forth herein, at any time and
from time to time from the date hereof through the business day immediately
prior to the expiration date in Section 1 above, Bank shall issue for the
account of Borrower such standby and commercial letters of credit ("Letters of
Credit") as Borrower may request, which request shall be made by delivering to
Bank a duly executed letter of credit application on Bank's standard form;
provided, however, that the outstanding and undrawn amounts under all such
Letters of Credit (i) shall not at any time exceed $8,000,000.00 and (ii) shall
be deemed to constituted outstanding for the purpose of calculating availability
under the Borrower Base. Unless Borrower shall have deposited with Bank cash
collateral in an amount sufficient to cover all undrawn amounts under each such
Letter of Credit and Bank shall have agreed in writing, no Letter of Credit
shall have an expiration date that is later than the expiration date in Section
1 above. All Letter of Credit shall be in form and substance acceptable to Bank
in its sole discretion and shall be subject to the terms and conditions of
Bank's form application and letter of credit agreement. Borrower will pay any
standard issuance and other fees that Bank notifies Borrower will be charged for
issuing and processing Letters of Credit for Borrower.
3. Subject to the availability of the Borrowing Base and in reliance on the
representations and warranties of Borrower set forth herein, at any time and
from time to time from the date hereof through the business day immediately
prior to the expiration date in Section 1 above, Bank shall arrange the purchase
by Borrower of foreign exchange futures contracts ("Exchange Contracts") as
Borrower may request, which request shall be made by delivering to Bank a duly
executed exchange contract application on Bank's standard form; provided,
however, that the maximum aggregate notional contract amount under all such
Exchange Contracts shall not at any time exceed $3,000,000.00 provided, further,
that 10% of the maximum aggregate notional contract amount under all such
Exchange Contracts shall be deemed to constituted outstanding for the purpose of
calculating availability under the Borrowing base. Unless Borrower shall have
deposited with Bank cash collateral in an amount sufficient to cover all undrawn
amounts under each such Exchange Contract and Bank shall have agreed in writing,
no Exchange Contract shall have a due date that is later than the expiration
date in Section 1 above. All Exchange Contacts shall be in form and substance
acceptable to Bank in its sole discretion and shall be subject to the terms and
conditions of Bank's form exchange contract application. Borrower will pay any
standard issuance and other fees that Bank notifies Borrower will be charges for
issuing and processing Exchange
1 of 7
<PAGE>
Addendum to Security and Loan Agreement
Dated August 12, 1997
Contract for Borrower. After and during the continuance of a default, Bank may,
in its sole and absolute discretion, terminate any or all of the Exchange
Contracts. Borrower agrees to indemnify and hold harmless Bank from and against
all loss, costs and expense associated with any such termination of any Exchange
Contract.
4. At no time will the sum of (i) all Letter of Credit outstanding, plus (ii)
10% of the maximum aggregate notional contract amount under all such Exchange
Contracts, plus (iii) direct borrowings, and plus (iv) the net amount due Bank
from any participation in equipment leases between Lighthouse Capital and
Borrower, exceed the aggregate sum of $8,000,000.00.
5. In addition to the provisions in the Security and Loan Agreement, Eligible
Accounts shall only include such accounts as Bank in its sole discretion shall
from time to time determine are eligible. Eligible Accounts shall also not
include any of the following:
a. Accounts with respect to which the account debtor is an officer,
director, shareholder, employee, subsidiary or affiliate of Borrower;
b. Accounts due from a customer if more than twenty-five percent (25%) or
more of the aggregate amount of accounts of such customer have at that time
remained unpaid for more than ninety (90) days from the invoice date (CROSS
AGE);
c. Accounts representing billings for service or maintenance contracts or
for inventory or equipment on rent to the account debtor;
d. Salesman's accounts for promotional purposes;
e. The amount by which any one account exceeds twenty-five percent (25%)
of the total accounts receivable balance (CONCENTRATION);
f. Accounts where the account debtor is a seller to borrower, to the
extent that a potential offset exists (CONTRA);
g. Accounts where the account debtor is a governmental entity, agency or
instrumentality thereof.
6. Pursuant to the provisions in the Security and Loan Agreement and this
Addendum, Bank will advance up to forty percent (40%) of Eligible Inventory at
the request of Borrower made from time to time, up to a maximum amount
outstanding not to exceed the lesser of $4,000,000 or 50% of the Borrowing Base.
