<PAGE>
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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, 1999
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________
to ______________
Commission File Number 0-23441
_____________________________
POWER INTEGRATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3065014
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
477 N. Mathilda Avenue, Sunnyvale, California 94086
(Address of principal executive offices) (Zip code)
(408) 523-9200
(Registrant's telephone number, including area code)
_____________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1999
----------------------------- ------------------------------
Common Stock, $.001 par value 12,844,299 shares
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POWER INTEGRATIONS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes To Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 26
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 11,436 $ 24,176
Short-term investments........................................................... 37,419 20,242
Accounts receivable.............................................................. 6,021 4,640
Inventories...................................................................... 8,242 8,845
Prepaid expenses and other current assets........................................ 2,222 812
----------- -----------
Total current assets..................................................... 65,340 58,715
----------- -----------
PROPERTY AND EQUIPMENT, net......................................................... 6,948 6,339
----------- -----------
$ 72,288 $ 65,054
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capitalized lease obligations................................. $ 1,801 $ 1,950
Accounts payable................................................................. 6,618 5,866
Accrued payroll and related expenses............................................. 1,887 2,394
Taxes payable and other accrued liabilities...................................... 5,031 2,951
Deferred income on sales to distributors......................................... 2,266 2,566
----------- -----------
Total current liabilities................................................ 17,603 15,727
----------- -----------
CAPITALIZED LEASE OBLIGATIONS, net of current portion............................... 1,655 1,963
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock..................................................................... 13 12
Additional paid-in capital....................................................... 58,055 57,289
Common stock warrants............................................................ 12 12
Stockholder notes receivable..................................................... (269) (274)
Deferred compensation............................................................ (286) (321)
Cumulative translation adjustment................................................ (92) (57)
Accumulated deficit.............................................................. (4,403) (9,297)
----------- -----------
Total stockholders' equity............................................... 53,030 47,364
----------- -----------
$ 72,288 $ 65,054
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
<PAGE>
POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share amounts)
Three Months Ended
March 31,
--------------------
1999 1998
-------- --------
NET REVENUES:
Product sales............................. $20,446 $13,902
License fees and royalties................ 375 524
-------- --------
Total net revenues..................... 20,821 14,426
-------- --------
COST OF REVENUES............................ 9,467 7,976
-------- --------
GROSS PROFIT................................ 11,354 6,450
-------- --------
OPERATING EXPENSES:
Research and development.................. 2,336 1,559
Sales and marketing....................... 2,475 1,889
General and administrative................ 1,369 548
-------- --------
Total operating expenses............... 6,180 3,996
-------- --------
INCOME FROM OPERATIONS...................... 5,174 2,454
-------- --------
OTHER INCOME, net........................... 584 187
-------- --------
INCOME BEFORE PROVISION FOR
INCOME TAXES............................... 5,758 2,641
PROVISION FOR INCOME TAXES.................. 864 663
-------- --------
NET INCOME.................................. $ 4,894 $ 1,978
-------- --------
EARNINGS PER SHARE:
Basic..................................... $0.39 $0.16
-------- --------
Diluted................................... $0.36 $0.15
-------- --------
SHARES USED IN PER SHARE CALCULATION:
Basic..................................... 12,641 12,080
-------- --------
Diluted................................... 13,757 13,130
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 4,894 $ 1,978
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................................... 751 701
Deferred compensation expense................................................... 35 35
Provision for accounts receivable and other allowances.......................... 107 119
Deferred tax provision.......................................................... (1,440) --
Change in operating assets and liabilities:
Accounts receivable.......................................................... (1,488) (345)
Inventories.................................................................. 603 (1,318)
Prepaid expenses and other current assets.................................... 30 (137)
Accounts payable............................................................. 752 (597)
Accrued liabilities.......................................................... 1,538 459
Deferred income on sales to distributors..................................... (300) 1,055
------------- -------------
Net cash provided by operating activities................................. 5,482 1,950
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................. (1,360) (1,401)
Purchases of short-term investments............................................. (23,843) (22,923)
Proceeds from sales and maturities of short-term investments.................... 6,666 2,962
------------- -------------
Net cash used in operating activities..................................... (18,537) (21,362)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock...................................... 767 (40)
Proceeds from stockholder note repayment........................................ 5 --
Principal payments under capitalized lease obligations.......................... (457) (505)
------------- -------------
Net cash provided by (used in) financing activities....................... 315 (545)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS......................................... (12,740) (19,957)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................. 24,176 25,553
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ 11,436 $ 5,596
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................................................... $ 85 $ 113
============= =============
Cash paid for income taxes...................................................... $ 282 $ 103
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts of Power
Integrations, Inc. (the Company), a Delaware corporation, and its wholly-owned
subsidiaries. Significant inter-company accounts and transactions have been
eliminated.
While the financial information furnished is unaudited, the condensed
consolidated financial statements included in this report reflect all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for the fair presentation of the results of operations for
the interim periods covered and of the financial condition of the Company at the
date of the interim balance sheet. The results for interim periods are not
necessarily indicative of the results for the entire year. The condensed
consolidated financial statements should be read in conjunction with the Power
Integrations, Inc. consolidated financial statements for the year ended December
31, 1998 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 not longer than fifteen months are classified as
short-term investments. As of March 31, 1999, the Company's short-term
investments consisted of U.S. Government backed securities, corporate commercial
paper and other high quality commercial and municipal securities, which were
classified as held to maturity and were valued using the amortized cost method
which approximates market.
Revenue Recognition
Product revenues consist of sales to OEMs, merchant power supply
manufacturers and distributors. Revenues from product sales to OEMs and merchant
power supply manufacturers are recognized upon shipment. Sales to distributors
are made under terms allowing certain rights of return and protection against
subsequent price declines on the Company's products held by the distributors. As
a result of the Company's distributor agreements, the Company defers recognition
of revenue and the proportionate costs of revenues derived from sales to
distributors until the 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.
Segment Reporting
During 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS 131 requires a new basis of determining reportable business
segments, i.e., the management approach. This approach requires that business
segment information used by management to assess performance and manage company
resources be the source for information disclosure. On this basis, the Company
is organized and operates as one business segment, the design, development,
manufacture and marketing of proprietary, high-voltage, analog circuits for use
in the AC to DC power conversion market.
6
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
hedging activities, and exposure definition. SFAS No. 133 requires companies to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company does not expect the adoption of SFAS No. 133 to have a material
impact on its financial statements.
3. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist of the following (in thousands):
March 31, December 31,
1999 1998
------------------------------
Raw materials........ $ 2,102 $ 3,132
Work-in-process...... 2,406 2,901
Finished goods....... 3,734 2,812
------ ------
$ 8,242 $ 8,845
====== ======
4. SIGNIFICANT CUSTOMERS AND EXPORT SALES:
Customer Concentration
The Company's end user base is highly concentrated and a relatively small
number of OEMs and distributors accounted for a significant portion of the
Company's net revenues. For the three months ended March 31, 1999 and 1998, ten
customers accounted for approximately 71% and 66% of total net revenues,
respectively.
