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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-K
(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2001
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
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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.)
5245 Hellyer Avenue San Jose, California 95138-1002
(Address of principal executive offices) (Zip code)
(408) 414-9200
(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, $0.001 par value
(Title of Class)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
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 February 28, 2002, as reported on the NASDAQ National
Market, was approximately $333,346,300. 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, $0.001 par value, as of
February 28, 2002: 28,156,942.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive Proxy Statement for registrant's 2002 Annual
Meeting of Stockholders to be filed with the Commission pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
Form are incorporated by reference into Part III of this Form 10-K Report.
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TABLE OF CONTENTS
PART I
Page
----
ITEM 1. BUSINESS ................................................................................. 3
ITEM 2. PROPERTIES ............................................................................... 15
ITEM 3. LEGAL PROCEEDINGS ........................................................................ 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................................... 15
PART II
ITEM 5. MARKET FOR POWER INTEGRATIONS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............... 16
ITEM 6. SELECTED FINANCIAL DATA .................................................................. 17
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS ......... 18
ITEM 7a. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS ................................ 31
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................................. 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ..... 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY .......................................... 32
ITEM 11. EXECUTIVE COMPENSATION ................................................................... 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ........................... 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................................... 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K .......................... 33
SIGNATURES ........................................................................................ 52
2
PART I
TOPSwitch, TinySwitch and EcoSmart are trademarks of Power Integrations,
Inc.
Item 1. Business
Overview
We design, develop, manufacture and market proprietary, high-voltage,
analog integrated circuits, commonly referred to as ICs, for use primarily in
alternating current to direct current, or AC to DC, power conversion. We have
targeted high-volume power supply markets including:
o the communications market;
o the consumer market;
o the computer market; and
o the industrial electronics markets.
Our initial focus is on those applications 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, which are designed to
reduce energy leakage by incorporating our new EcoSmart technology, enable a new
class of light, compact, energy-efficient power supplies. In March 2000, we
introduced the TOPSwitch-FX family of products, which also incorporates our
EcoSmart technology to help engineers meet the growing need for environmentally
friendly power solutions. In November 2000, we introduced the TOPSwitch-GX
family of products. The GX family is capable of supplying output levels from 6
watts to 290 watts. We believe that the FX and GX families of ICs give power
supply design engineers the ability to cost-effectively integrate additional
functionality into the power supplies they design. In March 2001, we introduced
the TinySwitch-II family of products with power levels ranging from 4 watts to
23 watts. All of our products introduced since 1998 incorporate our EcoSmart
technology.
Industry Background
Virtually every electronic device that plugs into a wall socket requires
some type of power supply to convert high-voltage AC, provided by electric
utilities, into low-voltage DC required by the devices. Additionally,
rechargeable, portable products, such as cellular phones and laptop computers,
also need an AC to DC power supply to recharge their batteries.
Before 1970, AC to DC power supplies used large, inefficient transformers,
which operated at low frequencies to convert power from AC to DC. In the 1970s,
the invention of high-voltage discrete semiconductors enabled the development of
a new generation of AC to DC "switching" power supplies, which allowed the use
of smaller, more efficient transformers to lower the voltage. Although these
discrete switchers offered advantages over older technologies, over the years
they have not kept pace with the technological advances made in the electronic
devices they power.
As the pressures from market forces have increased, the limitations of
discrete switchers have become more pronounced. Discrete switchers require
numerous components which limit the power supply designers' ability to reduce
the size, increase the functionality and improve the efficiency of switchers
while at the same time meeting stringent market cost and energy efficiency
requirements. In addition, discrete switchers involve a high level of design
complexity, which limits the scalability of designs and increases time-to-market
and development risks for new products.
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Early attempts to replace discrete switchers with integrated switchers,
using high-voltage analog ICs, did not achieve widespread acceptance in the
marketplace because they were not cost-effective. We addressed this opportunity
in 1994 by introducing our first cost effective IC, TOPSwitch. Our growth since
that time validates our belief that a substantial market opportunity exists for
high-voltage ICs that are cost effective and combine the benefits of integration
that discrete switcher and earlier transformer technologies lack.
Our Highly Integrated Solution
We have developed several families of high-voltage power conversion ICs,
which we believe are the first highly integrated power conversion ICs to achieve
widespread market acceptance. Since introducing our TOPSwitch family of products
in 1994, based on this and subsequent innovations, we have shipped into the
market we pioneered approximately 680 million ICs. These patented ICs achieve a
high level of system integration by combining a number of electronic components
into a single IC. Our TOPSwitch and TinySwitch products enable many power
supplies in the 0.5 to 290-watt power range to have a total cost equal to or
lower than discrete switchers. Our TOPSwitch and TinySwitch products offer the
following key benefits to power supplies:
o Fewer Components, Reduced Size and Enhanced Functionality
Our highly integrated TOPSwitch ICs enable the design and production
of cost-effective switchers that use up to 50% fewer components and
have enhanced functionality compared to discrete-based solutions. For
example, our ICs provide thermal and short circuit protection without
increasing system cost, while discrete switchers must add additional
components and cost to provide these functions.
o Improved Efficiency
Our integrated circuit also improves electrical efficiency, which
reduces power consumption and excess heat generation. Our patented
low-loss, high-voltage device, combined with its control circuitry,
improves overall electrical efficiency during both full operation and
stand-by mode.
o Reduced Time-to-Market
Our integrated circuit makes power supply design simpler and once
customers have created designs using our ICs, they can apply that
design to new products, resulting in a shorter time-to-market and
reduced product development risk.
o Wide Power Range and Scalability
Products in our current TOPSwitch and TinySwitch families can address
a power range of 0.5 to 290 watts. Within each family of products, the
switcher designer can scale up or down in power to address a wide
range of designs with minimal design effort.
Strategy
Our objective is to be the leading provider of high-voltage power
conversion ICs. We intend to pursue the following strategies to accelerate
adoption of our products:
o Target High-Volume Markets
Because of our products' scalability and ability to address a wide
power range, a small number of products address a wide variety of
customer needs, allowing us to take advantage of economies of scale
and making us more competitive.
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o Focus on Markets that Can Derive Significant Benefits from Integration
We are initially focusing our efforts on those markets that are
particularly sensitive to size, portability, energy efficiency and
time to market issues. We achieved early success in the cellular phone
fast charger market, as cellular phone customers demanded more
portable travel chargers instead of stand-alone desktop chargers. We
have also achieved success in the desktop PC market due to the
market's demand for stand-by power capability, and in the cable and
direct broadcast satellite decoder box market due to that market's
need for reducing component count and for shortening product design
cycles. As other significant market opportunities emerge for our
TOPSwitch products, we intend to focus our resources on the
development and penetration of those markets.
o Deliver Systems Solutions and Provide Applications Expertise
To help potential customers decide to purchase our TOPSwitch products,
we offer comprehensive application design support. We provide
extensive application notes, software design tools and reference
design boards. We also provide application-engineering support out of
our headquarters and through field application engineering labs
located in China, England, Germany, India, Japan, Korea and Taiwan. We
have committed substantial resources to system support by dedicating
approximately 35 percent of our technical workforce to applications
engineering. We believe our power supply systems expertise and
investment in field applications engineering provide us significant
competitive advantages.
o Extend Technological Leadership in High-Voltage Analog ICs
Our proprietary device structures and fabrication processes as well as
circuit and system designs have resulted in 39 U.S. patents and 51
foreign patents. These patents, in combination with our other
intellectual property, form the basis of our TOPSwitch and TinySwitch
product families. We recently introduced an enhanced TOPSwitch product
family that provides improved power capability and system cost
advantages while preserving the design simplicity of our original
TOPSwitch products. We continue to improve our device structures,
wafer fabrication processes and circuit and system designs and seek to
obtain additional patents to protect our intellectual property.
o Leverage Patented Technology in Strategic Relationships
We have established relationships with Matsushita Electronics
Corporation, and with OKI Electric Industry in order to take advantage
of these companies' high volume manufacturing resources, and in the
case of Matsushita, to also generate royalty revenues. Our wafer
manufacturing relationships with Matsushita and OKI enable us to focus
on fundamental high-voltage silicon technology, product design and
marketing while minimizing fixed costs and capital expenditures.
