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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
____________________________
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1998
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
______________
Commission File Number 0-23441
______________________________
POWER INTEGRATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3065014
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
477 N. MATHILDA AVENUE, SUNNYVALE, CALIFORNIA 94086
(Address of principal executive offices) (Zip code)
(408) 523-9200
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of Exchange on which registered
------------------- ------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
_____________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [x] NO [_]
The aggregate market value of registrant's voting and non-voting common
equity held by nonaffiliates of registrant, based upon the closing sale price of
the common stock on April 30, 1998, as reported on the Nasdaq National Market,
was approximately $112,782,818. Shares of common stock held by each officer,
director and holder of 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
Outstanding shares of registrant's common stock, $.001 par value, as of April
30, 1998: 12,086,964
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1
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POWER INTEGRATIONS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes To Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1998 1997
------- -------
<S> <C> <C>
NET REVENUES:
Product sales......................................................................... $13,902 $ 6,831
License fees and royalties............................................................ 524 235
------- -------
Total net revenues................................................................. 14,426 7,066
------- -------
COST OF REVENUES........................................................................ 7,976 4,321
------- -------
GROSS PROFIT............................................................................ 6,450 2,745
------- -------
OPERATING EXPENSES:
Research and development.............................................................. 1,559 1,077
Sales and marketing................................................................... 1,889 1,105
General and administrative............................................................ 548 410
------- -------
Total operating expenses........................................................... 3,996 2,592
------- -------
INCOME FROM OPERATIONS.................................................................. 2,454 153
------- -------
OTHER INCOME (EXPENSE), net............................................................. 187 (214)
------- -------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES........................................................................... 2,641 (61)
PROVISION FOR INCOME TAXES.............................................................. 663 10
------- -------
NET INCOME (LOSS)....................................................................... $ 1,978 $ (71)
------- -------
EARNINGS (LOSS) PER SHARE:
Basic................................................................................. $ 0.16 $ (0.08)
------- -------
Diluted............................................................................... $ 0.15 $ (0.08)
------- -------
SHARES USED IN PER SHARE CALCULATION:
Basic................................................................................. 12,080 876
------- -------
Diluted............................................................................... 13,130 876
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 5,596 $ 25,553
Short-term investments......................................................... 23,416 3,455
Accounts receivable............................................................ 6,469 6,243
Inventories.................................................................... 8,646 7,328
Prepaid expenses and other current assets...................................... 486 349
-------- --------
Total current assets.................................................... 44,613 42,928
-------- --------
PROPERTY AND EQUIPMENT, net:...................................................... 6,332 5,631
$ 50,945 $ 48,559
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capitalized lease obligations............................... $ 1,858 $ 1,787
Accounts payable............................................................... 6,306 6,903
Accrued payroll and related expenses........................................... 1,458 1,685
Taxes payable and other accrued liabilities.................................... 1,733 1,042
Deferred income on sales to distributors....................................... 2,435 1,380
-------- --------
Total current liabilities............................................... 13,790 12,797
-------- --------
CAPITALIZED LEASE OBLIGATIONS, net of current portion............................. 1,859 2,435
-------- --------
STOCKHOLDERS' EQUITY:
Common stock................................................................... 12 12
Additional paid-in capital..................................................... 56,180 56,220
Common stock warrants.......................................................... 12 12
Stockholder notes receivable................................................... (405) (405)
Deferred compensation.......................................................... (426) (461)
Cumulative translation adjustment.............................................. (80) (76)
Accumulated deficit............................................................ (19,997) (21,975)
-------- --------
Total stockholders' equity.............................................. 35,296 33,327
-------- --------
$ 50,945 $ 48,559
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
4
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POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................. $ 1,978 $ (71)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization................................................... 701 504
Deferred compensation expense................................................... 35 --
Provision for accounts receivable and other allowances.......................... 119 (93)
Change in operating assets and liabilities:
Accounts receivable.......................................................... (345) 242
Inventories.................................................................. (1,318) 105
Prepaid expenses and other current assets.................................... (137) 35
Accounts payable............................................................. (597) 332
Accrued liabilities.......................................................... 459 (389)
Deferred income on sales to distributors..................................... 1,055 (130)
-------- -------
Net cash provided by operating activities................................. 1,950 535
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................. (1,401) (212)
Purchases of short-term investments............................................. (22,923) (3,995)
Proceeds from sales and maturities of short-term investments.................... 2,962 3,924
-------- -------
Net cash used in investing activities..................................... (21,362) (283)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock...................................... (40) --
Principal payments under capitalized lease obligations.......................... (505) (382)
-------- -------
Net cash (used in)financing activities.................................... (545) (382)
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................................... (19,957) (130)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................. 25,553 3,282
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ 5,596 $ 3,152
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................................................... $ 113 $ 205
======== =======
Cash paid for income taxes...................................................... $ 103 $ --
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts of
Power Integrations, Inc. (the Company), a Delaware corporation, and its wholly-
owned subsidiaries. Significant inter-company accounts and transactions have
been eliminated.