The following customers accounted for more than 10% of total net revenues:
Three Months Ended
March 31,
----------------------
Customer 1999 1998
-------- ----------------------
A............. 23% 19%
B............. * 14%
C............. 12% *
- ----------------
* less than 10% or no sales
7
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED 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. As a percentage of total net revenues, export
sales, which consist of domestic sales to customers in foreign countries, are
comprised of the following:
Three Months Ended
March 31,
-----------------------
1999 1998
-----------------------
Japan............... 3% 4%
Taiwan.............. 12% 26%
Hong Kong/China..... 25% 20%
Korea............... 17% 6%
Western Europe...... 16% 16%
Other............... 8% 6%
---- ----
Total foreign....... 81% 78%
==== ====
5. EARNINGS PER SHARE:
Earnings per share are calculated in accordance with 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 are
calculated by dividing net income by the weighted average shares of common stock
outstanding during the period. Diluted earnings per share are calculated by
dividing net income by the weighted average shares of outstanding common stock
and common stock equivalents during the period. Common stock equivalents
included in the diluted calculation consist of dilutive shares issuable upon the
exercise of outstanding common stock options and warrants computed using the
treasury stock method.
The following table sets forth the calculation of basic and diluted earnings
per share (in thousands, except per share amounts):
Three Months Ended
March 31,
-----------------------
1999 1998
-----------------------
Basic earnings per share:
Net income....................................... $ 4,894 $ 1,978
--------- ---------
Weighted average common shares................... 12,641 12,080
--------- ---------
Basic earnings per share...................... $ 0.39 $ 0.16
========= =========
Diluted earnings per share:
Net income....................................... $ 4,894 $ 1,978
--------- ---------
Weighted average common shares................... 12,641 12,080
Weighted average common share equivalents:
Options....................................... 921 725
Employee stock purchase plan.................. 22 --
Warrants...................................... 173 325
--------- ---------
Diluted weighted average common shares........... 13,757 13,130
--------- ---------
Diluted earnings per share................. $ 0.36 $ 0.15
========= =========
8
<PAGE>
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. PROVISION FOR INCOME TAXES:
Income tax expense for the three-month periods ended March 31, 1999 and 1998
includes a provision for Federal, state and foreign taxes based on the annual
estimated effective tax rate applicable to the Company and its subsidiaries for
the year. The difference between the statutory rate and the Company's effective
tax rate for the quarter ended March 31, 1999 is primarily due to the beneficial
impact of deferred taxes resulting from a reduction in the valuation allowance
of $1.4 million.
7. LEGAL PROCEEDINGS:
In July 1998, the Company filed a complaint for patent infringement in the
U.S. District Court, Northern District of California, against its largest end
user, Motorola. In August 1998, the Company voluntarily dismissed the complaint,
and filed a new complaint in the U.S. District Court, District of Delaware,
alleging that Motorola has infringed and continues to infringe on two of the
Company's circuit patents. The Company seeks, among other things, an order
enjoining Motorola from infringing on the Company's patents and an award for
damages resulting from the alleged infringement. In October 1998, Motorola
asserted various counterclaims against the Company, alleging that the Company is
infringing on certain of Motorola's patents. The Company believes that
Motorola's counterclaims are without merit and intends to vigorously defend
itself against such claims. The trial is currently scheduled to commence in
October 1999.
Litigation may be necessary to resolve the claims asserted by the Company
against Motorola, and to resolve the claims Motorola has asserted against the
Company. There can be no assurance that the Company will 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 could have a material adverse effect on the Company's
business, financial condition and operating results. 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 operating results.
Moreover, the laws of certain foreign countries in which the Company's
technology is or may in the future be licensed may not protect its 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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Operating results includes a number of forward-looking statements which reflect
our current views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those discussed in the "Risk Factors" and elsewhere in this report,
that could cause actual results to differ materially from historical results or
those anticipated. In this report, the words "anticipates," "believes,"
"expects," "future," "intends," and similar expressions identify forward-looking
statements. We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report.
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 our
Form 10-K for the year ended December 31, 1998.
Overview
We design, develop, manufacture and market proprietary, high-voltage, analog
integrated circuits, or ICs, for use in AC to DC power conversion markets. We
have targeted high-volume power supply markets, including the cellular
telephone, personal computer, cable and direct broadcast satellite and various
consumer and industrial electronics markets. Our initial focus is on those
markets that are sensitive to size, portability, energy efficiency and time-to-
market. We believe our patented TOPSwitch ICs, introduced in 1994, are the first
highly integrated power conversion ICs to achieve widespread market acceptance.
We introduced an enhanced family of ICs, TOPSwitch-II, in April 1997. In
September 1998, we announced the TinySwitch family of integrated circuits for
power supplies used in a broad range of electronic products. TinySwitch ICs
incorporating our new EcoSmart technology enable a new class of light, compact,
energy-efficient power supplies. This new family of ICs is designed to reduce
energy leakage from power supplies.
Results of Operations
The following table sets forth certain operating data as a percentage of
total net revenues for the periods indicated.
Percentage of
Total Net Revenues for
Three Months Ended
March 31,
-------------------------
1999 1998
---------- ---------
Net revenues:
Product sales............................... 98.2% 96.4%
Royalties................................... 1.8 3.6
---------- ---------
Total net revenues....................... 100.0 100.0
---------- ---------
Cost of revenues.............................. 45.5 55.3
---------- ---------
Gross profit.................................. 54.5 44.7
---------- ---------
Operating expenses:
Research and development.................... 11.2 10.8
Sales and marketing......................... 11.9 13.1
General and administrative.................. 6.6 3.8
---------- ---------
Total operating expenses................. 29.7 27.7
---------- ---------
Income from operations........................ 24.8 17.0
Other income, net............................. 2.8 1.3
---------- ---------
Income before provision for income taxes...... 27.6 18.3
---------- ---------
Provision for income taxes.................... 4.1 4.6
---------- ---------
Net income.................................... 23.5% 13.7%
========== =========
10
<PAGE>
Comparison of the Three Months Ended March 31, 1999 and 1998
Net revenues. Net revenues consist of revenues from product sales, which
are calculated net of returns and allowances, plus license fees and royalties
paid by licensees of our technology. Net revenues for the first quarter ended
March 31, 1999 were $20.8 million compared to $14.4 million for the first
quarter of 1998, an increase of $6.4 million, or 44%.
Net revenues from product sales represented $20.4 million and $13.9 million
in the first quarter of 1999 and 1998, respectively. The increase in net
revenues from product sales for the three months ended March 31, 1999 was due
primarily to strong demand for our products in the cellular phone charger
market, which has historically shown weakness in the first quarter of the year.
Higher sales volume of the TOPSwitch family of products across a larger customer
base also contributed to the increase. In total, sales of our TOPSwitch and
TinySwitch products accounted for 96% of net product revenues in the quarter.
Revenue from royalties was $375,000 for the first quarter of 1999, compared to
$524,000 for the first quarter of 1998.