(Inventory Sublimit) Eligible Inventory is defined as completed silicon wafers
received from the fabrication plant, or packaged dies received from a third
party packaging company located at Borrower's chief executive office, less
reserves.
7. Borrower represents and warrants that:
a. There is no litigation or other proceeding pending or threatened
against or affecting Borrower, and Borrower is not in default with respect to
any order, writ, injunction, decree or demand of any court or other governmental
or regulatory authority;
b. The balance sheet of Borrower dated as of June 30, 1997, and the
related profit and loss statement for the quarter then ended, a copy of which
has heretofore been delivered to Bank by Borrower, and all other statements and
data submitted in writing by Borrower to Bank in connection with its request for
credit are true and
2 of 7
<PAGE>
Addendum to Security and Loan Agreement
Dated August 12, 1997
correct, and said balance sheet and profit and loss statement truly present the
financial condition of Borrower as of the date thereof and the results of the
operations of Borrower for the period covered thereby, and have been prepared in
accordance with generally accepted accounting principles on a basis consistently
maintained. Since such date, there have been no material adverse changes.
Borrower has no knowledge of any liabilities, contingent or otherwise, at such
date not reflected in said balance sheet, and Borrower has not entered into any
special commitments or substantial contracts which are not reflected in said
balance sheet, other than in the ordinary and normal course of its business,
which may have a materially adverse effect upon its financial condition,
operations or business as now conducted;
c. Borrower has no liability for any delinquent state, local or federal
taxes, and, if Borrower has contracted with any government agency, Borrower has
no liability for renegotiation of profits;
d. Borrower, as of the date hereof, possesses all necessary trademarks,
trade names, copyrights, patents, patent rights, and licenses to conduct its
business as now operated, without any known conflict with valid trademarks,
trade names, copyrights, patents and license rights of others.
8. Borrower agrees that so long as it is indebted to Bank, it will not,
without prior written consent of Bank:
a. Make any substantial change in the character of its business;
b. Create, incur, assume or permit to exist any indebtedness for borrowed
monies other than loans from Bank except for indebtedness (i) fully subordinated
in form and substance satisfactory to Bank to debt due Bank, (ii) equipment
leases, and (iii) obligations now existing as shown in financial statement dated
June 30, 1997, excluding those being refinanced by Bank; or sell or transfer,
either with or without recourse, any accounts or notes receivable or any monies
due or to become due;
c. Create, incur, or assume any mortgage, pledge, encumbrance, lien or
charge of any kind (including the charge upon property at any time purchased or
acquired under conditional sale or other title retention agreement) upon any
asset now owned or hereafter acquired by it, other than liens (i) for taxes not
delinquent, (ii) in Bank's favor, and (iii) for equipment leased from parties
other than Bank;
d. Make any loans or advances to any person or other entity other than in
the ordinary and normal course of its business as now conducted or make any
investment in the securities of any person or other entity other than
investments in accordance with the current investment policy of the Borrower as
disclosed to the Bank on Schedule A, with such changes thereto requested by the
Borrower as may be acceptable to the Bank; or guarantee or otherwise become
liable upon the obligation of any person or other entity, except by endorsement
of negotiable instruments for deposit or collection in the ordinary and normal
course of its business;
e. Purchase or otherwise acquire the assets or business of any person or
other entity; or liquidate, dissolve, merge or consolidate, or commence any
proceedings therefore; or except in the ordinary and normal course of its
business, sell (including without limitation the selling of any property or
other asset accompanied by the leasing back of the same) any assets including
any fixed assets, any property, or other assets necessary for the continuance of
its business as now conducted;
f. Declare or pay any dividend or make any other distribution on any of
its capital stock now outstanding or hereafter issued or purchase, redeem or
retire any of such stock.
3 of 7
<PAGE>
Addendum to Security and Loan Agreement
Dated August 12, 1997
9. All financial covenants and financial information referenced herein shall
be interpreted and prepared in accordance with generally accepted accounting
principles applied on a basis consistent with previous years. Compliance with
financial covenants shall be calculated and monitored on a monthly basis except
were noted otherwise.