While the financial information furnished is unaudited, the condensed
consolidated financial statements included in this report reflect all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for the fair presentation of the results of operation for
the interim periods covered and of the financial condition of the Company at the
date of the interim balance sheet. The results for interim periods are not
necessarily indicative of the results for the entire year. The condensed
consolidated financial statements should be read in conjunction with the Power
Integrations, Inc. consolidated financial statements for the year ended December
31, 1997 included in its Form 10-K.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents and Short-Term Investments
The Company considers cash invested in highly liquid financial instruments
with an original maturity of three months or less to be cash equivalents. Cash
investments in highly liquid financial instruments with original maturities
greater than three months but less than one year are classified as short-term
investments. As of March 31, 1998, the Company's short-term investments consist
of U.S. Government backed securities and commercial paper, which are classified
as held to maturity and are valued using the amortized cost method which
approximates market.
Revenue Recognition
Product revenues consist of sales to OEMs and merchant power supply
manufacturers and to distributors. Revenues from product sales to OEM and
merchant power supply manufacturers are recognized upon shipment. Sales to
distributors are made under terms allowing certain rights of return and
protection against subsequent price declines on the Company's products held by
the distributors. As a result of the Company's distributor agreements, the
Company defers recognition of revenue and the proportionate costs of revenues
derived from sales to distributors until such distributors resell the Company's
products to their customers. The margin deferred as a result of this policy is
reflected as "deferred income on sales to distributors" in the accompanying
condensed consolidated balance sheets.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and presentation of comprehensive
income. SFAS No. 130, requires companies to report a new measure of income. The
Company adopted SFAS No. 130 in the first quarter of 1998. "Comprehensive
Income" is to include foreign currency translation gains and losses and other
unrealized gains and losses that have historically been excluded from net income
and reflected instead in equity. The adoption of SFAS No. 130 did not have a
material impact on the Company's financial statements.
6
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POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires companies to report financial and descriptive information about its
reportable operating segments. SFAS No. 131 will be adopted by the Company in
its 1998 annual consolidated financial statements.
3. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ --------------
<S> <C> <C>
Raw materials.............................................................. $4,173 $3,323
Work-in-process............................................................ 3,228 2,977
Finished goods............................................................. 1,245 1,028
------ ------
$8,646 $7,328
====== ======
</TABLE>
4. SIGNIFICANT CUSTOMERS AND EXPORT SALES:
Customer Concentration
The Company's end user base is highly concentrated and a relatively small
number of OEMs and distributors accounted for a significant portion of the
Company's revenue. For the three months ended March 31, 1998 and 1997, ten
customers accounted for approximately 64% and 73% of total net revenues,
respectively.
The following customers accounted for more than 10% of total net revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
Customer 1998 1997
- -------- ---- ----
<S> <C> <C>
A........................................................................ 19% 19%
B........................................................................ 14% *
</TABLE>
__________
* less than 10% or no sales
Export Sales
The Company markets its products in North America and in foreign countries
through its sales personnel and a worldwide network of independent sales
representatives and distributors. Export sales, which consist of domestic sales
to customers in foreign countries, are comprised of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
1998 1997
---- ----
<S> <C> <C>
Japan...................................................................... 4% 7%
Taiwan..................................................................... 26% 16%
Hong Kong.................................................................. 20% 19%
Western Europe............................................................. 16% 16%
Other...................................................................... 12% 14%
---- ----
Total foreign...................................................... 78% 72%
==== ====
</TABLE>
7
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POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. EARNINGS PER SHARE:
In December 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings per Share." SFAS No. 128 requires companies
to compute earnings per share under two different methods (basic and diluted).