Matsushita also has licensed the right to manufacture our products for
sale in certain geographic regions and for use in its own products.
Products
Below is a brief description of our products:
o TOPSwitch and TinySwitch Product Families
Our TOPSwitch and TinySwitch high-voltage analog IC products are able
to meet the power conversion needs of a wide range of applications
within high volume markets. Sales of TOPSwitch and TinySwitch products
accounted for 98%, 98% and 97% of our net revenues in 2001, 2000 and
1999, respectively.
5
* TOPSwitch
The TOPSwitch family was introduced in 1994 and consists of 13
products. The key benefits that the TOPSwitch family brings to
power supplies, compared to discrete switchers, include fewer
components, reduced size, enhanced functionality and lower cost
in many applications. Our TOPSwitch products integrate a PWM
controller, a high-voltage MOSFET and a number of other
electronic components into a single 3 terminal IC.
* TOPSwitch II
The TOPSwitch II family was introduced in April 1997 and consists
of 11 products. The TOPSwitch II products further lower the
switcher costs by improving the performance of TOPSwitch and
addressing low power applications with lower cost packaging. The
TOPSwitch II family uses the same proprietary architecture as the
original TOPSwitch family, enabling switcher designers
experienced with TOPSwitch to take advantage of the TOPSwitch II
benefits without implementing a new architecture.
* TinySwitch
The TinySwitch family was introduced in September 1998 and
consists of 5 products. The product line topology was
specifically designed to address low power applications below 10
watts. The TinySwitch family of high voltage ICs was the first
family of chips to incorporate EcoSmart technology to address the
growing global demand to reduce energy waste in a wide range of
electronic products. It dramatically reduces the energy consumed
during standby and no-load, enabling our customers to meet
governmental energy efficiency guidelines.
* TOPSwitch-FX
The TOPSwitch-FX family was introduced in March 2000 and consists
of 6 products. This family offers engineers greater design
flexibility to develop highly integrated power supplies. New
features integrated into the TOPSwitch-FX parts continue to
reduce the system cost of power supplies as well as improve their
performance. In addition, this product line incorporates our
energy saving EcoSmart technology to help meet the growing need
for environmentally friendly power solutions. The family delivers
up to 75 watts of power for use in markets such as cellular phone
chargers, personal computers, set-top boxes and DVD players.
* TOPSwitch-GX
The TOPSwitch-GX family was introduced in November 2000 and
consists of 21 products. It is capable of supplying output power
levels up to 290 watts. TOPSwitch-GX is the first monolithic high
voltage switching power IC capable of providing this level of
power. Our recently introduced novel, high-voltage technology
further improves silicon efficiency of this family of devices by
using dual-conduction layers. This structure provides a
transistor conduction capability that results in a significantly
more cost-effective high voltage device than that of competing
technologies. The new family incorporates the features offered in
earlier TOPSwitch product families as well as new ones through
additional user configurable pins. This allows a higher level of
end user design flexibility, resulting in improved power supply
design optimization and lower system cost. Advanced EcoSmart
technology offers improved standby energy efficiency.
Applications for TOPSwitch-GX devices include set-top boxes, DVD
players, desktop computers, LCD monitors, internet appliances and
printers.
* TinySwitch- II
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The TinySwitch-II family was introduced in March 2001 and
consists of 4 products. This product line maintains the
simplicity of the previous TinySwitch line while providing
additional features and lowering system cost. This family of
products is also implemented on the new dual conduction high
voltage silicon technology and addresses power levels up to 23
watts. TinySwitch-II devices enable manufacturers to easily and
cost effectively meet energy guidelines for standby power as
outlined in Europe's EC Code of Conduct and the one watt standby
executive order and Energy Star in the U.S. Applications for
these devices include low power adaptors for portable equipment
such as cell phones, PDAs, digital cameras, external computer
peripherals, power tools, standby power supplies found in PCs and
audio/video equipment and power supplies for home appliances.
o Other Products
Our products also include our SMP family, INT family and a limited
number of custom products. Sales of these products accounted for 2%,
2% and 3% of our net revenues in 2001, 2000 and 1999, respectively.
These products are scheduled for end-of-life at the end of 2002.
7
Markets and Customers
Our strategy is to target high-volume power supply applications and to
initially focus on markets that can benefit the most from our highly integrated
power conversion ICs. The following chart shows representative customers and end
users and the primary applications of our products in power supplies in several
major market categories.
Market Category Primary Applications Customers
- ------------------------------------ ------------------------------------------ ---------------------------------
o Communications cellular phones, wireless PDAs, cable AcBel, Anam, Leader, Mitsubishi,
modem, XDSL modems, network Motorola, Nokia, Phihong, Quante,
hubs, Telcom AC-DC, Telcom DC-DC Salom, Samsung
o Consumer cable and DBS set top box, digital Braun, Daewoo, General Electric,
camera, DVD, TV standby, home LG, Maytag, Miele, Mitsubishi,
comfort, major appliances, personal Pace, Philips, Samsung, Shinco,
care and small appliances Sony, Whirlpool
o Computer desktop standby, desktop main, AcBel, Artesyn, Astec, Compaq,
notebook adapter, monitors, Dell, Delta, Hipro, IBM, Liteon,
multimedia audio, printer, removable Magnetek, Samsung
media, LCD projector
o Industrial Electronics industrial control, utility meters, motor Actaris, American Power
control, uninterruptible power supply Conversion, Black & Decker, EBM
(UPS) Werke GmbH, Formosa
Electronics, Samsung,
Schlumberger, Siemens
Revenue by our end market categories for 2001 was approximately 36 percent
communications, 31 percent consumer, 19 percent computer, 7 percent industrial
electronics and 7 percent other markets.
Sales, Distribution and Marketing
We sell our products to original equipment manufacturers (OEMs) and
merchant power supply manufacturers through a direct sales staff and through a
worldwide network of independent sales representatives and distributors. Our
international sales representatives also act as distributors in Europe and Asia.
In the United States, we use two national distributors and a number of regional
sales representatives. We have sales offices in California, Georgia and
Illinois, as well as in China, England, Germany, India, Japan, Korea, Singapore
and Taiwan. Direct sales to OEMs and merchant power supply manufacturers
represented approximately 49%, 50% and 60% of our net product revenues for 2001,
2000 and 1999, respectively, while sales through distributors accounted for
approximately 51%, 50% and 40% for 2001, 2000 and 1999, respectively. All
distributors are entitled to certain return privileges based on sales revenue
and are protected from price reductions affecting their inventories. Our
distributors are not subject to minimum purchase requirements and the sales
representatives and distributors can discontinue marketing any of our products
at any time.
Our products are generally incorporated into a customer's power supply at
the design stage. Our sales and marketing efforts are focused on facilitating
the customer's use of our products in the design of new power supplies for
specific applications. An important competitive factor in determining whether a
customer decides to use our products in its designs is our commitment to provide
comprehensive application design support. We publish comprehensive data books
and design guides, and provide to our current and prospective customers
extensive application notes and reference design boards. We also have available
our "P I Expert" software, which is a PC-based design program that aids users in
designing power supplies. In addition, we provide application-
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engineering support out of our headquarters, and our field application
engineering labs provide local resources to support customers in key
geographies. We focus particular efforts on building relationships with, and
providing support to, industry-leading OEMs and merchant power supply
manufacturers. We have committed substantial resources to system support by
dedicating approximately 35 percent of our technical workforce to applications
engineering.