10. Borrower affirmatively covenants that so long as any loans, obligations or
liabilities remain outstanding or unpaid to Bank, it will:
a. At all times maintain a quick ratio (meaning all cash plus accounts
receivable divided by current liabilities less deferred revenue) of at least one
to one (1.00:1.00);
b. At all times maintain a maximum ratio of total liabilities (meaning all
liabilities, excluding deferred revenue and long term indebtedness fully
subordinated to debt due Bank) to tangible net worth (meaning all assets
excluding any value for goodwill, trademarks, patents, copyrights, organization
expense and other similar intangible items, less total liabilities, plus long
term indebtedness fully subordinated to debt due Bank) not to exceed one to one
(1.00:1:00);
c. Measured on a quarterly basis on the last day of each fiscal quarter
maintain after tax profitability;
d. As soon as it is available, but not later than 15 days after and as of
the end of each month, deliver to Bank: (i) a listing of aged accounts
receivable and accounts payable from invoice date; (ii) inventory summary; and
(iii) Borrowing Base Certificate certified by an officer of Borrower; in form
satisfactory to Bank;
e. As soon as it is available, but not later than 30 days after and as of
the end of each month, deliver to Bank: (i) financial statement consisting of a
balance sheet, profit and loss statement and cash flow statement, and (ii)
Compliance Certificate certified by an officer of Borrower; in form satisfactory
to Bank;
f. As soon as it is available, but not later than 90 days after the end of
Borrower's fiscal year, deliver to Bank a report of audit of Borrower's
financial statements together with changes in financial position certified
without negative qualification by an independent certified public accountant
selected by Borrower but acceptable to Bank;
g. Upon Bank's reasonable Borrower shall deliver to Bank, budgets, sales
projections, operating plans, or other financial exhibits;
h. Upon Bank's reasonable request, and not less frequently than semi-
annually per calendar year, Borrower shall deliver to Bank executed originals of
Bank's standard form Patent Security Agreement and Trademark Security Agreement,
each with appropriate insertions and schedules sufficient for perfecting Bank's
security interest in all patents, patent licenses, trademarks and trademark
licenses to which Borrower then has any right, title or interest;
i. Permit representatives of Bank to conduct an audit of Borrower's books
and records relating to the Collateral and make extracts therefrom with
results satisfactory to Bank, provided that Bank shall use its best efforts to
not interfere with the conduct of Borrower's business, and to the extent
possible, to arrange for verification of all Accounts directly with the
persons obligated thereon or otherwise, all under reasonable procedures
acceptable to Bank and at Borrower's sole expense; provided further that,
prior to an Event of Default, Borrower shall not be responsible for the
expense of more than one audit in any fiscal year;
4 of 7
<PAGE>
Addendum to Security and Loan Agreement
Dated August 12, 1997
j. Maintain and preserve all rights, franchises and other authority
adequate for the conduct of its business; maintain its properties, equipment and
facilities in good order and repair; conduct its business or partnership,
maintain and preserve its existence;
k. Maintain public liability, property damage and workers compensation
insurance and insurance on all its insurable property against fire and other
hazards with responsible insurance carriers to the extent usually maintained by
similar businesses. Borrower shall provide evidence of property insurance in
amounts and types acceptable to Bank, and certificates naming Bank Loss Payee;
l. Pay and discharge, before the same become delinquent and before
penalties accrue thereon, all taxes, assessments and governmental charges upon
or against it or any of its properties, and any of its other liabilities at any
time existing, except to the extent and so long as:
(i) The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse
affect upon its financial condition or the loss of any right of
redemption from any sale thereunder; and
(ii) It shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting practice) deemed by
it adequate with respect thereto.
m. Maintain a standard and modern system of accounting in accordance with
generally accepted accounting principles on a basis consistently maintained;
permit Bank's representatives to have access to, and to examine its properties,
books and records at all reasonable times.
11. In addition to any other amounts due, or to become due, Borrower agrees to
pay a loan fee in the amount of five thousand dollars ($5,000.00) to Bank upon
signing of this Agreement, together with a documentation preparation.
12. Borrower will maintain substantially all its banking relationship with
Bank.
13. All obligations of Borrower shall be Secured by a perfected first priority
security interest in all corporate assets, excluding leased equipment. Specific
filing in first position on Borrower's intellectual property (excluding
MagneTek's rights to Borrower's technology for use inside the field pertaining
to lights, which the Bank has a specific filing in second position) with the
U.S. Patent & Trademark Office and the U.S. Copyright Office. Borrower agrees
to execute and deliver a mortgage for Borrower's intellectual property and
amendments appropriate and acceptable to Bank to perfect and maintain Bank's
security interest in all such intellectual property proceeds thereof.