Basic earnings per share is calculated by dividing net income (loss) by the
weighted average shares of common stock outstanding during the period. Diluted
earnings per share is calculated by dividing net income (loss) by the weighted
average shares of outstanding common stock and common stock equivalents during
the period. Common stock equivalents included in the diluted calculation consist
of dilutive shares issuable upon the exercise of outstanding common stock
options and warrants computed using the treasury stock method.
The following table sets forth the calculation of basic and diluted earnings
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
------- --------
<S> <C> <C>
Basic earnings (loss) per share:
Net income (loss)............................................................... $ 1,978 $ (71)
------- --------
Weighted average common shares.................................................. 12,080 876
------- --------
Basic earnings (loss) per share.............................................. $ 0.16 $ (0.08)
------- --------
Diluted earnings (loss) per share:
Net income (loss)............................................................... $ 1,978 $ (71)
------- --------
Weighted average common shares.................................................. 12,080 876
Weighted average common share equivalents:
Options...................................................................... 725 --
Warrants..................................................................... 325 --
------- --------
Diluted weighted average common shares.......................................... 13,130 876
------- --------
Diluted earnings (loss) per share......................................... $ 0.15 $ (0.08)
======= ========
</TABLE>
6. PROVISION FOR INCOME TAXES:
Income tax expense for the three month periods ended March 31, 1998 and 1997
include a provision for Federal, state and foreign taxes based on the annual
estimated effective tax rate applicable to the Company and its subsidiaries for
the year.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed in the "Factors That May Affect Future Results of
Operations" and elsewhere in this Form 10-Q that could cause actual results to
differ materially from historical results or those anticipated. In this report,
the words "anticipates," "believes," "expects," "future," "intends," and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof.
The following management's discussion and analysis of financial condition and
results of operations should be read in conjunction with management's discussion
and analysis of financial condition and results of operations included in the
Company's Form 10-K for the year ended December 31, 1997.
OVERVIEW
Power Integrations, Inc. (the "Company") designs, develops and markets
proprietary, high-voltage analog integrated circuits ("ICs") for use in AC to DC
power conversion. The Company has targeted high-volume power supply markets,
including the cellular telephone, personal computer, cable and direct broadcast
satellite and various consumer electronics markets. The Company initially
focuses on those markets that are sensitive to size, portability, energy
efficiency and time-to-market. The Company believes its patented TOPSwitch ICs,
introduced in 1994, are the first highly integrated power conversions ICs to
achieve widespread market acceptance. The Company introduced an enhanced family
of ICs, TOPSwitch-II, in April 1997.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total net revenues for the periods indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL NET REVENUES FOR
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
------- -------
<S> <C> <C>
Net revenues:
Product sales............................................................... 96.4% 96.7%
License fees and royalties.................................................. 3.6 3.3
------- -------
Total net revenues....................................................... 100.0 100.0
------- -------
Cost of revenues.............................................................. 55.3 61.2
------- -------
Gross profit.................................................................. 44.7 38.8
------- -------
Operating expenses:
Research and development.................................................... 10.8 15.2
Sales and marketing......................................................... 13.1 15.6
General and administrative.................................................. 3.8 5.9
------- -------
Total operating expenses................................................. 27.7 36.7
------- -------
Income from operations........................................................ 17.0 2.1
Other income (expense), net................................................... 1.3 (3.0)
------- -------
Income (loss) before provision for income taxes............................... 18.3 (0.9)
------- -------
Provision for income taxes.................................................... 4.6 0.1
------- -------
Net income (loss)............................................................. 13.7% (1.0)%
======= =======
</TABLE>
9
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 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 for the first
quarter of 1998 were $14.4 million compared to $7.1 million for the first
quarter of 1997, an increase of $7.3 million or 104%. Net revenues from product
sales represented $13.9 million and $6.8 million in the first quarter of 1998
and 1997, respectively. The increase in net revenues from product sales was due
primarily to higher sales volume of the Company's TOPSwitch family of products
across a larger customer base. Net revenues also grew because of an increase in
royalty revenues. License fees and royalties were $524,000 for the first quarter
of 1998, an increase of $289,000 or 123% from the first quarter of 1997.