International sales were $16.8 million in the first quarter of 1999 compared
to $11.2 million for the same period in 1998, an increase of $5.6 million, or
50%, which represented 81% of our net revenues compared to 78% in the comparable
period of 1998. Although the power supplies using our products are designed and
distributed worldwide, most of these power supplies are manufactured in Asia. As
a result, sales to this region were 64% and 66% of product sales for the three
months ended March 31, 1999 and 1998, respectively. We expect international
sales to continue to account for a large portion of our net revenues.
Direct sales for the first quarter of 1999 were divided approximately 45% to
distributors and 55% to OEMs and power supply merchants, compared to
approximately 48% to distributors and 52% to OEMs and power supply merchants for
the same quarter in 1998. For the quarter ended March 31, 1999, sales to two
customers accounted for 23% and 12% of net revenues, and for the quarter ended
March 31, 1998, one of the same customers accounted for 19% of net revenues and
another customer accounted for 14% of net revenues.
The exact dollar amounts and percentages of sales to end customers are
difficult to ascertain because most of those sales occur through distributors or
indirectly through sales to merchant power supply manufacturers which, in turn,
sell power supplies to OEMs. However, we estimate that direct and indirect sales
to Motorola, who is our largest end user, accounted for approximately 17% and 6%
of net revenues for the quarters ended March 31, 1999 and 1998, respectively.
Direct sales to Motorola were approximately 12% and 3% of our net revenues for
the quarters ended March 31, 1999 and 1998, respectively.
Cost of revenues; Gross profit. Gross profit is equal to net revenues less
cost of revenues. Our cost of revenues consists primarily of costs associated
with the purchase of wafers, the assembly and packaging of our products, and
internal labor and overhead associated with the testing of both wafers and
packaged components. Gross profit for the first quarter of 1999 was $11.4
million, or 54.5%, of net revenues, compared to $6.5 million, or 44.7%, of net
revenues for the same period in 1998. The increase in gross profit for the three
months ended March 31, 1999 was primarily due to efficiencies achieved from
increased sales volume, lower prices for wafers, weaker Japanese yen and better
manufacturing yields due to improved test equipment. There can be no assurance
that these or other factors will have a favorable impact on our 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. We also
expense prototype wafers and mask sets related to new products as research and
development costs until new products are released to production. Research and
development expenses for the first quarter of 1999 were $2.3 million compared to
$1.6 million for the same period in 1998, an increase of $700,000, or 50%, which
represented 11.2% and 10.8% of our net revenues, respectively. The increase for
the three months ended March 31, 1999 was primarily due to increased salaries
and other costs related to the hiring of additional engineering personnel,
outside consulting fees and expensed prototype materials caused by the
transition of foundry manufacturing processes. We expect research and
development expenses to continue to increase in absolute dollars but to
fluctuate as a percentage of our net revenues.
11
<PAGE>
Sales and marketing expenses. Sales and marketing expenses consist
primarily of employee-related expenses, commissions to sales representatives and
facilities expenses, including expenses associated with our regional sales and
support offices. Sales and marketing expenses for the first quarter of 1999 were
$2.5 million compared to $1.9 million for the same period in 1998, an increase
of $600,000, or 31%, which represented 11.9% and 13.1% of our net revenues,
respectively. The increase for the three months ended March 31, 1999 was
primarily a result of the addition of personnel to support increased sales, and
to increase the availability of field application engineers. We expect that
sales and marketing expenses will continue to increase in absolute dollars, but
will fluctuate as a percentage of our 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 consulting, outside services, legal
and auditing expenses. For the quarters ended March 31, 1999 and 1998, general
and administrative expenses were $1.4 million and $548,000, respectively, which
represented 6.6% and 3.8% of our net revenues, respectively. This increase in
spending is primarily attributable to increased professional and legal expenses
related to our patent infringement lawsuit filed against Motorola. We expect
general and administrative expenses to continue to increase in absolute dollars,
and may increase as a percentage of our net revenues depending on our patent
infringement lawsuit against Motorola.
Other income, net. Other income, net, for the first quarter of 1999
increased by $397,000 over the same period in 1998. The increase for the three
months ended March 31, 1999 was due primarily to additional interest income from
an increase in short-term investments in 1999.
Provision for income taxes. Provision for income taxes represents Federal,
state and foreign taxes. The provision for income taxes was $864,000 for the
first quarter of 1999 compared to $663,000 for the same period in 1998. The
estimated effective tax rate for 1999 is 15% compared to 25% used in the same
quarter for 1998. The difference between the statutory rate and our effective
tax rate for 1999 is primarily due to the beneficial impact of deferred taxes
resulting from a reduction in the valuation allowance.
Liquidity and Capital Resources
At March 31, 1999, we had approximately $48.9 million in cash, cash
equivalents and short-term investments. In addition, under a revolving line of
credit agreement with Union Bank of California, we can borrow up to $10.0
million. A portion of the credit line is used to cover advances for commercial
letters of credit and standby letters of credit, which we provide to Matsushita
and OKI prior to the shipment of wafers by the foundries to us. The balance of
this credit line is unused and available. The line of credit agreement contains
financial covenants and requires that we maintain profitability on a quarterly
basis and not pay or declare dividends without the bank's prior consent. We
have financed a significant portion of our machinery and equipment through
capital equipment leases. There was no additional equipment financing during the
three months ended March 31, 1999.
As of March 31, 1999, we had working capital, defined as current assets less
current liabilities, of approximately $47.7 million, which was an increase of
approximately $4.7 million over December 31, 1998. Our operating activities
generated cash of $5.5 million and $2.0 million in the quarters ended March 31,
1999 and 1998, respectively. Cash generated in the first quarter of 1999 was
principally the result of net income in the amount of $4.9 million, depreciation
and amortization, and an increase in accrued liabilities, partially offset by
increases in accounts receivable and deferred tax provision. Cash generated in
the first quarter of 1998 was principally the result of net income and an
increase in deferred revenue; offset by increases in accounts receivable and
inventories.
Our investing activities were a net transfer from cash and cash equivalents
to short-term investments of $17.2 million and $20 million in the quarters ended
March 31, 1999 and 1998, respectively.
We believe that cash generated from operations, together with existing
sources of liquidity, will satisfy our projected working capital and other cash
requirements for at least the next 12 months.
12
<PAGE>
Year 2000 Issues
Some computers, software, and other equipment include computer code in which
calendar year data is abbreviated to only two digits. As a result of this design
decision, some of these systems could fail to operate or fail to produce correct
results if "00" is interpreted to mean 1900, rather than 2000. These problems
are widely expected to increase in frequency and severity as the year 2000
approaches, and are commonly referred to as the "year 2000 problem."
Assessment. The year 2000 problem affects the computers, software and other
equipment that we use, operate or maintain for our operations. Accordingly, we
have organized a program team responsible for monitoring the assessment and
remediation status of our year 2000 projects and reporting such status to our
board of directors. This project team is currently assessing the potential
effect and costs of remediating the year 2000 problem for our internal systems.