Our customer base is highly concentrated, and a relatively small number of
distributors, OEMs and merchant power supply manufacturers, accounted for a
significant portion of our revenue in 2001 and 2000. We estimate that our top
ten customers, including distributors which resell to large OEMs and merchant
power supply manufacturers, accounted for 74%, 69% and 68% of our net revenues
for 2001, 2000 and 1999, respectively. For 2001, Memec Electronic Components and
Synnex Technologies, both distributors, accounted for 22% and 13% of our net
revenues, respectively. Also in 2001, Phihong Enterprise Co., a merchant power
supply manufacturer, accounted for 11% of our net revenues. For 2000, Memec and
Synnex accounted for 22% and 10% of our net revenues, respectively. For 1999,
these two distributors accounted for 16% and 11% of our net revenues,
respectively. No other customers accounted for more than 10% of net revenues
during 2001, 2000 and 1999. In 2001, 2000 and 1999, international sales
comprised 93%, 84% and 78%, respectively, of our net revenues.
Sales of our products are generally made pursuant to standard purchase
orders, which are frequently revised to reflect changes in the customer's
requirements. Product deliveries are scheduled upon our receipt of purchase
orders. Generally, these orders allow customers to reschedule delivery dates and
cancel purchase orders without significant penalties. For these reasons, we
believe that purchase orders received, while useful for scheduling production,
are not necessarily reliable indicators of future revenues.
Technology
o High-Voltage Transistor Structure and Process Technology
We have developed a patented high-voltage, power IC technology, which
uses our proprietary high voltage MOS transistor structure and
fabrication process and has resulted in 12 U.S. patents. The
technology enables us to integrate cost effectively on the same
monolithic IC, high-voltage n-channel transistors with industry
standard CMOS and bipolar components. The IC device structure and the
wafer fabrication process both contribute to the cost effectiveness of
our high-voltage technology. Recently introduced novel, high-voltage
technology further improves silicon efficiency of the devices by using
dual-conduction layers. The device structure provides a transistor
conduction capability that results in a significantly more
cost-effective high voltage device than that of competing
technologies. Our high voltage ICs have been implemented on low cost
silicon wafers using standard 5V CMOS silicon processing techniques
with a relatively large feature size of 3-microns combined with our
proprietary implant process step.
o IC Design and System Technology
Our proprietary IC designs combine complex control circuits and
high-voltage transistors on the same monolithic IC. Our IC design
technology takes advantage of our high-voltage process to minimize the
die size of both the high-voltage device and control circuits and
improve the performance of our ICs versus alternative integrated
technologies. We also have developed system expertise in switching
converters that have resulted in new innovative topologies that reduce
system cost, increase system performance and greatly improve energy
efficiency of power supplies compared to alternative approaches. Our
innovations in IC circuit designs system level architectures have
resulted in 27 U.S. patents, and have enabled us to develop
revolutionary products such as the highly integrated TOPSwitch,
TOPSwitch-GX and TinySwitch family of ICs and scalable architecture
for integrated switchers.
Research and Development
Our research and development efforts are focused on improving our
high-voltage device structures, wafer fabrication processes, analog circuit
designs and system level architecture. By these efforts, we seek to further
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reduce the costs of our products, and improve the cost effectiveness and enhance
the functionality of our customers' power supplies. We have assembled a
multidisciplined team of highly skilled engineers to meet our research and
development goals. These engineers bring expertise in high-voltage structure and
process technology, analog design and power supply systems architecture.
In 2001, 2000 and 1999, we spent $14.5 million, $12.5 million and $10.8
million, respectively, on research and development efforts. We expect to
continue to invest substantial funds in research and development activities. The
development of high-voltage analog ICs is highly complex. We cannot guarantee
that we will develop and introduce new products in a timely and cost-effective
manner or that our development efforts will successfully permit our products to
meet changing market demands.
Intellectual Property and Other Proprietary Rights
We use a combination of patents, trademarks, copyrights, trade secrets and
confidentiality procedures to protect our intellectual property rights. We hold
39 U.S. patents and have generally filed for or received foreign patent
protection on these patents resulting in 51 foreign patents to date. The U.S.
patents have expiration dates ranging from 2006 to 2020. We are currently
pursuing additional U.S. patent applications relating to new products and
improvements, and extensions of our current products. We cannot guarantee that
our pending United States or foreign patent applications or any future United
States or foreign patent applications will be approved, that any issued patents
will protect our intellectual property or will not be challenged by third
parties, or that the patents of others will not have an adverse effect on our
ability to do business. Furthermore, we cannot guarantee that others will not
independently develop similar or competing technology or design around any of
our patents. We also hold 18 trademarks, six in the U.S., two in California, two
in Taiwan, one in Korea, two in Hong Kong, one in China, one in Europe and three
in Japan.
We regard as proprietary certain equipment, processes, information and
knowledge that we have developed and used in the design and manufacture of our
products. Our trade secrets include a proprietary high volume production process
that produces our patented high-voltage ICs. We attempt to protect our trade
secrets and other proprietary information through non-disclosure agreements,
proprietary information agreements with employees and consultants and other
security measures. Despite these efforts, we cannot guarantee that others will
not gain access to our trade secrets, or that we can meaningfully protect our
intellectual property. In addition, effective trade secret protection may be
unavailable or limited in certain foreign countries. Although we intend to
protect our rights vigorously, we cannot assure that such measures will be
completely successful.
We have granted a perpetual non-transferable license to Matsushita to use
our semiconductor patents and other intellectual property for our current
high-voltage technology, including our TOPSwitch technology and improvements on
the existing technology, which allows Matsushita to manufacture and design
products for internal use and for sale or other distribution to Japanese
companies and to subsidiaries of Japanese companies in Asia. To the extent the
products they manufacture and design are not based on the TOPSwitch technology,
Matsushita may make sales or other distribution to Asian companies in Asia.
Matsushita has granted us perpetual cross licenses to the technology developed
by them under their license rights. We have agreed not to license the technology
licensed to Matsushita to other Japanese companies or their subsidiaries prior
to July 2005. In exchange for its license rights, Matsushita has paid and will
continue to pay to us licensing fees for a fixed period and has paid or will pay
royalties on products using the licensed technology during fixed periods.
We have also granted a perpetual, non-transferable license to AT&T
Microelectronics to use certain of our IC processes and device technologies in
the products AT&T sells. In addition, pursuant to an agreement with MagneTek,
Inc., we have granted MagneTek an exclusive, non-transferable, perpetual
royalty-free license to manufacture lighting products that incorporate certain
of our technology.
Manufacturing
We contract with Matsushita and OKI to manufacture our wafers in foundries
located in Japan. Our semiconductor products are assembled and packaged by
independent subcontractors in China, Malaysia and the Philippines. We perform
testing, finishing and shipping at our facility in San Jose, California. This
fabless manufacturing model enables us to focus on our engineering and design
strengths, minimize fixed costs on capital
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expenditures, and still have access to high-volume manufacturing capacity. Our
products do not require leading edge process geometries for them to be
cost-effective, and thus we can use Matsushita and OKI's older, low-cost
facilities for wafer manufacturing. We use a proprietary and sensitive implant
process and must interact closely with Matsushita and OKI to achieve
satisfactory yields. Although we generally utilize standard IC packages for
assembly, some materials and aspects of assembly are specific to our products.
We require our manufacturers to use a high-voltage molding compound that is
difficult to process and is available from only one supplier. 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. As a result we
must be involved with our contractors on an active engineering basis to maintain
and improve the process. We have developed process monitoring equipment to
support this effort and must provide adequate engineering resources to provide
similar support in the future.
Our wafer supply agreements with Matsushita and OKI expire in June 2005 and
September 2003, respectively. Under the terms of our agreement with Matsushita,
we establish minimum annual and monthly purchase and sale commitments annually
with the mutual agreement of Matsushita. We also establish pricing by good faith
agreement, subject to our right to most favored pricing. Under the terms of the
OKI agreement, OKI has agreed to reserve a specified amount of production
capacity and to sell wafers to us at fixed prices, which are subject to periodic
review jointly by OKI and us. Our agreements with both Matsushita and OKI
provide for the purchase of wafers in Japanese yen. Both agreements allow for
mutual sharing of the impact of the exchange rate fluctuation between Japanese
yen and the U.S. dollar.
