<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1997
REGISTRATION NO. 333-35421
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 5 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.
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<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 DECEMBER 12, 1997
PROSPECTUS
4,000,000 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 $8.00 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.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
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Total (3)................ $ $ $ $
</TABLE>
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(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
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES, INC.
, 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
POWER
INTEGRATIONS,
INC.
APPEARS HERE)
TOPSWITCH ICS ENABLE COST-EFFECTIVE INTEGRATION
OF AC-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 1970s, 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 $2.75 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>
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 10,475
</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 $22,149
Working capital....................................... 11,076 24,253
Total assets.......................................... 27,350 39,224
Long-term debt and capitalized lease obligations, net
of current portion................................... 4,160 2,713
Stockholders' equity.................................. 12,096 26,720
</TABLE>
- --------
(1) Excludes 733,665 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 474,212 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 $8.00 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 7,447,558 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 33% of the Company's revenues were attributable to use of the
Company's products in power supplies for cellular phone battery chargers and
approximately 19% 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 for 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 no customer is presently obligated either to purchase
a specified amount of products or to provide the Company with binding
forecasts of product purchases for any period. The 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 end markets, 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 a lengthy sales cycle, the
Company may experience a delay between increasing expenses for research and
development and its sales and marketing efforts and the generation of volume
production revenues, if any, from such expenditures. 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-THOMSON
Microelectronics N.V. ("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 28.8% 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 7,102,056 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. The remaining
364,980 shares will become freely tradeable at various times thereafter.
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 1,551,787 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
6,258,948 shares of the Company's Common Stock (including 474,212 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 $5.67 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 primary purposes of this offering are to create a public market for the
Company's Common Stock and to obtain additional capital. The Company
anticipates that approximately $2,750,000 of the net proceeds will be used to
pay down the Company's $3,000,000 subordinated debt to Hambrecht & Quist
Transition Capital, LLC, which bears interest at an annual rate of 12% and
matures on November 15, 1999. See "Underwriting." The Company intends to use
the remaining $11,874,000 of net proceeds for general corporate purposes,
including expansion of working capital, but has not allocated the remaining
proceeds to specific purposes. The Company may in the future use a portion of
the net proceeds to make acquisitions of other businesses, products or
technologies for the purpose of broadening the Company's current product
lines. The Company has no present plans, agreements or commitments and is not
currently engaged in any negotiations with respect to any such transactions.
Pending the foregoing uses, the Company expects to invest the remaining net
proceeds of this offering in short-term investment grade or U.S. Government
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 $8.00 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 1,697 250
------- ------- -------
Total Note payable to a Shareholder.............. 3,000 3,000 250
------- ------- -------
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, 1,919,478 shares issued and
outstanding as of September 30, 1997; 40,000,000
shares authorized, 9,367,036 shares outstanding
pro forma; 11,467,036 shares issued and
outstanding as adjusted (2)..................... 2,113 37,384 52,008
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 26,720
------- ------- -------
Total capitalization......................... $15,096 $15,096 $26,970
======= ======= =======
</TABLE>
- ------------
(1) See Note 4 of Notes to Consolidated Financial Statements.
(2) Excludes 733,665 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 474,212 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 7,447,558 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 $8.00 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 $26.7 million,
or $2.33 per share. This represents an immediate increase in such net tangible
book value of $1.04 per share to existing stockholders and an immediate
dilution of $5.67 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $8.00
Net tangible book value per share before the offering ........... $1.29
Increase per share attributable to new investors................. 1.04
-----
Pro forma net tangible book value per share after the offering..... 2.33
-----
Dilution per share to new investors................................ $5.67
=====
</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 68.9% $ 3.97
New investors (1)....... 2,100,000 18.3 16,800,000 31.1 8.00
---------- ----- ----------- -----
Total................. 11,467,036 100.0% $53,966,000 100.0%
========== ===== =========== =====
</TABLE>
As of September 30, 1997, there were outstanding stock options to purchase
an aggregate of 733,665 shares of Common Stock at a weighted average exercise
price of $1.50 per share and outstanding warrants to purchase 474,212 shares
of Common Stock at a weighted average exercise price of $3.65 per share. To