To date, we have not obtained verification or validation from any independent
third parties of our processes to assess and correct any of our year 2000
problems or the costs associated with these activities. We do not believe that
the scope of our program warrants this time and expense.
Products. We have evaluated the functionality of our past and present
products with respect to any year 2000 problems and have determined that none of
our past or present products utilize date-related functions and, therefore, have
no year 2000 problems.
Internal Infrastructure. We have completed an inventory of our computers,
software applications, and production equipment used in connection with our
internal operations and we have categorized such systems as critical or non-
critical. We expect to complete the process of modifying, upgrading, and
replacing non-compliant systems categorized as critical, which began during
1998, during the first half of 1999.
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, telephone switches, security systems, and other common devices may
be affected by the year 2000 problem. We expect to have identified relevant year
2000 issues for such systems and equipment and to have completed the necessary
upgrading during the first half of 1999.
We estimate the total cost to us of completing any required modifications,
upgrades or replacements of our internal systems, beyond expenditures planned to
meet the needs for managing our growth, to be approximately 350,000, almost all
of which we believe will be incurred during 1999. This estimate is being
monitored and we will revise it, as additional information becomes available.
Based on the activities described above, we do not believe that the year 2000
problem will have a material adverse effect on our business or operating
results. In addition, we have not deferred any material information technology
projects as a result of our year 2000 problem activities.
Suppliers. We are in the process of contacting third-party suppliers of
components used in the manufacture of our products to identify and, to the
extent possible, resolve issues involving the year 2000 problem. We have
categorized our suppliers as critical or non-critical and we intend to verify
the status of the materials, parts or products from all critical suppliers as
well as their continued performance into the year 2000 during the third quarter
of 1999. However, we have limited or no control over the actions of these third-
party suppliers. Thus, while we expect that we will be able to resolve any
significant year 2000 problems with these third parties, there can be no
assurance that these suppliers will resolve any or all year 2000 problems before
the occurrence of a material disruption to the operation of our business. Any
failure of these third parties to resolve year 2000 problems with their systems,
on a timely basis, could have a material adverse effect on our business,
operating results and financial condition.
Customers. We are in the process of contacting our customers and, to the
extent possible, determining their year 2000 readiness and to ensure that our
revenue flow will not be substantially impacted by their inability to take
delivery of planned product shipments. However, we have limited or no control
over the actions of these customers. Thus, while we expect that we will be able
to resolve any significant year 2000 problems with them, there can be no
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assurance that these customers will resolve any or all year 2000 problems before
the occurrence of a material reduction in the sale of our products. Any failure
of these customers to resolve year 2000 problems with their systems, on a timely
basis, could have a material adverse effect on our business, operating results
and financial condition.
Most Likely Consequences of Year 2000 Problems. We expect to identify and
resolve all year 2000 problems that could materially adversely affect our
business operations. However, we believe that it is not possible to determine
with complete certainty that all year 2000 problems affecting us have been
identified or corrected. The number of devices that could be affected and the
interactions among these devices are simply too numerous. In addition, no one
can accurately predict how many year 2000 problem-related failures will occur or
the severity, duration, or financial consequences of these perhaps inevitable
failures. As a result, we believe that the following consequences are possible:
. a significant number of operational inconveniences and inefficiencies for
us, our contract manufacturers and our customers that will divert
management's time and attention and financial and human resources from
ordinary business activities;
. several business disputes and claims for pricing adjustments or penalties
due to year 2000 problems by our customers, which we believe will be
resolved in the ordinary course of business; and
. a few serious business disputes alleging that we failed to comply with the
terms of contracts or industry standards of performance, some of which
could result in litigation or contract termination.
Worst case year 2000 scenario. While it is impossible to evaluate every
aspect of year 2000 compliance, we believe the worst case scenario related to
year 2000 compliance issues would be the failure of a sole or limited source
supplier to be year 2000 compliant. The failure of one of these suppliers to be
year 2000 compliant could seriously interrupt the flow of materials into the
manufacturing process and therefore delay the manufacture and sale of our
products. However, due to the general uncertainty inherent in the year 2000
computer problem resulting from the uncertainty of the year 2000 readiness of
third-party suppliers, we are unable to determine at this time whether the
consequences of year 2000 failures will have a material impact on our business.
Contingency Plans. We are currently developing contingency plans to be
implemented if our efforts to identify and correct year 2000 problems affecting
our internal systems are not effective. We expect to complete the development of
our contingency plans during the third quarter of 1999. Depending on the systems
affected, these plans could include:
. accelerated replacement of affected equipment or software;
. short-to medium-term use of backup equipment and software;
. increased work hours for our personnel; and
. use of contract personnel on an accelerated schedule to correct any year
2000 problems that arise or to provide manual workarounds for information
systems.
Our implementation of any of these contingency plans could have a material
adverse effect on our business, operating results and financial condition.
Disclaimer. The discussion of our efforts and expectations relating to year
2000 compliance are forward-looking statements. Our ability to achieve year
2000 compliance and the level of incremental costs associated therewith could be
adversely affected by, among other things, the availability and cost of
programming and testing resources, third party suppliers' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.
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New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, hedging activities, and exposure
definition. SFAS No. 133 requires companies to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. We do not expect that
the adoption of SFAS No. 133 will have a material impact on our financial
statements.
Quantitative and Qualitative Disclosure About Market Risks
Interest Rate Risk. Our exposure to market risk for changes in interest rates
relate primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. We invest in high-credit quality
issuers and, by policy, limit the amount of credit exposure to any one issuer.
As stated in our policy, we ensure the safety and preservation of our invested
principal funds by limiting default risk, market risk and reinvestment risk. We
mitigate default risk by investing in safe and high-credit quality securities
and by constantly positioning our portfolio to respond appropriately to a
significant reduction in a credit rating of any investment issuer, guarantor or
depository. The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity.
The table below presents principal amounts and related weighted average
interest rates for our investment portfolio at March 31, 1999. All investments
mature, by policy, in 15 months or less.
(in thousands, except average interest rates)
Average
Carrying Interest
Amount Rate
----------- -----------
Cash Equivalents:
U.S. corporate securities............... $ 2,008 5.32%
----------- -----------
Total cash equivalents............. 2,008 5.32%
----------- -----------
Short-term Investments:
U.S. corporate securities............... 31,694 5.72%
U.S. Government securities.............. 959 5.16%
Foreign securities...................... 4,096 6.60%
----------- -----------
Total short-term investments....... 36,749 5.87%
----------- -----------
Total investment securities........ $ 38,757 5.63%
=========== ===========
Foreign Currency Exchange Risk. We transact business in various foreign
countries. Our primary foreign currency cash flows are in Japan and Western
Europe. Currently, we dot not employ a foreign currency hedge program utilizing
foreign currency forward exchange contracts as the foreign currency transactions
and risks to date have not been significant.
Factors That May Affect Future Results of Operations
Our future results of operations are dependent upon a number of factors,
including those described below. For a complete description of such factors, see
our Form 10-K for the year ended December 31, 1998.