We cannot assure you that we will be able to reach an agreement with either
Matsushita or OKI to extend the term of their respective wafer supply
agreements. Failure to reach, in a timely fashion, an extension of either
agreement or to enter into a wafer supply arrangement with another manufacturer
could result in material disruptions in supply. Contractual provisions limit the
conditions under which we can enter into such arrangements with other Japanese
manufacturers or their subsidiaries during the term of the agreement with
Matsushita. 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 these sources were unable to produce wafers with acceptable
manufacturing yields, our operating results would suffer.
We typically receive shipments from Matsushita or OKI approximately 5 to 9
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 and 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 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. We carry a
substantial amount of inventory of tested wafers to help offset these factors to
better serve our markets and meet customer demand.
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 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 families of high-voltage power conversion ICs offer
favorable cost-performance benefits compared to linear and discrete switcher
supplies in many high-volume applications. However, there has been sizeable
overcapacity of discrete components, which resulted in significant price erosion
for these products during 2000 and 2001. A continuation of the price decline 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 like linear transformers are more
cost-effective than discrete switchers and integrated switchers that use our ICs
in certain low 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 switchers.
Our TinySwitch IC family, introduced in September 1998, was specifically
designed to enhance the cost effectiveness of our integrated
11
switcher solutions in the low power range. However, we cannot guarantee that our
efforts in this area will continue to be successful.
Recently, our TOPSwitch product families have begun to meet increased
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 ON Semiconductor, STMicroelectronics, Fairchild
Semiconductor Infineon, Philips and Sanken Electric Company. We expect
competition to increase as companies like these see the success we have had in
converting older technologies to the integrated solutions enabled by 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
STMicroelectronics, Fairchild, Infineon, Philips and Sanken, have significantly
greater financial, technical, manufacturing and marketing resources than do we.
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:
o timing and success of new product introductions by us and our
competitors;
o the pace at which our customers incorporate our products into their
end user products;
o availability of wafer fabrication and finished good manufacturing
capability;
o availability of adequate sources of raw materials;
o protection of our products by effective utilization of intellectual
property laws; and
o 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.
Employees
As of December 31, 2001, we employed 264 full time personnel, consisting of
108 in manufacturing, 62 in research and development, 36 in applications
support, 35 in sales and marketing and 23 in finance and administration.
12
Executive Officers of Power Integrations
As of February 28, 2002, our executive officers, which are elected by and
serve at the discretion of the board of directors, were as follows:
Name Position With Power Integrations Age
- ---------------------------- --------------------------------------------------------------- ---
Balu Balakrishnan President and Chief Executive Officer 47
Derek Bell Vice President, Engineering 58
John M. Cobb Vice President, Finance and Administration, Chief Financial 45
Officer
Richard S. Fassler Vice President, Marketing 50
Bruce Renouard Vice President, Worldwide Sales 41
Daniel M. Selleck Vice President, Strategic Business Development 55
John Tomlin Vice President, Operations 54
Clifford J. Walker Vice President, Corporate Development 50
Howard F. Earhart Chairman of the Board 62
Alan D. Bickell(1)(2) Director 65
Nicholas E. Brathwaite(2) Director 43
R. Scott Brown(1) Director 60
E. Floyd Kvamme(1)(2) Director 64
Steven J. Sharp Director 60
- -----------
(1) Member of the compensation committee
(2) Member of the audit committee
Balu Balakrishnan became the president and chief executive officer in
January 2002. He served as our president and chief operating officer from April
2001 to January 2002. From January 2000 to April 2001, he was the vice president
of engineering and strategic marketing. From September 1997 to January 2000 he
was the vice president of engineering and new business development. From
September 1994 to September 1997 Mr. Balakrishnan served as our vice president
of engineering and marketing. He served as our vice president of design
engineering from April 1989 to September 1994.
Derek Bell has served as vice president of engineering since joining us in
April of 2001. Previously Mr. Bell was vice president of engineering for the
professional services group at Synopsys during 1999 and 2000, vice president of
strategic alliances at Cirrus Logic from 1996 to 1999, vice president and
general manager of the application specific product group at National
Semiconductor from 1995 to 1996 and served as president and chief executive
officer of NovaSensor, a manufacturer of silicon sensors from 1990 to 1994. He
also held various senior management positions at Signetics from 1972 to 1990,
most recently as group vice president.
John M. Cobb has served as our vice president, finance and administration
and chief financial officer since April 2001. From April 1990 to October 2000,
Mr. Cobb held various senior level financial positions at Quantum Corporation, a
computer storage company, most recently as vice president, finance and chief
financial officer of the Hard Disk Drive Group.
Richard S. Fassler has served as our vice president, marketing since
January 2000. From 1986 to 2000, Mr. Fassler held various positions, most
recently as the vice president of sales and marketing at IXYS Corporation, a
designer and developer of power semiconductors.
Bruce Renouard has served as our vice president, worldwide sales since
February 2002. Mr. Renouard joined our company in January 2002 as a member of
the sales organization. From August 1999 to August 2001,
13
he served as vice president, worldwide sales of Zoran Corporation, a provider of
digital solutions in the multimedia and consumer electronics markets. Mr.
Renouard held the position of director, worldwide market development from June
1997 to August 1999 for IDT/Centaur, an X 86 processor and start-up. From
January 1995 to June 1997, he served as national distribution sales manager for
Cyrix Corp, a company specializing in Intel compatible processors.
Daniel M. Selleck has served as our vice president, strategic business
development since February 2002. He was our vice president, worldwide sales from
May 1993 to February 2002. From February 1984 to May 1993, Mr. Selleck held
various sales management positions with Philips Semiconductor including european
regional sales manager and western area sales manager in the United States.
John Tomlin has served as our vice president, operations since October
2001. From 1981 to 2001, Mr. Tomlin served in a variety of senior management
positions in operations, service, logistics and marketing, most recently as vice
president of worldwide operations at Quantum Corporation, a computer storage
company.
Clifford J. Walker has served as our vice president, corporate development
since June 1995. From September 1994 to June 1995, Mr. Walker served as vice
president of Reach Software, a software company. From December 1993 to September
1994, Mr. Walker served as president of Morgan Walker, a consulting company.
Howard F. Earhart served as our president, chief executive officer and as a
director from January 1995 until January 2002, and continues as chairman of the
board of directors. Mr. Earhart brings more than 30 years of executive
management experience to Power Integrations. His management experience includes
photographic film products at Eastman Kodak and consumer products at Memorex
Corporation where he was president of the consumer products group. Mr. Earhart
also served as the chief executive officer of Lin Data Corporation and
Information Magnetics Corporation; both companies manufacture
semiconductor-based components for the disk drive industry. Mr. Earhart
currently serves on the boards of two private companies. He holds a B.S. in
chemical engineering from Clarkson University.
Alan D. Bickell has served as a member of the board of directors since
April 1999. Mr. Bickell retired in 1996 after more than 30 years with Hewlett
Packard, serving as a corporate senior vice president and managing director of
geographic operations since 1992. Mr. Bickell also serves on the boards of
Asiainfo Holdings, Inc., Junior Achievement International and the Peking
University Educational Foundation (USA).
Nicholas E. Brathwaite has served as a member of the board of directors
since January 2000. Mr. Brathwaite currently serves as senior vice president and
chief technology officer for Flextronics International, a provider of
engineering, advanced electronics manufacturing and logistical services, and has
held various engineering management positions with Flextronics since 1995. From
1989 to 1995, Mr. Brathwaite held various management positions at nChip, a
multi-chip module company.
R. Scott Brown has served as member of the board of directors since July
1999. Mr. Brown has been retired since May 1999. From 1985 to May 1999, Mr.
Brown served as senior vice president of worldwide sales and support for Xilinx,
Inc., a designer and developer of complete programmable logic solutions for use
by electronic equipment manufacturers.