14. If any interest payment, principal payment or principal balance payment due
from Borrower is delinquent ten (10) or more days, Borrower agrees to pay Bank a
late charge in the amount of 5% of the payment so due and unpaid, in addition to
the payment; but nothing in this provision is to be construed as any obligation
on the part of Bank to accept payment of any payment past due or less than the
total unpaid principal balance after maturity. All payments shall be applied
first to any late charges owing, then to interest and the remainder, if any, to
principal.
15. Should there be a default under the Security and Loan Agreement, the
General Security Agreement, or under any note executed by Borrower, all
obligations, loans and liabilities of Borrower to Bank, due or to become
5 of 7
<PAGE>
Addendum to Security and Loan Agreement
Dated August 12, 1997
due, whether now existing or hereafter arising, shall, at the option of Bank,
become immediately due and payable without notice or demand, and Bank shall
thereupon have the right to exercise all of its default rights and remedies.
The default rate of interest shall be five percent per year in excess of the
rate otherwise charged.
16. Notice of Default. Borrower shall promptly notify Bank in writing of the
occurrence of any event of default hereunder or any event which upon notice and
lapse of time would be an event of default.
17. Miscellaneous Provisions. Failure or Indulgence Not Waiver. No failure or
delay on the part of Bank or any holder of Notes issued hereunder, in the
exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof. All rights and
remedies existing under this agreement or any not issued in connection with a
loan that Bank may make hereunder, are cumulative to, and not exclusive of, any
rights or remedies otherwise available.
18. Reference Provision.
a. Other than (i) non-judicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property; or (ii) the
appointment of a receiver, or the exercise of other provisional remedies (any
and all of which may be initiated pursuant to applicable law), each controversy,
dispute or claim between the parties arising out of or relating to this Note
("Agreement"), which controversy, dispute or claim is not settled in writing
within thirty (30) days after the "Claim Date" (defined as the date on which a
party subject to the Agreement gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 et seq. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court in the
County where the real property securing this Agreement, if any, is located or
Los Angeles County if none (the "Court"). The referee shall be a retired Judge
of the Court selected by mutual agreement of the parties, and if they cannot so
agree within forty-five (45) days after the Claim Date, the referee shall be
promptly selected by the Presiding Judge of the Court (or his representative).
The referee shall be appointed to sit as a temporary judge, with all of the
powers of a temporary judge, as authorized by law, and upon selection should
take and subscribe to the oath of office as provided for in Rule 244 of the
California Rules of Court (or any subsequently enacted Rule). Each party shall
have one peremptory challenge pursuant to CCP (S)170.6. The referee shall (a)
be requested to set the matter for hearing within sixty (60) days after the
Claim Date and (b) try any and all issues of law or fact and report a statement
of decision upon them, if possible, within ninety (90) days of the Claim Date.
Any decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP (S)644 in any court in the State of
California having jurisdiction. Any party may apply for a reference proceeding
at any time after thirty (30) days following notice to any other party of the
nature of the controversy, dispute or claim, by filing a petition for a hearing
and/or trial. All discovery permitted by this Agreement shall be completed no
later than fifteen (15) days before the first hearing date established by the
referee. The referee may extend such period in the event of a party's refusal to
provide requested discovery for any reason whatsoever, including, without
limitation, legal objections raised to such discovery or unavailability of a
witness due to absence or illness. No party shall be entitled to "priority" in
conducting discovery. Depositions may be taken by either party upon seven (7)
days written notice, and request for production or inspection of documents shall
be responded to within ten (10) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall
6 of 7
<PAGE>
Addendum to Security and Loan Agreement
Dated August 12, 1997
be final and binding upon the parties. Pending appointment of the referee as
provided herein, the Superior Court is empowered to issue temporary and/or
provisional remedies, as appropriate.
b. Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter, except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
c. The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of California. The
rules of evidence applicable to proceedings at law in the State of California
will be applicable to the reference proceeding. The referee shall be empowered
to enter equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding upon the
parties. The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of law, a written statement of decision, and
the right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
d. In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, (S)1280 through (S)1294.2 of the CCP as
amended from time to time. The limitations with respect to discovery as set
forth herein above shall apply to any such arbitration proceeding.
This Addendum is executed by and on behalf of the parties as of the date first
above written.
Power Integrations, Inc. Imperial Bank
By: By:
-------------------------- --------------------------
Robert G. Staples Kenneth W. Le Deit
Its: Vice President Finance & Administration Its: Assistant Vice President
7 of 7
<PAGE>
Assignment and Assumption Agreement
Between
Power Integrations, Inc., a California corporation
and
Power Integrations, Inc., a Delaware corporation
and
Imperial Bank
and
Imperial Bancorp
This Assignment and Assumption Agreement dated as of September 23, 1997
("Assumption Agreement") by and between Power Integrations, Inc., a California
corporation ("California"), Power Integrations, Inc., a Delaware corporation
("Delaware"), Imperial Bank ("Bank"), and Imperial Bancorp ("Bancorp").