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Our Operating Results Fluctuate and Are Unpredictable. Our net revenues and
operating results have varied significantly in the past, are difficult to
forecast, are subject to numerous factors both within and outside of our
control, and may fluctuate significantly in the future.
. Our Operating Results Depend on the Volume and Timing of Orders
Received. Our revenues and operating results are substantially dependent
upon the volume and timing of orders received from our customers. We have
historically experienced lengthy sales cycles, which limit our visibility
regarding future financial performance. We are also subject to the risks to
which the markets for our 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 our
existing large customers have been unpredictable in the past, and we expect
that customer-ordering patterns will continue to be unpredictable in the
future. Not only does the volume of units ordered by particular customers
vary substantially from period to period, but also purchase orders received
from particular customers often vary substantially from early oral
estimates provided by those customers for planning purposes. Our 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. We have in the past experienced
customer cancellations of substantial orders for reasons beyond our
control, and significant cancellations could occur again at any time in the
future.
. Our Operating Results Are Subject to Competitive Pressures on Selling
Prices. Our 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 we are unable
to successfully introduce new products with higher average selling prices
or are unable to reduce manufacturing costs to offset expected decreases in
the prices of our existing products; our operating margins will be
adversely affected.
. Our Operating Results Are Dependent Upon the Volume and Timing of Our
Orders With Our Foundries. Our operating results are also substantially
dependent upon the volume and timing of orders that we place with our
foundries. Due to the absence of substantial noncancellable backlog, we
must plan our production and inventory levels based on internal forecasts
of customer demand, which is unpredictable and may fluctuate substantially.
If we underestimate the number of units required to meet customer demand
and fail to maintain adequate inventory levels, we may lose significant
revenue opportunities and market share to competitors. On the other hand,
if we overestimate the number of units required to meet customer demand,
our operating results may be materially 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 our distributors or customers.
. Other Factors Which May Affect Our Operating Results. Other factors
which may affect our revenues and operating results include the following:
. 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;
. our ability to develop and bring to market new products and
technologies on a timely basis;
. the introduction of products and technologies by our competitors;
. market acceptance of our and our customers' products;
. the timing of investments in research and development and sales
and marketing;
. cyclical semiconductor industry conditions;
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. 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.
Our 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 our common stock will likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Operating
Results."
We Depend on the Cellular Phone Battery Charger and Desktop PC Stand-By
Markets for a Majority of Our Revenues. A limited number of applications of our
products, primarily in the cellular phone battery chargers and desktop PC stand-
by markets, currently account for the majority of our revenues. We expect that
our 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.
We may experience substantial period-to-period fluctuations in future
operating results due to general conditions of these markets. Our 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 our largest end user, Motorola, to lower, or
consider lowering, the wattage level of the power supplies used to recharge
batteries. As the output power has dropped below 5 watts for some slow or
trickle chargers, older alternative technologies have been substituted for
switchers by some OEMs. Although this has not had any significant impact on our
business to date, it could in the future if these older technological
alternatives are more cost effective than our current and future product
offerings. While we continue our efforts to enhance the cost effectiveness of
integrated switchers based on our high-voltage ICs, we cannot guarantee we will
be successful in our efforts, and, in the absence of a successful competitive
response, demand for our products would be materially adversely affected.
Similarly, if a competitor successfully and cost-effectively combines desktop PC
stand-by power supplies with the main PC desktop power supplies before we do,
demand for our products could be materially adversely affected.
We believe that our future success will depend in part upon our ability to
penetrate additional markets for our products, and we cannot assure you that we
will be able to overcome the marketing or technological challenges necessary to
do so. To the extent that a competitor penetrates additional markets before we
do, or takes market share from us in our existing markets, our revenues,
financial condition and operating results would be materially adversely
affected.
We Are Highly Dependent on a Limited Number of Customers. Our 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 our revenue. We expect to continue to be dependent upon a
relatively limited number of customers for a significant portion of our net
revenues in future periods. Also, no customer is presently obligated either to
purchase a specified amount of products or to provide us with binding forecasts
of product purchases for any period. Our products are typically one of many
components used in a larger product produced by our customers. Demand for our
products is therefore subject to many risks beyond our control, including, among
others:
. competition faced by our customers in their particular end markets;
. market acceptance of the products of our customers;
. technical challenges which may or may not be related to the components
supplied by us; and
. the technical, sales and marketing and management capabilities of our
customers and the financial and other resources of our customers.
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Certain divisions within Motorola have developed products intended to compete
with us, as has Samsung, another customer of our products. We believe that we
have been successful in competing against such internally developed products to
date, but in the future we may lose sales as a result of such competing
products. The reduction, delay or cancellation of orders from Motorola or one of
our other significant customers, or the discontinuance of our products by our
end users, could materially adversely affect our business, financial conditions
and operating results. We have experienced such effects in the past and we
cannot assure you that any of our customers will not reduce, cancel or delay
orders in the future.
We Are Dependent on Our Wafer Suppliers. We outsource all of our
semiconductor manufacturing and product assembly, except for testing and
finishing. We have supply arrangements for the production of wafers with
Matsushita and OKI. Although certain aspects of our relationships with
Matsushita and OKI are contractual, many important aspects of these
relationships depend on the continued cooperation of these strategic partners
and, in many instances, the parties' course of conduct deviates from the literal
provisions of the contracts. We cannot assure you that our strategic partners
and we will continue to work together successfully in the future or that either
Matsushita or OKI will not seek an early termination of its wafer supply
agreement with us.
Our wafer supply contracts with Matsushita and OKI terminate in June 2000 and
September 2003, respectively. We cannot assure you that we will be able to reach
an agreement with Matsushita to extend the term of its wafer supply agreement.
Failure to reach, in a timely fashion, an extension of our agreement with
Matsushita or to enter into an arrangement with another manufacturer could
result in material disruptions in supply. Certain contractual provisions limit
the conditions under which we can enter into such arrangements with other
Japanese manufacturers or their subsidiaries during the term of our agreement
with Matsushita. In addition, our products do not require leading edge device
process geometries. As device process geometries become increasingly smaller and
as demand for such smaller geometries increases, Matsushita 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 Matsushita, if we were unable to quickly qualify
alternative manufacturing sources for existing or new products or if such
sources were unable to produce wafers with acceptable manufacturing yields, our
business, financial condition and operating results would be materially
adversely affected. We estimate that it would take between 9 to 12 months from
the time an alternate manufacturing source is identified for that source to
produce wafers with acceptable manufacturing yields in sufficient quantities to
meet our needs.