E. Floyd Kvamme has served as a member of the board of directors since
September 1989. Mr. Kvamme has been a general partner of Kleiner Perkins
Caufield & Byers, a venture capital company, since 1984. Mr. Kvamme also serves
on the boards of Brio Technology, Harmonic Inc., National Semiconductor, Photon
Dynamics and several private companies.
Steven J. Sharp is one of our founders and has served as a member of the
board of directors since our inception. Mr. Sharp has served as president, chief
executive officer and chairman of the board of TriQuint Semiconductor, a
manufacturer of electronic components for the communications industry, since
September 1991.
14
Item 2. Properties.
Our main executive, administrative, manufacturing and technical offices are
located in a 118,000 square foot facility in San Jose, California under a lease,
which expires in September 2010 with two conditional five-year options which if
exercised would extend the lease to September 2020.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
15
PART II
Item 5. Market for Power Integration's Common Equity and Related Stockholder
Matters.
Our common stock trades on the Nasdaq National Market under the symbol
"POWI." As of February 28, 2002, there were approximately 120 stockholders of
record. Because brokers and other institutions on behalf of stockholders hold
many of such shares, we are unable to estimate the total number of stockholders
represented by these record holders. The following table sets forth, for the
quarter indicated, the range of daily closing prices per share of our common
stock as reported on the Nasdaq National Market:
Price Range
-------------------
Year Ended December 31, 2001 High Low
---------------------------- ------- -------
Fourth quarter $ 27.10 $ 16.58
Third quarter $ 25.71 $ 15.36
Second quarter $ 22.79 $ 12.10
First quarter $ 23.06 $ 10.25
Year Ended December 31, 2000 High Low
---------------------------- ------- -------
Fourth quarter $ 17.19 $ 9.34
Third quarter $ 26.13 $ 12.75
Second quarter $ 30.75 $ 15.06
First quarter $ 65.63 $ 22.75
All prices per share have been adjusted to reflect the 2-for-1 stock split
we effected on November 22, 1999.
We have not paid any cash dividends on our capital stock. We currently
intend to retain our earnings for use in the operation and expansion of our
business and, therefore, do not anticipate paying any cash dividends in the
foreseeable future.
16
Item 6. Selected Financial Data.
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Form 10-K.
Years Ended December 31,
--------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Net revenues:
Product sales ......................................... $92,919 $109,759 $102,655 $68,206 $44,827
License fees and royalties ............................ 1,176 1,755 1,412 1,802 1,162
------- -------- -------- ------- -------
Total net revenues ............................... 94,095 111,514 104,067 70,008 45,989
Cost of revenues ........................................... 51,252 53,876 46,794 36,638 26,291
------- -------- -------- ------- -------
Gross profit ............................................... 42,843 57,638 57,273 33,370 19,698
------- -------- -------- ------- -------
Operating expenses:
Research and development .............................. 14,471 12,521 10,764 7,231 5,253
Sales and marketing ................................... 14,485 12,953 11,085 8,468 6,417
General and administrative ............................ 5,980 6,451 8,760 3,641 2,053
------- -------- -------- ------- -------
Total operating expenses ......................... 34,936 31,925 30,609 19,340 13,723
------- -------- -------- ------- -------
Income from operations ..................................... 7,907 25,713 26,664 14,030 5,975
Interest and other income (expense), net ................... 1,749 2,523 2,147 1,248 (683)
------- -------- -------- ------- -------
Income before provision for income taxes ................... 9,656 28,236 28,811 15,278 5,292
Provision for income taxes ................................. 2,930 8,471 4,334 2,600 530
------- -------- -------- ------- -------
Net income ................................................. $ 6,726 $ 19,765 $ 24,477 $12,678 $ 4,762
======= ======== ======== ======= =======
Earnings per share:
Basic ................................................ $ 0.24 $ 0.73 $ 0.94 $ 0.52 $ 1.26
======= ======== ======== ====== =======
Diluted .............................................. $ 0.23 $ 0.69 $ 0.87 $ 0.48 $ 0.25
======= ======== ======== ====== =======
Shares used in per share calculation:
Basic ................................................ 27,714 27,179 25,958 24,426 3,776
======= ======== ======== ====== =======
Diluted .............................................. 28,991 28,774 28,197 26,452 18,678
======= ======== ======== ====== =======
December 31,
---------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments .......... $ 76,865 $ 63,434 $61,672 $44,418 $29,008
Working capital ............................................ $100,836 $ 87,005 $71,169 $42,988 $30,131
Total assets ............................................... $135,665 $127,391 $98,571 $65,054 $48,559
Long-term liabilities and capitalized lease obligations,
net of current portion .................................... $ 716 $ 715 $ 1,393 $ 1,963 $ 2,435
Stockholders' equity ....................................... $123,302 $108,787 $80,248 $47,364 $33,327
17
Item 7. Management's Discussion and Analysis of Financial Condition and
Operating Results.
This report includes a number of forward-looking statements. The use of
such words and phrases as "will", "expect", "believe", "should", "anticipate",
"outlook", "if", "future" and similar words and phrases identify forward looking
statements. Such statements reflect our current views with respect to future
events and our potential financial performance and are subject to risks and
uncertainties that could cause our actual results and financial position to
differ materially from what we say in this report. These factors include, but
are not limited to, our ability to maintain and establish strategic
relationships; the risks inherent in the development and delivery of complex
technologies; our ability to attract, retain and motivate qualified personnel;
the emergence of new markets for our products and services, and our ability to
compete in those markets based on timeliness, cost and market demand; and our
limited financial resources. We make these forward looking statements based upon
information available on the date hereof, and we have no obligation (and
expressly disclaim any such obligation) to update or alter any forward looking
statements, whether as a result of new information or otherwise .We more fully
discuss these and other risk factors in "Item 7--Management's Discussion and
Analysis of Financial Condition and Operating Results-- Factors That May Affect
Future Results of Operations" and elsewhere in this report.
Overview
We design, develop, manufacture and market proprietary, high-voltage,
analog ICs for use primarily in AC to DC power conversion primarily for the
communications, consumer, computer and industrial electronics markets. From our
inception in March 1988 through 1993, we developed numerous standard and custom
products incorporating high levels of features and functionality, each intended
to address the needs of various markets. Although we succeeded in developing the
core of our patented technology during this period, market penetration of our
products was low because these products were not as cost-effective as
alternative products. Limited product revenue and the high costs associated with
developing and marketing numerous solutions to numerous target markets resulted
in our being unprofitable.
In 1993, we changed our strategy to focus on bringing cost-effective,
integrated products to the high-voltage AC to DC power supply markets. As a
result, in 1994, we completed development of TOPSwitch, the first in our family
of cost effective, high voltage, power conversion ICs. The TOPSwitch family of
products, with its proprietary integrated architecture, is designed to address
with relatively few products broad applications in a number of high-volume,
high-voltage AC to DC power supply markets. The initial target markets served by
TOPSwitch are particularly sensitive to size, portability, energy efficiency and
time-to-market. The TOPSwitch products and the solutions enabled by them are
significantly lower in cost than our previous products and the solutions enabled
by those products. Commercial shipments of TOPSwitch began in May 1994. As a
result of the acceptance of TOPSwitch products, our net revenues from product
sales were $92.9 million, $109.8 million and $102.7 million in 2001, 2000 and
1999, respectively.
In response to increasing market acceptance of our TOPSwitch products and
faster revenue growth in 1996, we accelerated our investment in research and
development and sales and marketing, including technical customer support. Total
operating expenses in 2001, 2000 and 1999 were $34.9 million, $31.9 million and
$30.6 million, respectively. For 2002, we expect our operating expenses to
increase in absolute dollars as we continue to add resources to research and
development, sales and marketing and general and administrative activities.
Our quarterly and annual operating results are volatile and difficult to
predict. Our net revenues and operating results have varied significantly in the
past, are difficult to forecast and are subject to numerous factors both within
and outside of our control. As a result, our quarterly and annual operating
results may fluctuate significantly in the future. For a discussion of the
factors that may affect our quarterly and annual operating results, please see
"Factors that May Affect Future Results of Operations."