the extent outstanding options and warrants are exercised, there will be
further dilution to new investors. If all outstanding options and warrants are
exercised, the pro forma net tangible book value per share immediately after
completion of the offering would be $2.33. This represents an immediate
dilution in net tangible book value of $5.67 per share to purchasers of Common
Stock in the offering. 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
income (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 10,475
<CAPTION>
DECEMBER 31,
------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -------------------
(IN THOUSANDS)
<S> <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 down approximately
$2.75 million of 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 10,407 10,475
</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 $13.7 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 79% 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 21%
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
Set-top Decoders........... Amstrad, API, Grundig, Hughes, Nokia, Pace
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
Supply.................... Exide Electronics
</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 121 full time personnel,
consisting of 47 in manufacturing, 33 in research and development, 29 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 (1)(2) 55 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
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 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 (i)
the effective date of this offering (for persons serving on the Board of
Directors on the effective date of this offering) or (ii) 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 II 1,019,777 10.9 0 1,019,777 8.9
3000 Sand Hill Road
Bldg. 1, Suite 240
Menlo Park, CA 94025
Funds affiliated with
Kleiner Perkins Caufield
& Byers(14)............ 893,443 9.5 0 893,443 7.8
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,
Trustees(16)........... 537,115 5.7 268,558 268,558 2.0
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>
Funds Associated with
Atlas Venture Funds
(17)................... 339,582 3.6 33,957 305,625 2.7
Concord Partners II,
L.P. .................. 272,333 2.9 272,333 0 0
Euroventures Switzerland
II..................... 209,211 2.2 107,436 101,775 1.4
Klas H. Eklund.......... 117,251 1.3 12,000 105,251 *
Gilde Investment Fund
B.V. .................. 115,183 1.2 115,183 0 0
C.G. Grefenslette and
Thomas G. Bigley,
Trustees (18).......... 101,700 1.1 50,852 50,848 *
Venhill Limited
Partnership............ 88,452 * 44,224 44,228 *
Funds Associated with
Rainbow Trading
Ventures, Ltd. (19).... 73,189 * 36,594 36,595 *
Joan Fury............... 59,403 * 29,701 29,702 *
Richard and Sheryl
Keller................. 37,988 * 11,000 26,988 *
Stanford C. Finney,
Jr. ................... 31,378 * 15,689 15,689 *
Dillon, Read & Co. Inc.,
as agent............... 26,760 * 26,760 0 0
Benchmark Partners...... 26,122 * 26,122 0 0
The Middlebrook Family
Trust.................. 16,432 * 10,550 5,882 *
K R JAM Partners........ 15,689 * 7,844 7,845 *
Albert C. Hurwit,
M.D. .................. 12,551 * 10,982 1,569 *
B & M Partners.......... 10,472 * 10,472 0 0
Melvyn Bloch............ 10,472 * 10,472 0 0
Stuart M. Ackerman...... 10,433 * 10,433 0 0
Lorraine Di Paolo....... 10,433 * 10,433 0 0
Norman C. Fields........ 10,433 * 3,922 6,511 *
Jerry Logan............. 10,433 * 10,433 0 0
Stanley Marks........... 10,433 * 10,433 0 0
Vahe Sarkissian......... 8,441 * 1,688 6,753 *
Henry F. Bannister...... 5,255 * 1,313 3,942 *
Joan M. Carotenuto...... 5,255 * 5,255 0 0
Thomas Ferrara.......... 5,255 * 5,255 0 0
Robert and Nancy
Kauffman............... 5,255 * 2,666 2,589 *
Joseph Peters........... 5,255 * 5,255 0 0
George D. Pierce........ 5,255 * 5,255 0 0
John Schulz............. 5,255 * 5,255 0 0
Lexington Partners II,
L.P. .................. 4,980 * 4,980 0 0
Michael R. Bruce........ 4,157 * 4,157 0 0
James R. Gagnard........ 4,079 * 4,079 0 0
Crystal Partners III.... 3,376 * 3,376 0 0
Sanford M. Epstein...... 3,137 * 3,137 0 0
Sterling Hou............ 1,688 * 1,688 0 0
All Selling Stockholders
as a Group: 2,920,349 31.2 1,900,000 1,020,349 8.9
</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
48
<PAGE>
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.
(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 (see
footnote 18). 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. The HLH Trust is
selling 53,731 shares. HCC Investments, Inc. is selling 252,708 shares.
(17) Includes 113,194 shares held by Atlas Venture Beheer II, BV, and 226,388
shares held by Atlas Venture Fund, L.P. Atlas Venture Beheer II, BV is
selling 11,319 shares. Atlas Venture Fund, L.P. is selling 22,638 shares.
(18) Includes shares held in four separate trusts. 25,425 shares are held in
trust for the benefit of William Talbot Hillman, 25,425 shares are held
in trust for the benefit of Juliet Lea Hillman, 25,425 shares are held in
trust for the benefit of Audrey Hilliard Hillman, and 25,425 shares are
held in trust for the benefit of Henry Lea Hillman, Jr. Each trust is
selling 13,450 shares.
(19) Includes 41,811 shares held by Rainbow Trading Partners, Ltd. and 31,378
shares held by Rainbow Trading Venture Partners. Rainbow Trading
Partners, Ltd. is selling 20,905 shares. Rainbow Trading Venture Partners
is selling 15,689 shares.
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 6,258,948 shares of Common Stock (including 474,212 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 5,925,942 shares of Common Stock (including 297,742
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 176,470 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 and other contractual restrictions,
7,102,056 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, and the remaining
364,980 shares will become freely tradeable at various times thereafter. In
addition, outstanding options to purchase approximately 325,863 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 1,551,787 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
325,863 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, BancAmerica Robertson Stephens and NationsBanc Montgomery Securities,
Inc. (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............................................
BancAmerica Robertson Stephens...................................
NationsBanc Montgomery Securities, Inc. .........................