We typically receive shipments from Matsushita or OKI in approximately 8 to
10 weeks after placing orders, and lead times for new products can be
substantially longer. To provide sufficient time for assembly, testing and
finishing, we typically need to receive wafers from Matsushita or OKI 4 to 6
weeks before the desired ship date to our customers. As a result of these
factors and the fact that customers' orders can be made with little advance
notice, we have only a limited ability to react to fluctuations in demand for
our products. This could cause us to have an excess or a shortage of inventory
of a particular product. From time to time in the past we have been unable to
fully satisfy customer requests as a result of these factors. Any significant
disruptions in deliveries would materially adversely affect our business and
operating results. Although we provide OKI and Matsushita with rolling forecasts
of our production requirements, the ability of Matsushita or OKI to provide
wafers to us is limited by the available capacity of the foundry in which it
manufactures wafers for us. An increased need for capacity to meet internal
demands or demands of other customers could cause Matsushita and OKI to reduce
capacity available to us. Matsushita and OKI may also require us to pay amounts
in excess of contracted or anticipated amounts for wafer deliveries or require
us to make other concessions in order to acquire the wafer supply necessary to
meet our customers' requirements. Any of these concessions could materially
adversely affect our business, financial condition or operating results. We
carry a substantial amount of inventory of tested wafers to help offset these
factors to better serve our markets and meet customer demand.
We Rely on Our Contracted Foundries and Independent Subcontractors to Produce
Wafers and Assemble Finished Products at Acceptable Yields. We depend on
Matsushita and OKI to produce wafers, and independent subcontractors to assemble
finished products, at acceptable yields and to deliver them to us in a timely
manner. The manufacture of our 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, our financial condition or operating results would be
materially adversely affected. Our IC
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assembly process also requires our manufacturers to use a high-voltage molding
compound available from only one vendor, which is difficult to process. This
compound and its required processes, together with the other non-standard
materials and processes needed to assemble our products, require a more exacting
level of process control than normally required for standard packages.
Unavailability of the sole source compound or problems with the assembly process
can materially adversely affect yields and cost to manufacture. Good production
yields are particularly important to our business and financial results,
including our ability to meet customers' demand for products and to maintain
profitability. As we continue to increase our product output, our foundries and
assemblers may experience a decrease in yields. We cannot assure you that
acceptable yields will be maintainable in the future.
Matsushita Has Certain Licenses to Our Technology Which They May Use to Our
Detriment. Matsushita currently manufactures and sells its versions of our
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 us to manufacture and sell products using our 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, we agreed not to sell our products in Japan to new customers. We receive
royalties on sales by Matsushita, although such royalties are substantially
lower than the gross profit we would receive on direct sales. In addition, the
royalties paid by Matsushita are denominated in Japanese yen and are subject to
risks inherent in exchange rate fluctuations. Although we engage in sales,
marketing and support activities to encourage sales by Matsushita, should
Matsushita fail to adequately promote and deliver our products, our ability to
take advantage of the potentially large Japanese market for our products could
be severely limited. Should we fail to negotiate acceptable royalty-bearing
extensions to our contract with Matsushita, we would need to expend substantial
effort and expense to establish ourselves in this market directly or through a
different partner. There can be no assurance that we would not lose customers
for Matsushita's products during such a transition. In addition, the licenses to
Matsushita for many important aspects of our technology are perpetual. We cannot
assure you that Matsushita will not use these technology rights to develop or
market competing products following any termination of their relationships with
us or after termination of Matsushita's royalty obligation to us.
Our International Sales Subject Us to Substantial Risks. Sales to customers
outside of the United States account for a large portion of our net revenues.
These sales involve a number of 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 our foreign sales are denominated
in U.S. dollars, increase in the value of the dollar would increase the price in
local currencies of our products in foreign markets and make our products
relatively more expensive and less price competitive than competitors' products
that are priced in local currencies. We are exposed to additional risks to the
extent that the products of our customers are subject to foreign currency or
other international risks. These factors may have a material adverse effect on
our future international sales and, consequently, on our business, financial
condition or operating results.
We Are Dependent on Foreign Manufacturers and Assemblers for the Manufacture
of Our Wafers. Because we depend on Matsushita and OKI, both located in Japan,
for the manufacture of all of our finished silicon wafers
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and on foreign assembly subcontractors of our products, we are directly affected
by the political and economic conditions of the countries in which our wafers
are or are expected to be manufactured. To the extent that these conditions
result in any prolonged work stoppages or other inability to manufacture and
assemble our products, our business, financial condition or operating results
could be materially adversely affected. Our contracts with Matsushita and OKI
are denominated in Japanese yen, exposing us to the risk of increased costs for
finished wafers, which increase we could not readily pass through to our
customers.
New Products and Technological Change May Render Our and Our Customers'
Products Out of Date. Our future success depends in significant part upon our
ability to develop new ICs for high-voltage power conversion for existing and
new markets, to introduce these products in a timely manner and to have these
products selected for design into products of leading manufacturers. The
development of these new devices is highly complex, and from time to time we
have 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;
. timely completion and introduction of new product designs;
. availability of foundry capacity;
. achievement of acceptable manufacturing yields; and
. market acceptance of our and our customers' products.
We cannot be sure that we will be able to adjust to changing market demands
as quickly and cost-effectively as necessary to compete successfully.
Furthermore, we cannot assure you that we will be able to introduce new products
in a timely and cost-effective manner or in sufficient quantities to meet
customer demand or that such products will achieve market acceptance. Our or our
customers' failure to develop and introduce new products successfully and in a
timely manner would materially adversely affect our business, financial
condition and operating results. Certain customers may defer or return orders
for existing products in response to the introduction of new products. Although
we maintain reserves against any such returns, there can be no assurance that
these reserves will be adequate.
We Have Historically Experienced a Lengthy Sales Cycle. Our products are
generally incorporated into a customer's products at the design stage. However,
customer decisions to use our products, commonly referred to as design wins,
which can often require us to expend significant resources 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 our products into its product, we
may not have another opportunity for a design win with respect to that product
for many months or years. Because of such a lengthy sales cycle, we may
experience a delay between increasing expenses for research and development and
our 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. We
cannot assure you that we will continue to achieve design wins or that any
design win will result in future revenues. Our failure to timely develop and
introduce products that are incorporated into our customers' products could
materially adversely affect our business, financial condition and operating
results.
Our Products Must Meet Exacting Specifications, and Undetected Defects and
Failures May Occur. The fabrication and assembly of ICs is a highly complex and
precise process. We expect that our customers will continue to establish
demanding specifications for quality, performance and reliability that our
products must meet. ICs as complex as those we sell often encounter development
delays and may contain undetected defects or failures when first introduced or
after commencement of commercial shipments. We have from time to time in the
past experienced product quality, performance or reliability problems. We cannot
guarantee that defects or failures will not occur in the future relating to our
product quality, performance and reliability that may have a material adverse
effect on our operating results. If such defects and failures occur, we could
experience lost revenue, increased costs, including warranty expense and costs
associated with customer support, delays in or cancellations or rescheduling
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of orders or shipments and product returns or discounts, any of which would
materially adversely affect our business, financial condition or operating
results.
The High-Voltage Power Supply Industry is Extremely Competitive and Highly
Price-Sensitive. The high-voltage power supply industry is intensely
competitive and characterized by extreme price sensitivity. Accordingly, the
most significant competitive factor in the target markets for our products is
cost effectiveness. Our products face competition from alternative technologies,
including traditional linear transformers and discrete switcher power supplies.