We license certain technologies and grant limited product manufacturing and
marketing rights to strategic parties in return for foundry relationships,
license fees and product royalty arrangements. Prior to the introduction of
TOPSwitch in 1994, our analog ICs generated limited product sales while license
fees and prepaid royalties accounted for a significant percentage of our total
revenues. Since then license fees and royalties have consisted
18
primarily of royalties on products shipped by licensees incorporating licensed
technology, and have accounted for a small percentage of our net revenues. We
expect this trend to continue in 2002.
A portion of our cost of revenues consists of the cost of wafers. The
contract prices to purchase wafers from Matsushita and OKI are denominated in
Japanese yen. The agreements with both vendors allow for mutual sharing of the
impact of the exchange rate fluctuation between Japanese yen and the U.S.
dollar. Nevertheless, changes in the exchange rate between the U.S. dollar and
the Japanese yen subject our gross profit and operating results to the potential
for material fluctuations.
Critical Accounting Policies
We believe our critical accounting policies are as follows:
o revenue recognition;
o estimating sales, returns and allowances;
o estimating ship and debit reserve;
o estimating allowance for doubtful accounts, and
o estimating reserve for excess and obsolete inventory.
A brief description of these policies is set forth below. For more
information regarding our accounting policies, see note 2 in the notes to the
consolidated financial statements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. On an on-going basis, we evaluate our
estimates, including those related to revenue recognition, sales returns,
allowance for ship and debit, bad debts and inventories. We base our estimates
on historical facts and various other assumptions that we believe to be
reasonable at the time the estimates are made. Actual results could differ from
those estimates.
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. At that time, we
provide for estimated sales returns and other allowances related to those sales.
Between 45% and 55% of our sales are made to distributors under terms allowing
certain rights of return and price protection for our products held in the
distributors' inventories. Therefore, we defer recognition of revenue and the
proportionate cost of revenues derived from sales to distributors until the
distributors sell our products to their customers. We evaluate the amounts to
defer based on the level of actual distributors' inventory on hand as well as
inventory that is in transit. The gross profit deferred as a result of this
policy is reflected as "deferred income on sales to distributors" in the
accompanying condensed consolidated balance sheets. See note 2 in the notes to
consolidated financial statements.
Estimating sales returns and allowances
Net revenue consists of product revenue reduced by estimated sales returns
and allowances. To estimate sales returns and allowances, we analyze historical
returns, current economic trends, levels of inventories of our products held by
our customers, and changes in customer demand and acceptance of our products
when initially establishing and then evaluating quarterly the adequacy of the
reserve for sales returns and allowances. This reserve is reflected as a
reduction to accounts receivable in the accompanying consolidated balance
sheets. Increases to the reserve are recorded as a reduction to net revenue.
Because the reserve for sales returns and allowances is based on our judgments
and estimates, particularly as to future customer demand and acceptance of our
products, our reserves may not be adequate to cover actual sales returns and
other allowances. If our reserves are not adequate, our net revenues could be
adversely affected.
19
Estimating ship and debit reserve
A large portion of our sales is made to distributors. Under certain
circumstances, some of those sales are subject to credits that distributors
claim as protection against subsequent price declines on products they hold. The
credits are referred to as "ship and debits." The credits are available to the
distributors after they have sold our products through to their end customer. We
maintain a reserve for these credits that appears as a reduction to accounts
receivable in our accompanying consolidated balance sheets. Any increase in the
reserve results in a corresponding reduction in our net revenues. To establish
the adequacy of the reserve, we analyze historical ship and debit payments and
levels of inventory in the distributor channels. If our reserves are not
adequate, our net revenues could be adversely affected.
Estimating allowance for doubtful accounts
We maintain an allowance for losses we may incur as a result of our
customers' inability to make required payments. Any increase in the allowance
results in a corresponding increase in our general and administrative expenses.
In establishing this allowance, and then evaluating the adequacy of the
allowance for doubtful accounts, we analyze historical bad debt, customer
concentrations, customer credit-worthiness, current economic trends and changes
in our customer payment terms. If the financial condition of one or more of our
customers unexpectedly deteriorated, resulting in their inability to make
payments, or if we otherwise underestimate the losses we incur as a result of
our customers' inability to pay us, we could be required to increase our
allowance for doubtful accounts which could adversely affect our operating
results.
Estimating reserve for excess and obsolete inventory
We identify excess and obsolete products and analyze historical usage,
forecasted production based on demand forecasts, current economic trends, and
historical write-offs when evaluating the adequacy of the reserve for excess and
obsolete inventory. This reserve is reflected as a reduction to inventory in the
accompanying consolidated balance sheets, and an increase in cost of revenues.
If actual market conditions are less favorable than our assumptions, we may be
required to take additional reserves, which could adversely impact our cost of
revenues and operating results.
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 the Years Ended December 31,
--------------------------------
2001 2000 1999
---- ---- ----
Net revenues:
Product sales .......................... 98.8% 98.4% 98.6%
License fees and royalties ............. 1.2 1.6 1.4
----- ----- -----
Total net revenues ................ 100.0 100.0 100.0
Cost of revenues ............................ 54.5 48.3 45.0
----- ----- -----
Gross profit ................................ 45.5 51.7 55.0
----- ----- -----
Operating expenses:
Research and development ............... 15.4 11.2 10.3
Sales and marketing .................... 15.4 11.6 10.7
General and administrative ............. 6.4 5.8 8.4
----- ----- -----
Total operating expenses .......... 37.2 28.6 29.4
----- ----- -----
Income from operations ...................... 8.3 23.1 25.6
Interest and other income, net .............. 1.9 2.2 2.1
----- ----- -----
Income before provision for income taxes .... 10.2 25.3 27.7
Provision for income taxes .................. 3.1 7.6 4.2
----- ----- -----
Net income .................................. 7.1% 17.7% 23.5%
===== ===== =====
20
Comparison of Years Ended December 31, 2001 and 2000
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 decreased 15.6% to $94.1
million in 2001 compared to $111.5 million in 2000. Net revenues from product
sales represented $92.9 million and $109.8 million of net revenues in 2001 and
2000, respectively. The decrease in net revenues from product sales was
generally in all of our end markets and due primarily to the unfavorable
economic conditions during the year. Our revenue mix for 2001 in the end markets
which we serve was approximately 36% in the communications category, 31% in the
consumer category, 19% in the computer category, 7% in the industrial
electronics category and 7% in all other. Sales of our TOPSwitch and TinySwitch
products represented 98% of net revenues from product sales in both 2001 and
2000. Net revenues from royalties were $1.2 million in 2001 compared to $1.8
million in 2000.
International sales were $87.9 million in 2001 compared to $93.7 million in
2000, representing approximately 93% and 84% of net revenues in those respective
periods. 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 76.6% and 66.7% of our product sales for
2001 and 2000, respectively. We expect international sales to continue to
account for a large portion of our net revenues.
Direct sales for 2001 were divided 51.0% to distributors and 49.0% to OEMs,
and merchant power supply manufacturers, compared to 50.0% to distributors and
50.0% to OEMs and merchant power supply manufacturers for 2000. In 2001, two
separate customers, both of whom are distributors, accounted for approximately
22% and 13% of net revenues. Also in 2001, one other customer, a merchant power
supply manufacturer accounted for approximately 11% of net revenues. In 2000,
the same two distributors accounted for approximately 22% and 10% of net
revenues, respectively. See note 2 in the notes to consolidated financial
statements.
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 from Matsushita and OKI, the assembly and packaging
of our products, and internal labor and overhead associated with the testing of
both wafers and packaged components. Gross profit was $42.8 million, or 45.5% of
net revenues in 2001 compared to $57.6 million, or 51.7% of net revenues, in
2000. The decrease in gross profit percentage for 2001 was due primarily to
lower sales volumes, lower manufacturing efficiencies due to new product
introductions and the adverse impact of increased pressure from customers for
lower pricing. The decrease in gross profit was partially offset by a decrease
in wafer costs and assembly costs. We expect our gross profit to remain in a
range of 43% to 45% for 2002, but if pricing pressures from our customers
increase during the year as a result of the economic slowdown or for other
reasons, our gross profit could decline.