RECITALS
--------
A. The Bank has made certain credit facilities available to California.
B. California has requested that the Bank consent to the merger of
California into Delaware.
C. The Bank has agreed to consent to the above merger of California into
Delaware, but only on the terms of this Agreement.
Now, therefore the parties hereby agree as follows:
1. California hereby assigns and Delaware hereby assumes all the obligations
of California pursuant to that Loan and Security Agreement with Addendum, dated
August 12, 1997 (the "Credit Agreement"), executed by California in favor of the
Bank; the General Security Agreement (Tangible and Intangible Property), dated
February 15, 1995 (the "Security Agreement"), executed by California in favor of
Bank; the Patent Security Agreement dated February 15, 1995 ("Patent Agreement")
executed by California in favor of Bank; the Trademark Security Agreement dated
February 15, 1995 ("Trademark Agreement") executed by California in favor of
Bank; the Warrant To Purchase Stock dated February 27, 1995, Warrant To Purchase
Stock dated August 7, 1995, Common Stock Purchase Warrant dated November 17,
1995, Warrant To Purchase Stock dated April 15, 1996 ("Warrant Agreements")
executed by California in favor of Bancorp; and all other documents executed by
California in favor of the Bank or Bancorp (the Credit Agreement, the Security
Agreement, the Patent Agreement, Trademark Agreement, the Warrant Agreements,
and related documents thereto executed by California in favor of Bank or Bancorp
hereby collectively referred to as the "Loan Documents")
2. Wherever the name Power Integrations, Inc. appears in any Loan Documents it
shall mean Delaware.
3. Wherever the term Obligor, Borrower, the undersigned or other terms which
refer to California appear in the Loan Documents it shall mean Delaware.
4. The bank hereby consents to the merger of California into Delaware,
provided all the terms of this Agreement are complied with.
Page 1 of 3
<PAGE>
5. The Bank's consent hereunder shall only be effective upon the occurrence of
all of the following, all in form and substance satisfactory to the Bank:
A. The receipt by the Bank of this Agreement executed by California and
Delaware.
B. If requested by Bank, UCC-1 Statements shall have been filed with the
California Secretary of State showing Delaware as the Debtor and the Bank as the
secured Party, and the Bank shall have received a return from the Secretary of
State of California showing the Bank as the only secured creditor of Delaware.
C. The receipt by the Bank, of Certificate of Incorporation of Delaware,
Good Standing Certificates of Delaware from the Secretary of State of Delaware
and Secretary of State of California.
D. The receipt by the Bank of a Corporate Resolution of Delaware,
authorizing Delaware to assume the obligations of California under the Loan
Documents.
E. If requested by Bank, Proof that Delaware has obtained the insurance
required by the Loan Documents and named the Bank as loss payee on such
insurance.
6. California and Delaware agree to provide Bank such other documentation as
the Bank may reasonable required to further the intent of this Agreement.
7. California and Delaware hereby acknowledge that the Warrants are held in
the name of Imperial Bancorp or registered assignees, and agree to do any and
all acts requested by Bank to transfer the Warrants to such holder.
8. Except as provided above, the Loan Documents remain unchanged and the
parties hereby confirm that the Loan Documents as may be modified by this
Agreement are in full force and effect.
Power Integrations, Inc. a Delaware corporation ("Delaware")
By: By:
---------------------------- ------------------------------
Title: Title:
------------------------ ---------------------------
Power Integrations, Inc. a California corporation ("California")
By: By:
---------------------------- ------------------------------
Title: Title:
------------------------ ---------------------------
(Signatures continued on next page)
Imperial Bank ("Bank") Imperial Bancorp ("Bancorp")
Page 2 of 3
<PAGE>
By: By:
---------------------------- ------------------------------
Title: Title:
------------------------ ---------------------------
Page 3 of 3
<PAGE>
September 10, 1997
Power Integrations, Inc.