International sales were $11.2 million in the first quarter of 1998 compared
to $5.1 million for the same period in 1997, an increase of $6.1 million or
120%. 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 net 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.
For the quarter ended March 31, 1998, net revenues from two different direct
customers accounted for approximately 19% and 14% of net revenues. For the
quarter ended March 31, 1997, one of those same customers accounted for 19% of
net revenues. There were no end customers which accounted for 10% or more of net
revenues.
Cost of revenues; Gross profit. Gross profit is equal to net revenues less
cost of revenues. The Company's cost of revenues consists primarily of costs
associated with the purchase of wafers, the assembly and packaging of its
products, and internal labor and overhead associated with the testing of both
wafers and packaged components. Gross profit for the first quarter of 1998 was
$6.5 million, or 44.7% of net revenues, compared to $2.7 million, or 38.8% of
net revenues for the same period in 1997. The increase of 5.9 percentage points
in gross profit was primarily 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. There can be no assurance that these or other factors will have
a favorable impact on gross profit in future periods.
Research and development expenses. Research and development expenses
consist primarily of employee-related expenses, expensed material and facility
costs associated with the development of new processes and new products. The
Company also expenses prototype wafers and mask sets related to new products as
research and development costs until new products are released to production.
Research and development expenses for the first quarter of 1998 were $1.6
million compared to $1.1 million for the same period in 1997, an increase of
$500,000 or 45%. 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. These expenses, as a percentage of net
revenues, were 10.8% in the first quarter of 1998 compared to 15.2% in the first
quarter of 1997, primarily 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 for the first quarter of
1998 were $1.9 million compared to $1.1 million for the same period in 1997, an
increase of $800,000 or 73%, which represented 13.1% and 15.6% 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. For the
quarters ended March 31, 1998 and 1997 general and administrative expenses were
$550,000 and $410,000, respectively, which represented 3.8% and 5.9% 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
10
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expects that general and administrative expenses will continue to increase in
absolute dollars but will fluctuate as a percentage of net revenues.
Other income (expense), net. Other income (expense), net, for the first
quarter of 1998 increased by $401,000 over the same period in 1997 due primarily
to additional interest income from an increase in short-term investments in 1998
and a reduction in interest expense as a result of the repayment of $3.0 million
of subordinated debt in the fourth quarter of 1997. The Company expects to
continue to utilize term debt to finance its capital equipment needs.
Provision for income taxes. Provision for income taxes represents Federal,
state and foreign taxes. The provision for income taxes was $660,000 for the
first quarter of 1998 or an effective tax rate of 25% reflecting the profitable
results for the 1998 period. The provision for the same period of 1997 was
$10,000 which represented minimum tax. The difference between the statutory rate
and the Company's effective tax rate for 1998 is due to the beneficial impact of
net operating loss carryforwards, offset partially by a change in the deferred
tax valuation allowance. Utilization of the net operating loss carryforwards
will be subject to an annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had approximately $29.0 million in cash, cash
equivalents and short-term investments. In addition, under a working capital
line of credit agreement with a bank, the Company can borrow up to $8.0 million
conditional upon meeting certain financial covenants, including maintaining
quarterly profitability and specific financial covenants. As of March 31, 1998,
there were no borrowings outstanding under the line of credit agreement. The
Company has financed a significant portion of its machinery and equipment
through capital equipment leases. At March 31, 1998, approximately $3.7 million
was outstanding under various capital equipment leasing agreements.
As of March 31, 1998, the Company had working capital, defined as current
assets less current liabilities, of approximately $30.8 million, which was an
increase of approximately $700,000 over December 31, 1997. The increase was
primarily due to the net income generated in the first quarter of 1998.