Research and development expenses. Research and development expenses
consist primarily of employee-related expenses, and 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 were $14.5 million, or 15.4% of net revenues
in 2001, compared to $12.5 million, or 11.2% of net revenues in 2000. The
increase for 2001 was due primarily to increased salaries and other costs
related to the hiring of additional engineering personnel, outside consulting
fees and higher facility costs. We expect research and development expenses to
continue to increase in absolute dollars but depending on our ability to sell
our products in the current economic environment, may fluctuate as a percentage
of our 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 our regional sales and
support offices. Sales and marketing expenses were $14.5 million, or 15.4% of
net revenues in 2001, compared to $13.0 million, or 11.6% of net revenues in
2000. Included in these marketing expenses are costs associated with
applications engineering in the amounts of $3.7 million and $2.7 million for
2001 and 2000, respectively. The increase in sales and marketing expenses for
2001 resulted primarily from the addition of ersonnel to support our sales
effort and the increased activity in application engineering. We expect sales
and
21
marketing expenses to increase in 2002, but depending on the general economic
environment and resulting demand for our products, sales and marketing expenses
may 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, as well as consulting, outside services,
legal and auditing expenses. In 2001 and 2000, general and administrative
expenses were $6.0 million and $6.5 million, respectively, which represented
6.4% and 5.8% of net revenues in each respective period. The decrease in
spending for general and administration expenses for 2001, was attributable
primarily to a reduction in professional and legal expenses following the
settlement in 2000 of our patent infringement lawsuit, which we had initiated
with Motorola. For 2002, we expect general and administrative expenses to
increase in absolute dollars but depending on the sales levels we are able to
achieve given current economic conditions, they may fluctuate as a percentage of
our net revenues.
Interest and other income, net. Interest and other income, net, was $1.7
million and $2.5 million in 2001 and 2000, respectively. The decrease for 2001
was due primarily to lower interest rates on our cash equivalents and short-term
investments in 2001 compared to 2000, and an increase in costs attributable to
foreign currency fluctuations.
Provision for income taxes. Provision for income taxes for 2001 and 2000
represents Federal, state and foreign taxes. The provision for income taxes was
$2.9 million for 2001 compared to $8.5 million for 2000. Our estimated effective
tax rate used for both 2001 and 2000 was 30%. The difference between the
statutory rate of 35% and our effective tax rate is due primarily to the
favorable effects of research and development tax credits, international sales,
Federal tax-exempt investments and apportionment of state taxes, net of the
federal benefit. See note 7 in the notes to consolidated financial statements
for more information relating to our income tax.
Comparison of Years Ended December 31, 2000 and 1999
Net revenues. Net revenues increased 7.2% to $111.5 million in 2000
compared to $104.1 million in 1999. Net revenues from product sales represented
$109.8 million and $102.7 million of net revenues in 2000 and 1999,
respectively. The increase in net revenues from product sales was due primarily
from our "other" end market category in which no one market represented more
than 5% of our net revenues. Sales to the cellular phone market, which was our
largest end market, accounted for approximately 30% of our net product revenues
for 2000 compared to 39% of net product revenues in 1999. Sales of our TOPSwitch
and TinySwitch products represented 98% and 97% of net revenues from product
sales in 2000 and 1999, respectively. Net revenues from royalties were $1.8
million in 2000 compared to $1.4 million in 1999.
International sales were $93.7 million in 2000 compared to $81.6 million in
1999, representing approximately 84% and 78% of net revenues in those respective
periods. Although the power supplies using our products are designed and
distributed worldwide, most of these power supplies are manufactured in Asia. As
a result, the largest portion of our net revenues is derived from sales to this
region.
In 2000, two separate customers, both of whom are distributors, accounted
for approximately 22% and 10% of net revenues. In 1999, the same customers
accounted for approximately 16% and 11% of net revenues, respectively. See note
2 in the notes to consolidated financial statements.
Cost of revenues; Gross profit. Gross profit was $57.6 million, or 51.7% of
net revenues in 2000 compared to $57.3 million, or 55.0% of net revenues, in
1999. In 2000, we experienced increased pricing pressures, which adversely
affected our gross margins, and we had lower manufacturing efficiencies due to
new product introductions. In 1999, gross profit benefited from a one-time
credit from one of our wafer suppliers in the amount of $1.4 million, which
improved our gross profit by 1.3% for that year.
Research and development expenses. Research and development expenses were
$12.5 million, or 11.2% of net revenues in 2000, compared to $10.8 million, or
10.3% of net revenues in 1999. The increase in absolute dollars 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, and
bringing newly developed products into manufacturing.
22
Sales and marketing expenses. Sales and marketing expenses were $13.0
million, or 11.6% of net revenues in 2000, compared to $11.1 million, or 10.7%
of net revenues in 1999. This increase in absolute dollars represented the
addition of personnel to support international sales and field application
engineers.
General and administrative expenses. In 2000 and 1999, general and
administrative expenses were $6.5 million and $8.8 million, respectively, which
represented 5.8% and 8.4% of net revenues in each respective period. The
decrease in absolute dollars in general and administrative expenses in 2000 was
primarily attributable to reduced professional and legal expenses related to the
patent infringement lawsuit that we filed against Motorola in 1998.
Interest and other income, net. Interest and other income, net, was $2.5
million and $2.1 million in 2000 and 1999, respectively. The increase in other
income reflected additional interest income related to the increase in cash
equivalents and short-term investments from 1999 to 2000, and lower interest
expense related to a reduction in our capital equipment lease obligations.
Provision for income taxes. Provision for income taxes for 2000 and 1999
represents Federal, state and foreign taxes. The effective tax rate was 30% for
2000 and 15% for 1999. The increased tax rate in 2000 is primarily because the
impact of benefiting net operating loss carry-forwards ended in 1999. The
difference between the statutory rate of 35% and our effective tax rate for 2000
is due primarily to the favorable effects of research and development tax
credits, foreign sales corporation and apportionment of state taxes, net of the
federal benefit. See note 7 in the notes to consolidated financial statements.
23
Selected Quarterly Results of Operations
The following tables set forth certain consolidated statements of
operations data for each of the quarters in the years ended December 31, 2001
and 2000 as well as the percentage of our net revenues represented by each item.
This information has been derived from our unaudited consolidated financial
statements. The unaudited consolidated financial statements have been prepared
on the same basis as the audited consolidated financial statements contained
herein and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of such
information when read in conjunction with our annual audited consolidated
financial statements and notes thereto appearing elsewhere in this report. The
operating results for any quarter are not necessarily indicative of the results
for any subsequent period or for the entire fiscal year.