We believe that at current pricing, our high-voltage power conversion IC
families of products offer favorable cost-performance benefits compared to the
competition. However, there has recently been sizeable over capacity of discrete
components, which resulted in significant price erosion for these products.
Continued significant erosion in the price of competing products, such as high-
voltage Bipolar and MOSFET transistors and PWM controller ICs, could adversely
affect the cost effectiveness of our products. Also, older alternative
technologies to switchers are more cost-effective than discrete switchers and
integrated switchers that use our products in certain power ranges for certain
applications. If power requirements for certain applications in which our
products are currently utilized, such as battery chargers for cellular
telephones, drop below certain power levels, these older alternative
technologies can be used more cost effectively than TOPSwitch-based switchers.
We are continuing our efforts to enhance the cost effectiveness of integrated
switchers in the lower power ranges but we cannot guarantee that we will be
successful in these efforts.
Recently, our 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, STMicroelectronics, Samsung and Sanken.
We expect competition to increase as companies like these see the success we
have had in converting older technologies to the integrated solutions used in
our product offerings. To the extent these competitors' products are more cost
effective than our products, our business, financial condition and operating
results could be materially adversely affected. Many of our emerging
competitors, including Motorola, STMicroelectronics, Samsung and Sanken, have
significantly greater financial, technical, manufacturing and marketing
resources than we do. In the context of a market where a high-voltage IC is
designed into a customer's product and the provider of such ICs is therefore the
sole source of the IC for that product, greater manufacturing resources may be a
significant factor in the customer's choice of the IC because of the customer's
perception of greater certainty in its source of supply.
Our ability to compete in our target markets also depends on such factors as:
. timing and success of new product introductions by us and our competitors;
. the pace at which our customers incorporate our products into their end
user products;
. availability of wafer fabrication and finished good manufacturing
capability;
. availability of adequate sources of raw materials;
. protection of our products by effective utilization of intellectual
property laws; and
. general economic conditions.
We cannot assure you that our products will continue to compete favorably or
that we will be successful in the face of increasing competition from new
products and enhancements introduced by existing competitors or new companies
entering this market. Our failure to compete successfully in the high-voltage
power supply business would materially adversely affect our business, financial
condition and operating results.
We Must Protect Our Intellectual Property And Have Sued, And Have Been Sued,
By Our Largest End User, Motorola, Regarding Certain Patents. Our future
success depends upon our ability to protect our intellectual property, including
patents, trade secrets, and know-how, and to continue our technological
innovation. We cannot assure you that the steps we have taken to protect our
intellectual property will be adequate to prevent misappropriation or that
others will not develop competitive technologies or products.
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In July 1998, we filed a complaint for patent infringement in the U.S.
District Court, Northern District of California, against our largest end user,
Motorola. In August 1998, we voluntarily dismissed the complaint, and filed a
new complaint in the U.S. District Court, District of Delaware, alleging that
Motorola has infringed and continues to infringe on two of our circuit patents.
We seek, among other things, an order enjoining Motorola from infringing on our
patents and an award for damages resulting from the alleged infringement. In
October 1998, Motorola asserted various counterclaims against us, alleging that
we are infringing on certain of Motorola's patents. We believe that Motorola's
counterclaims are without merit and intend to vigorously defend ourselves
against these claims. The trial is currently scheduled to commence in October
1999.
Litigation may be necessary to resolve the claims we have asserted against
Motorola and to resolve the claims Motorola has asserted against us. There can
be no assurance that we will prevail in any future litigation. Any litigation,
whether or not determined in our favor or settled by us, would be costly and
would divert the efforts and attention of our management and technical personnel
from normal business operations, which could have a material adverse effect on
our business, financial condition and operating results. Adverse determinations
in litigation could result in the loss of our proprietary rights, subject us to
significant liabilities, require us to seek licenses from third parties or
prevent us from licensing our technology, any of which could have a material
adverse effect on our business, financial condition and operating results.
Moreover, the laws of certain foreign countries in which our technology is or
may in the future be licensed may not protect our intellectual property rights
to the same extent as the laws of the United States, thus increasing the
possibility of infringement of our intellectual property.
We Depend on a Few Key Personnel. Our success depends to a significant
extent upon the continued service of our executive officers and other key
management and technical personnel, and on our ability to continue to attract,
retain and motivate qualified personnel, such as experienced systems
applications engineers. The competition for these employees is intense,
particularly in Silicon Valley. The loss of the services of one or more of our
engineers, executive officers or other key personnel or our inability to recruit
replacements for such personnel or to otherwise attract, retain and motivate
qualified personnel could have a material adverse effect on our business,
financial condition or operating results. We do not have long-term employment
contracts with, and we do not have in place "key person" life insurance policies
on, any of our employees.
Our Future Success Depends On Our Successful Management of Growth. We have
experienced a period of rapid growth and expansion, which has placed, and
continues to place, a significant strain on our resources. To accommodate this
growth, we will be required to implement a variety of new and upgraded
operational and financial systems, procedures and controls, including the
improvement of our internal management systems, which may require substantial
management efforts. Such efforts may not be accomplished successfully. In
addition, any future periods of rapid growth or expansion could be expected to
place a significant strain on our limited managerial, financial, engineering and
other resources. Relationships with new customers generally require significant
engineering support. As a result, any increase in the number of customers using
our technology will increase the strain on our resources, particularly our
engineers. Any delays or difficulties in our research and development process
caused by these factors or others could make it difficult for us to develop
future generations of our products and to remain competitive. In addition, the
rapid rate of hiring new employees could be disruptive and adversely affect the
efficiency of our research and development process. Any failure to improve our
operational, financial and management systems, or to hire, train, motivate or
manage our employees, could have a material adverse effect on our business,
financial condition and operating results.
Arrival of the Year 2000 May Create Unforeseen Difficulties. Many computer
systems were not designed to handle any dates beyond the year 1999, and
therefore, computer hardware and software for virtually all businesses will need
to be modified prior to the year 2000 in order to remain functional. We are
concerned that many enterprises will be devoting a substantial portion of their
information systems spending to resolving this upcoming year 2000 problem. This
expense may result in spending being diverted from ICs for use in AC to DC power
conversion in the near future. We are still assessing the impact of the year
2000 issue on our internal information systems and have begun, and in many cases
completed, corrective efforts in these areas. We have evaluated the
functionality of our current products with respect to any year 2000 problems and
have determined that our current
22
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products have no year 2000 problems. We do not anticipate that addressing the
year 2000 problem for our internal information systems and future products will
have a material impact on our operations or financial results. However, we
cannot assure you that these costs will not be greater than anticipated, or that
we will complete the corrective actions we have undertaken before any year 2000
problems could occur. The year 2000 issue could lower demand for our products
while increasing our costs. These combining factors, while not quantified, could
have a material adverse impact on our operations and financial results.