The nature of the semiconductor industry, combined with the current economic
environment, make it very difficult for the Company to predict future liquidity
requirements with certainty. However, the Company believes that its existing
cash and cash equivalents, cash generated from operations and existing sources
of working capital will be adequate to finance its operations through at least
1998.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company's future results of operations are dependent upon a number of
factors, including those described below. For a complete description of such
factors, see the Company's Form 10-K for the year ended December 31, 1997.
Unpredictable and Fluctuating Operating Results. The Company's quarterly
revenues and operating results have varied significantly in the past, are
difficult to forecast, are subject to numerous factors both within and outside
of the Company's control, and may fluctuate significantly in the future.
Although the Company was profitable in the first quarter of 1998, there can be
no assurance that the Company will continue to be profitable in future periods.
The Company believes that period-to-period comparisons are not necessarily
meaningful and should not be relied upon as indicative of future operating
results. The Company believes that the growth in revenues and operating income
in the first quarter of 1998 compared to the same period in 1997 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.
Factors which may affect the Company's revenues and operating results include
the timing and volume of orders received by the Company; competitive pressures
on selling prices; the volume and timing of orders placed
11
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by the Company with its foundries; the availability of raw materials;
fluctuations in manufacturing yields, whether resulting from the transition to
new foundries or from other factors; changes in product mix including the impact
of new product introduction 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."
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. 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 over capacity. The Company may experience
substantial period-to-period fluctuations in future operating results due to
general conditions of these markets. The Company's 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 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.
Customer Concentration and Competing Products from Customers. The Company's
end user base is highly concentrated and a relatively small number of OEMs,
directly or indirectly through merchant power supply manufacturers, account for
a significant portion of the Company's net revenues. The Company estimates that
its top ten customers, including distributors which resell to large OEMs and
merchant power supply manufacturers, accounted for 64% and 73% of the Company's
net revenues for the three months ended March 31, 1998 and 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 reduction, delay or cancellation of orders
from one or more of the Company's significant customers, or the discontinuance
of the Company's products by the Company's end users, could materially and
adversely affect the Company's business, financial conditions and results of
operations. The Company has experienced such effects in the past and there can
be no assurance that any of the Company's customers will not reduce, cancel or
delay orders in the future.
Dependence on Wafer Suppliers. The Company outsources all of its
semiconductor manufacturing and product assembly except for testing and
finishing. The Company has supply arrangements for the production of wafers with
Matsushita Electronics Corporation and an affiliate of Matsushita ("MEC"), and
OKI Electric Industry Co., Ltd. ("OKI"). Although certain aspects of the
Company's relationships with MEC and OKI are contractual, many important aspects
of these relationships depend on the continued cooperation of these strategic
partners and, in many instances, the parties' course of conduct deviates from
the literal provisions of the contracts. There can be no assurance that the
Company and its strategic partners will continue to work together successfully
in the future or that either MEC or OKI will not seek an early termination of
its wafer supply agreement with the Company.
12
<PAGE>
The Company's wafer supply contracts with OKI and MEC terminate in June 1998
and June 2000, respectively. The Company is currently negotiating a renewal of
its wafer supply contract with OKI, however there can be no assurance that the
Company will be able to reach an agreement with OKI or in the future, with MEC
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 the event of a supply disruption with OKI or MEC, if the Company were unable
to qualify alternative manufacturing sources for existing or new products in a
timely manner or if such sources were unable to produce wafers with acceptable
manufacturing yields, the Company's business, financial condition and operating
results would be materially and adversely affected.
From time to time in the past, the Company has been unable to fully satisfy
customer requests for its products. Any significant disruptions in deliveries of
the Company's products to its customers would materially and adversely affect
the Company's business and operating results.