---------
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
preferred stock convertible into 135,962 shares of Common Stock at the
equivalent price of $5.92 per share; and (iii) purchased from the Company for
$12,000 a warrant to purchase 176,470 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 $2.75 million
of the net proceeds of this offering will be used to pay down 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, 875,822 shares in
1996 and 1,919,478 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 10,475
======== ======== =======
</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.... -- -- 17 100 -- -- -- -- -- 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 35,271 876 565 12 -- -- (13) (26,737) 9,098
Issuance of
Common Stock
under employee
stock option
plan........... -- -- 1,044 982 -- (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 been 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 on 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 as of September 30, 1997.
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 and
dilutive events. As of September 30, 1997, each share of Series A, B, C, D, E
and F preferred stock is convertible into common stock (after giving effect to
the reverse stock split discussed in Note 7 and the dilutive events that have
occurred) on a one for 6.68, 5.92, 5.92, 4.91, 6.37, 6.68 share basis,
respectively. 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 7,447,558 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 $4.55 per share were outstanding and a maximum of
368,122 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............. -- (1,043,662) .34-1.70 .94
Cancelled............. 32,791 (32,791) .51-1.70 1.31
-------- ---------- ---------- -----
Outstanding at September
30, 1997 .............. 368,122 733,665 $.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>
Options issued under the 1988 and 1997 Plans may be exercised at any time
prior to their expiration. In addition, the Company has the right, upon
termination of an optionholder's employment or service with the Company, at
its discretion, to repurchase any unvested shares issued under the 1988 and
1997 Plans at the original purchase price. Under the terms of the 1988 and
1997 Plans, an option holder may not sell shares obtained upon the exercise of
an option until the option has vested as to those shares. As of September 30,
1997, an aggregate of 503,361 shares of common stock issued under the 1988 and
1997 Plans 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 51,465 9.85 $6.86 -- --
------- ---- ----- ------- -----
$ .34 - $8.84 733,665 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.
Shareholder Notes Receivable
In July 1997, in connection with the purchase of Common Stock upon exercise
of stock options granted to certain officers and employees of the Company, the
Company loaned to these officers and employees an aggregate of $405,000, at an
interest rate of 6.65% pursuant to Promissory Note and Pledge Agreements (the
"Loans"). The Loans, which are secured by 238,231 shares of Common Stock, are
full recourse notes, and are due in full without regard to the value of the
Company's Common Stock in July 2002, or at the Company's option upon (i)
termination of employment with the Company, (ii) a default in the payment of
any installment or principal and/or interest when due, (iii) a sale of the
Pledged Stock (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.
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 shorter of the period in which the employee,
director or consultant provides services or 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. Compensation expense
is decreased in the period of forfeiture for any accrued, but unvested
compensation arising from the early termination of an option holder's
services. No compensation expense related to any other periods presented has
been recorded.
Warrants
In connection with an equipment lease agreement entered into during 1988
with a leasing company, the Company issued a warrant for the purchase of up to
22,058 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 16,883 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.
F-16
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 41,165 shares
of the Company's Common Stock at $6.34 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 23,149
shares of Common Stock at $6.34 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 176,470 shares of the
Company's Common Stock at $1.36 per share. The warrant is exercisable upon
issuance and expires May 22, 2002. Such warrants were deemed to have an
immaterial value at the issuance date, and accordingly, are carried at the
amount paid for the warrant in the accompanying consolidated financial
statements of $12,000.
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............. 7,447,558
Stock Option and Stock Purchase Plans.............................. 1,551,787
Warrants:
Convertible Series D, E and F Preferred Stock.................... 233,428
Common Stock..................................................... 240,784
---------
9,473,557
=========
</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>
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
IN A SINGLE INTEGRATED CIRCUIT.
THE COMPANY HAS BEEN ISSUED
22 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 , 1998 (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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,000,000 SHARES
[POWER INTEGRATIONS LOGO]
COMMON STOCK
------------
PROSPECTUS
------------
HAMBRECHT & QUIST
BANCAMERICA
ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES, INC.
, 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 41,165
shares of Common Stock at an exercise price of $6.34 per share.
(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 23,149 shares
of Common Stock at an exercise price of $6.34 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.
* 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. 5 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 11TH DAY OF DECEMBER 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. 5 HAS
BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED:
SIGNATURE TITLE DATE
/s/ Howard F. Earhart President, Chief
- ------------------------------------- Executive Officer December 11, 1997
HOWARD F. EARHART and Director
(Principal
Executive Officer)
/s/ Robert G. Staples Chief Financial
- ------------------------------------- Officer and Vice December 11, 1997
ROBERT G. STAPLES President--Finance
and Administration
(Principal
Financial &
Accounting Officer)
Edward C. Ross* Director
- ------------------------------------- December 11, 1997
DR. EDWARD C. ROSS
William Davidow* Director
- ------------------------------------- December 11, 1997
DR. WILLIAM DAVIDOW
E. Floyd Kvamme* Director
- ------------------------------------- December 11, 1997
E. FLOYD KVAMME
Steven J. Sharp* Director
- ------------------------------------- December 11, 1997
STEVEN J. SHARP
/s/ Howard F. Earhart
*By: ________________________________
HOWARD F. EARHART
(ATTORNEY-IN-FACT)
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.
* 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 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
December 11, 1997