We have certain relationships with key suppliers. If these suppliers fail to
adequately address the year 2000 issue for the products they provide to us, this
could have a material adverse impact on our operations and financial results. We
are still assessing the effect the year 2000 issue will have on our suppliers
and at this time we cannot determine the impact it will have. Contingency plans
will be developed if it appears we or our key suppliers will not be year 2000
compliant. Any such noncompliance could have a material adverse impact on our
operations.
We Have Adopted Certain Anti-Takeover Measures Which May Make it More
Difficult for a Third Party to Acquire Us. Our board of directors has the
authority to issue up to 3,000,000 shares of preferred stock and to determine
the price, rights, preferences and privileges of those shares without any
further vote or action by the stockholders. The rights of the holders of common
stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance of
shares of preferred stock, while potentially providing 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 our outstanding voting stock. We have no present intention to issue
shares of preferred stock. Further, on February 24, 1999, our board of directors
adopted a preferred stock purchase rights plan intended to guard against certain
takeover tactics. The adoption of this plan was not in response to any proposal
to acquire us, and the board is not aware of any such effort. The existence of
this plan could also have the effect of making it more difficult for a third
party to acquire a majority of our outstanding voting stock. In addition,
certain provisions of our certificate of incorporation may have the effect of
delaying or preventing a change of control, which could adversely affect the
market price of our common stock. These provisions provide, among other things,
that:
. stockholders may not take action by written consent;
. the ability of stockholders to call special meetings and to raise matters
at stockholders' meetings is restricted; and
. certain amendments of our certificate of incorporation, and all amendments
of our bylaws, require the approval of holders of at least two-thirds of
the voting power of all outstanding shares.
In addition, we are subject to the anti-takeover provisions of section 203 of
the Delaware General Corporation Law, which prohibits us 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.
Our Stock Price Has Been Volatile. Our common stock has been, and is likely
to be, volatile. Factors such as future announcements concerning us or our
competitors, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in our
product pricing policies or those of our competitors, proprietary rights or
other litigation, changes in earnings estimates by analysts or other factors
could cause the market price of our common stock to fluctuate substantially. In
addition, stock prices for many technology companies fluctuate widely for
reasons, which may be unrelated to operating results. These fluctuations, as
well as general economic, market and political conditions such as recessions or
military conflicts may materially adversely affect the market price of our
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. We cannot assure you that the trading price of our
common stock will remain at or near the price at which you may have purchased
it.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1998, we filed a complaint for patent infringement in the U.S.
District Court, Northern District of California, against our largest end user,
Motorola. In August 1998, we voluntarily dismissed the complaint, and filed a
new complaint in the U.S. District Court, District of Delaware, alleging that
Motorola has infringed and continues to infringe on two of our circuit patents.
We seek, among other things, an order enjoining Motorola from infringing on our
patents and an award for damages resulting from the alleged infringement. In
October 1998, Motorola asserted various counterclaims against us, alleging that
we are infringing on certain of Motorola's patents. We believe that Motorola's
counterclaims are without merit and intend to vigorously defend ourselves
against these claims. The trial is currently scheduled to commence in October
1999.
Litigation may be necessary to resolve the claims we have asserted against
Motorola and to resolve the claims Motorola has asserted against us. There can
be no assurance that we will prevail in any future litigation. Any litigation,
whether or not determined in our favor or settled by us, would be costly and
would divert the efforts and attention of our management and technical personnel
from normal business operations, which could have a material adverse effect on
our business, financial condition and operating results. Adverse determinations
in litigation could result in the loss of our proprietary rights, subject us to
significant liabilities, require us to seek licenses from third parties or
prevent us from licensing our technology, any of which could have a material
adverse effect on our business, financial condition and operating results.
Moreover, the laws of certain foreign countries in which our technology is or
may in the future be licensed may not protect our intellectual property rights
to the same extent as the laws of the United States, thus increasing the
possibility of infringement of our intellectual property.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
The following exhibits are attached hereto and filed herewith:
10.24* Amendment Number One, dated as of February 26, 1999, to
the Wafer Supply Agreement between the Company and OKI,
dated as of October 1, 1998.
27.1 Financial Data Schedule.
b. Reports on Form 8-K.
24
<PAGE>
Form 8-K filed on March 12, 1999 with the Securities and Exchange
Commission.
Form 8-K/A filed on March 22, 1999 with the Securities and Exchange
Commission.
* 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.
25
<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 10, 1999 By:__________________________
Robert G. Staples
Chief Financial Officer
26
<PAGE>
EXHIBIT 10.24
AMENDMENT NUMBER ONE
TO
WAFER SUPPLY AGREEMENT
This Amendment Number One (the "Amendment"), dated as of February 26, 1999,
amends the Wafer Supply Agreement dated as of October 1, 1998, (the "OKI
Agreement"), by and between OKI Electric Industry Co., Ltd. ("OKI"), a Japanese
corporation, and Power Integrations, Inc., a Delaware corporation (the
"Company"). Unless specifically designated otherwise, capitalized terms used
herein shall have the same meanings given them in the OKI Agreement.
RECITALS
--------
WHEREAS, pursuant to the terms of the OKI Agreement, the Company grants to
OKI licenses of certain of the Company's intellectual property and the Company
acquires from OKI fabrication and supply of wafers of certain Power IC products;
WHEREAS, the Company and OKI desire to amend the terms of the OKI
Agreement;
WHEREAS, in accordance with Section 16.10 of the OKI Agreement, the OKI
Agreement may be amended by an instrument in writing duly executed by authorized
officers of OKI and the Company;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements of the parties contained herein, the parties hereby agree to amend
the OKI Agreement as follows:
AGREEMENT
---------
1. The last sentence of EXHIBIT B shall be struck, and the following three
sentences inserted in its place:
"Additionally, a F/X_ADDITIONAL_CHARGE will be paid to OKI for each of
the WAFERS accepted by PI during the first year of the Agreement. The
F/X_ADDITIONAL_CHARGE will be set at * for the first quarter of the
Agreement. * will set the value, in its sole discretion, including
the possible value of *, of the F/X_ADDITIONAL_CHARGE for each
subsequent quarter during the first year of the Agreement."
2. This Amendment shall be governed in accordance with the laws of the
State of California, without regard to conflict of law principles.
3. This Amendment may be executed in counterparts, each of which shall be
an original and all of which together shall constitute one and the same
instrument.
[*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
1
<PAGE>
4. Except as amended hereby, the OKI Agreement remains in full force and
effect.
IN WITNESS WHEREOF, the undersigned parties have caused this Amendment to
be executed by their duly authorized representatives.
OKI ELECTRIC INDUSTRY CO., LTD. POWER INTEGRATIONS, INC.
/s/ Yoshiaki Inoue /s/ C. E. Pausa
By: Yoshiaki Inoue By: C.E. Pausa
Title: DBG SF Sales and Marketing Title: Vice President Operations
[*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
2
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<RECEIVABLES> 7,485
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<CURRENT-ASSETS> 65,340
<PP&E> 17,233
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0
0
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