Risks of Outside Manufacturing and Assembly; Sole Source Risks. The Company
depends on MEC and OKI to produce wafers, and independent subcontractors to
assemble finished products, at acceptable yields and to deliver them to the
Company in a timely manner. To the extent the wafer foundries do not achieve
acceptable manufacturing yields or they experience product shipment delays, the
Company's financial condition or results of 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 International Sales. Sales to customers outside of the United
States represented 78% and 72% for the three months ended March 31, 1998 and
1997, respectively. These sales involve a number of inherent risks, including
imposition of government controls, currency exchange fluctuations, potential
insolvency of international distributors and representatives, reduced protection
for intellectual property rights in some countries, the impact of recessionary
environments in economies outside the United States, political instability,
generally longer receivables collection periods, tariffs and other trade
barriers and restrictions, and the burdens of complying with a variety of
foreign laws. Furthermore, because substantially all of the Company's foreign
sales are denominated in U.S. dollars, increase in the value of the dollar would
increase the price in local currencies of the Company's products in foreign
markets and make the Company's products relatively more expensive and less price
competitive than competitors' products that are priced in local currencies. The
Company is exposed to additional risks to the extent that the products of its
customers are subject to foreign currency or other international risks. There
can be no assurance that these factors will not have an adverse effect on the
Company's future international sales and, consequently, on the Company's
business, financial condition or operating results.
New Products and Technological Change. The Company's future success depends
in significant part upon its ability to develop new ICs for high-voltage power
conversion for existing and new markets, to introduce such products in a timely
manner and to have such products selected for design into products of leading
manufacturers. The development of these new devices is highly complex, and from
time to time the Company has experienced delays in completing the development of
new products. There can be no assurance that the Company will be able to adjust
to changing market demands as quickly and cost-effectively as necessary to
compete successfully. Furthermore, there can be no assurance that the Company
will be able to introduce new products in a timely and cost-effective manner or
in sufficient quantities to meet customer demand or that such products will
achieve market acceptance. The Company's or its customers' failure to develop
and introduce new products successfully and in a timely manner would materially
adversely affect the Company's business, financial condition or operating
results.
13
<PAGE>
Lengthy Sales Cycle. The Company's products are generally incorporated into
a customer's products at the design stage. However, customer decisions to use
the Company's products (design wins), which can often require significant
expenditures by the Company without any assurance of success, often precede
volume sales, if any, by a year or more. If a customer decides at the design
stage not to incorporate the Company's products into its product, the Company
will not have another opportunity for a design win with respect to that product
for many months or years. Because of such a lengthy sales cycle, the Company may
experience a delay between increasing expenses for research and development and
its sales and marketing efforts and the generation of volume production
revenues, if any, from such expenditures. Failure by the Company to timely
develop and introduce products that are incorporated into its customers'
products could have a material adverse effect on the Company's business,
financial condition or results of operations.
Product Quality, Performance and Reliability. The fabrication and assembly
of ICs is a highly complex and precise process. The Company expects that its
customers will continue to establish demanding specifications for quality,
performance and reliability that must be met by the Company's products. ICs as
complex as those offered by the Company often encounter development delays and
may contain undetected defects or failures when first introduced or after
commencement of commercial shipments. The Company has from time to time in the
past experienced product quality, performance or reliability problems. There can
be no assurance that defects or failures relating to the Company's product
quality, performance and reliability will not occur in the future or that such
defects or failures will not have a material adverse effect on the Company's
operating results.
Competition. The high-voltage power supply industry is intensely
competitive and characterized by extreme price sensitivity. Accordingly, the
most significant competitive factor in the target markets for the Company's
products is cost effectiveness. The Company's products face competition from
alternative technologies, primarily discrete switchers. The Company believes
that at current pricing, the TOPSwitch families of products offer favorable cost
performance benefits compared to discrete switchers in many high-volume
applications. However, any significant erosion in the price of discrete
components, such as high voltage Bipolar and MOSFET transistors and PWM
controller ICs, could adversely affect the cost effectiveness of the TOPSwitch
products. Also, older alternative technologies to switchers are more cost-
effective than switchers that use the Company's TOPSwitch products in certain
power ranges for certain applications. 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.
In addition, the Company faces competition from MEC, which currently
manufactures and sells its versions of the Company's TOPSwitch families of
products under the right (exclusive during the term of the contract as to other
Japanese companies, except OKI, and their subsidiaries) granted by the Company
to manufacture and sell products using the Company's technology to Japanese
companies worldwide and to subsidiaries of Japanese companies located in Asia.