477 North Mathilda Avenue
Sunnyvale, CA 94086
Attn: Howard Earhart, President and Chief Executive Officer
Robert G. Staples, Vice President of Finance & Administration
Re: Bank's Consent
Gentlemen:
Power Integrations, Inc. ("Borrower") a California corporation has requested
Imperial Bank's ("Bank") consent, pursuant to that Security and Loan Agreement
dated August 12, 1997 between Borrower and Bank, with the attached Addendum
dated the same date, (the Security and Loan Agreement and the Addendum herein
collectively referred to as "Agreement") to the following: (i) selling its stock
through a public offering registered though the Securities Act of 1933
("Offering"), and (ii) to merge into Power Integrations, Inc. a Delaware
corporation ("Delaware").
Bank hereby consents to the Offering. Bank also hereby consents to the merger
of Borrower into Delaware on the condition that Borrower and Delaware execute
the attached Assignment and Assumption Agreement. In consideration of Bank
providing the above consent regarding the merger, Borrower hereby agrees that
they will, and will cause Delaware to, execute the attached Assignment and
Assumption prior to the merger of Borrower into Delaware. A failure of Borrower
or Delaware to execute the attached Assignment and Assumption Agreement will
cause the consent contained herein relating to the merger to be null and void.
Except as stated above, the Agreement shall remain unaltered and in full force
and effect. The above consent is specific as to content and time. This letter
is not a consent, amendment or waiver of any other term of the Agreement.
Please sign below to show your agreement with the foregoing and return the
original.
Sincerely,
Kenneth W. Le Deit
Assistant Vice President
Emerging Growth Industries
Agreed to and accepted:
Power Integrations, Inc.
_______________________________
Signature
_______________________________
Title
<PAGE>
EXHIBIT 11.1
POWER INTEGRATIONS, INC.
STATEMENTS OF COMPUTATION OF PRO FORMA COMMON
SHARES AND EQUIVALENTS
(in thousands, except for per share amounts)
Nine Months Ended
September 30,
Year Ended -----------------------
December 31, 1996 1996 1997
----------------- -------- --------
PRIMARY
Net income (loss) $(1,341) $ (1,287) $ 2,370
======= ======== =======
Weighted average common shares
outstanding 853 847 874
Weighted average common equivalent
shares:
Weighted average preferred stock
outstanding 7,395 7,377 7,447
Weighted average warrants
outstanding - - 474
Common stock option grants - - 341
Adjustments to reflect requirements
of the Securities and Exchange
Commission's Staff Accounting
Bulletin No. 83:
Common stock issuances 1,016 1,016 1,016
Common stock option grants 316 316 316
------- -------- -------
Pro forma total weighted average
common shares and equivalents 9,580 9,556 10,468
======= ======== =======
Pro forma net income (loss) per
share $ (0.14) $ (0.13) $ 0.23
======= ======== =======
FULLY DILUTED
Net income (loss) $(1,341) $ (1,287) $ 2,370
======= ======== =======
Weighted average common shares
outstanding 853 847 874
Weighted average common equivalent
shares:
Weighted average preferred stock
outstanding 7,395 7,377 7,447
Weighted average warrants
outstanding - - 474
Common stock option grants - - 341
Adjustments to reflect requirements
of the Securities and Exchange
Commission's Staff Accounting
Bulletin No. 83:
Common stock issuances 1,016 1,016 1,016
Common stock option grants 316 316 316
------- -------- -------
Pro forma total weighted average
common shares and equivalents 9,580 9,556 10,468
======= ======== =======
Pro forma net income (loss) per
share $ (0.14) $ (0.13) $ 0.23
======= ======== =======
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Power Integrations International Holdings, Inc.
Power Integrations KK
Power Integrations (Europe) Limited
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
San Jose, California
October 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,813
<SECURITIES> 0
<RECEIVABLES> 7,906
<ALLOWANCES> 994
<INVENTORY> 4,600
<CURRENT-ASSETS> 22,170
<PP&E> 11,521
<DEPRECIATION> 6,341
<TOTAL-ASSETS> 27,350
<CURRENT-LIABILITIES> 11,094
<BONDS> 0
0
35,271
<COMMON> 2,113
<OTHER-SE> (25,288)
<TOTAL-LIABILITY-AND-EQUITY> 27,350
<SALES> 29,668
<TOTAL-REVENUES> 30,458
<CGS> 17,602
<TOTAL-COSTS> 27,166
<OTHER-EXPENSES> 148
<LOSS-PROVISION> 709
<INTEREST-EXPENSE> 626
<INCOME-PRETAX> 2,743
<INCOME-TAX> 373
<INCOME-CONTINUING> 2,370
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,370
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