Beginning in April 1997, the Company agreed not to sell its products to new
customers in Japan. The Company's TOPSwitch product families have also begun to
meet additional competition from hybrid and single high-voltage ICs similar to
TOPSwitch. These competing products are being developed or have been developed
and are being produced by companies such as Motorola, SGS, Samsung and Sanken.
The Company expects competition to increase as Motorola, SGS, Samsung, Sanken
and possibly other companies develop and introduce new products.
The Company's ability to compete in its target markets also depends on such
factors as the timing and success of new product introductions by the Company
and its competitors, the pace at which the Company's customers incorporate the
Company's products into their end user products, availability of wafer
fabrication and finished good manufacturing capability, availability of adequate
sources of raw materials, protection of Company products by effective
utilization of intellectual property laws and general economic conditions. There
can be no assurance that the Company's products will continue to compete
favorably or that the Company will be successful in the face of increasing
competition from new products and enhancements introduced by existing
competitors or new companies entering this market. Failure of the Company to
compete successfully in the high-voltage power supply business would materially
and adversely affect the Company's business, financial condition and results of
operations.
Dependence on Proprietary Technology. The Company's future success depends
in part upon its ability to protect its intellectual property, including
patents, trade secrets, and know-how, and to continue its technological
14
<PAGE>
innovation. There can be no assurance that the steps taken by the Company to
protect its intellectual property will be adequate to prevent misappropriation
or that others will not develop competitive technologies or products.
The semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. While the Company has not
received formal notice of any infringement of the right of any third party,
questions of infringement in the semiconductor field involve highly technical
and subjective analyses. Litigation may be necessary in the future to enforce
the Company's patents and other intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement or invalidity, and
there can be no assurance that the Company would prevail in any future
litigation. In addition, the laws of certain foreign countries in which the
Company's technology is or may in the future be licensed may not protect the
Company's intellectual property rights to the same extent as the laws of the
United States, thus increasing the possibility of infringement of the Company's
intellectual property.
Dependence on Key Personnel. The Company's success depends to a significant
extent upon the continued service of its executive officers and other key
management and technical personnel, and on its ability to continue to attract,
retain and motivate qualified personnel, such as experienced systems
applications engineers. The loss of the services of one or more of the Company's
engineers, executive officers or other key personnel or the Company's inability
to recruit replacements for such personnel or to otherwise attract, retain and
motivate qualified personnel could have a material adverse effect on the
Company's business, financial condition or operating results. The Company does
not have long-term employment contracts with any of its employees.
Management of Growth. The Company has experienced a period of rapid growth
and expansion which has placed, and continues to place, a significant strain on
its resources. To accommodate this growth, the Company will be required to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the improvement of its accounting and other
internal management systems, all of which may require substantial management
efforts. There can be no assurance that such efforts can be accomplished
successfully.
Year 2000 Compliance. The Company is in the process of defining costs,
issues and uncertainties associated with making the Company's internal-use
software applications compliant with the Year 2000. In general, the Company
expects to resolve the Year 2000 issues through planned replacement upgrades of
its software applications. Although management does not expect the Year 2000
issues to have a material impact on the Company's business or future results of
operations, there can be no assurance that there will not be interruptions of
operations or other limitations of system functionality or that the Company will
not incur significant costs to avoid such interruptions or limitations.
Possible Volatility of Stock. The stock market has from time to time
experienced significant price and volume fluctuations which have particularly
affected the market prices of the stock of high technology companies, and which
may be unrelated to the operating performance of particular companies. Factors
such as technology and product announcements by the Company or by competitors,
disputes relating to patents and proprietary rights, and failures or delays in
the Company's development program may have a significant effect on the market
price of the Company's common stock.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
27.1 Financial Data Schedule.
b. Reports on Form 8-K.
None.
16
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
POWER INTEGRATIONS, INC.
/s/ Robert G. Staples
Dated: May 12, 1998 By: ----------------------------
Robert G. Staples
Chief Financial Officer
17
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