Three Months Ended
--------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
2001 2001 2001 2001 2000 2000 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
(unaudited)
(in thousands, except per share data)
Net revenues:
Product sales .................... $23,403 $22,710 $20,985 $25,821 $26,158 $27,377 $28,637 $27,587
License fees and royalties ....... 246 293 262 375 474 483 375 423
------- ------- ------- ------- ------- ------- ------- -------
Total net revenues ........... 23,649 23,003 21,247 26,196 26,632 27,860 29,012 28,010
Cost of revenues ................... 13,486 13,092 11,893 12,781 13,287 13,280 13,867 13,442
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ....................... 10,163 9,911 9,354 13,415 13,345 14,580 15,145 14,568
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development ......... 3,643 3,586 3,696 3,546 2,951 3,084 3,431 3,055
Sales and marketing .............. 3,339 3,797 3,839 3,510 2,968 3,139 3,438 3,408
General and administrative ....... 1,707 1,537 1,434 1,302 1,286 1,743 1,505 1,917
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses ..... 8,689 8,920 8,969 8,358 7,205 7,966 8,374 8,380
------- ------- ------- ------- ------- ------- ------- -------
Income from operations ............. 1,474 991 385 5,057 6,140 6,614 6,771 6,188
Interest and other income, net ..... 330 325 572 522 371 701 696 755
------- ------- ------- ------- ------- ------- ------- -------
Income before provision for
income taxes ..................... 1,804 1,316 957 5,579 6,511 7,315 7,467 6,943
Provision for income taxes ......... 541 395 287 1,707 1,930 2,219 2,240 2,082
------- ------- ------- ------- ------- ------- ------- -------
Net income ......................... $ 1,263 $ 921 $ 670 $ 3,872 $ 4,581 $ 5,096 $ 5,227 $ 4,861
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share
Basic ............................ $ 0.05 $ 0.03 $ 0.02 $ 0.14 $ 0.17 $ 0.19 $ 0.19 $ 0.18
Diluted........................... $ 0.04 $ 0.03 $ 0.02 $ 0.14 $ 0.16 $ 0.18 $ 0.18 $ 0.17
Shares used in per share calculation
Basic ............................ 27,951 27,758 27,620 27,522 27,418 27,325 27,210 26,756
Diluted........................... 29,670 29,339 28,528 28,449 28,101 28,495 28,702 28,877
Percentage of Total Net Revenues
--------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
2001 2001 2001 2001 2000 2000 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
Net revenues:
Product sales .................... 99.0% 98.7% 98.8% 98.6% 98.2% 98.3% 98.7% 98.5%
License fees and royalties ....... 1.0 1.3 1.2 1.4 1.8 1.7 1.3 1.5
----- ----- ----- ----- ----- ----- ----- -----
Total net revenues ........... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues ................... 57.0 56.9 56.0 48.8 49.9 47.7 47.8 48.0
----- ----- ----- ----- ----- ----- ----- -----
Gross profit ....................... 43.0 43.1 44.0 51.2 50.1 52.3 52.2 52.0
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Research and development ......... 15.5 15.6 17.4 13.5 11.1 11.1 11.8 10.9
Sales and marketing .............. 14.1 16.5 18.1 13.4 11.1 11.3 11.9 12.2
General and administrative ....... 7.2 6.7 6.7 5.0 4.8 6.2 5.2 6.8
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses ..... 36.8 38.8 42.2 31.9 27.0 28.6 28.9 29.9
----- ----- ----- ----- ----- ----- ----- -----
Income from operations ............. 6.2 4.3 1.8 19.3 23.1 23.7 23.3 22.1
Interest and other income, net ..... 1.4 1.4 2.7 2.0 1.3 2.6 2.4 2.7
----- ----- ----- ----- ----- ----- ----- -----
Income before provision for
income taxes ................... 7.6 5.7 4.5 21.3 24.4 26.3 25.7 24.8
Provision for income taxes ......... 2.3 1.7 1.3 6.5 7.2 8.0 7.7 7.4
----- ----- ----- ----- ----- ----- ----- -----
Net income ......................... 5.3% 4.0% 3.2% 14.8% 17.2% 18.3% 18.0% 17.4%
===== ===== ===== ===== ===== ===== ===== =====
24
Net revenues increased sequentially in the first two quarters of 2000 and
then decreased sequentially from the third quarter of 2000 through the second
quarter of 2001 as we saw the effect of the global economic downturn. Net
revenues increased slightly during the third and fourth quarters of 2001. We did
not experience historical seasonal increases in the third and fourth quarters of
2000, due primarily to the impact of the weakening economy to our end markets
during that time.
Our gross profit, as a percentage of net revenues, was relatively stable
through 2000 and the first quarter of 2001. However, we experienced a decrease
in gross profit beginning in the second quarter of 2001, and continuing through
2001, as a result of increased pricing pressures, lower sales volumes and lower
manufacturing efficiencies due to new product introductions.
Research and development expenses generally increased in absolute dollars
during the eight quarters presented, primarily due to increased staffing in the
areas of new product design and technology development.
Sales and marketing expenses generally increased in absolute dollars over
the first six quarters presented and then leveled off in the third and fourth
quarters of 2001, primarily as a result of additional staffing required to
support our sales offices and increased activity in application engineering.
General and administrative expenses generally decreased during 2000 as the
legal costs related to a patent infringement lawsuit that we filed in a prior
year declined. General and administrative expenses generally increased during
2001 due to additional personnel costs and increased outside professional
services.
Interest and other income, net, generally trended down over the eight
quarters presented, primarily from continuing decreases in interest rates over
the periods. The significant decrease in the fourth quarter of 2000 was due to a
one-time write off of abandoned leasehold improvements connected with the move
to our new facilities in that quarter.
Liquidity and Capital Resources
Since our initial public offering of common stock in December 1997, our
principal source of funding has been cash from our operations with some funding
from capital equipment lease lines.
As of December 31, 2001, we had approximately $76.9 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 those foundries to us. The balance of
this credit line is unused and available. The line of credit agreement contains
financial covenants that we have remained in compliance with, and requires that
we maintain profitability on a quarterly basis and not pay or declare dividends
without the bank's prior consent. In previous years, we have financed a
significant portion of our machinery and equipment through capital equipment
leases. However, we did not obtain any additional financing through capital
equipment leases in the years ended December 31, 2001 and 2000. We may obtain
additional financing for equipment purchases in future quarters. As of December
31, 2001, we owed approximately $715,000 on our various capital equipment
leases.
As of December 31, 2001, we had working capital, defined as current assets
less current liabilities, of approximately $100.8 million, which was an increase
of approximately $13.8 million over December 31, 2000. Our operating activities
generated cash of $16.2 million and $14.2 million in the years ended December
31, 2001 and 2000, respectively. Cash generated in the year ended December 31,
2001 was principally the result of net income in the amount of $6.7 million,
depreciation and amortization and decreases in accounts receivable and prepaid
expenses and other current assets. This was partially offset by an increase in
inventory and decrease in accounts payable. Cash generated in the year ended
December 31, 2000 was principally the result of net income of $19.8 million,
depreciation and amortization and an increase in accrued liabilities, partially
offset by increases in deferred income taxes, inventory and prepaid expenses.
Our investing activities were a net transfer from cash and cash equivalents
to short-term investments of $12.2 million and $6.8 million for the years ended
December 31, 2001and 2000, respectively. We also purchased
25
capital assets in the amount of $7.6 million and $16.2 million for the years
ended December 31, 2001 and 2000, respectively. The increase in purchases of
capital assets in 2000 was primarily due to expenditures related to the purchase
of tenant improvements at our new facilities in San Jose.
As of December 31, 2001, we have commitments through September 2010 for our
operating and capital leases totaling approximately $20.2 million. See note 4 in
the notes to consolidated financial statements.
During 2001, a significant portion of our cash flow was generated by our
operations. If our operating results deteriorate in 2002, as a result of
decrease in customer demand or severe pricing pressures from our customers or
our competitors, our ability to generate positive cash flow from operations may
be jeopardized. In that case, we may be forced to use our cash, cash equivalents
and short-term investments to fund our operations. 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.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 addresses financial accounting and reporting for the long-lived assets to be
held and used, and disposed of. The statement will be effective for financial
statements issued for fiscal years beginning after December 15, 2001. We do not
expect the adoption of SFAS No. 144 to have a material impact on our financial
statements
Factors That May Affect Future Results of Operations
In addition to the other information in this Report, the following factors
should be considered carefully in evaluating our business before purchasing
shares of our stock.
Our quarterly and annual operating results are volatile and difficult to
predict. If we fail to meet the expectations of public market analysts or
investors, the market price of our common stock may decrease significantly. 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. As a result, our
quarterly operating results may fall below the expectations of public market
analysts or investors. If that occurs, the price of our stock may decline.
Some of the factors that could affect our operating results include the
following:
o the volume and timing of orders received from customers;
o the volume and timing of orders placed by us with our foundries;
o changes in product mix including the impact of new product
introduction on existing products;
o our ability to develop and bring to market new products and
technologies on a timely basis;
o the timing of investments in research and development and sales and
marketing;
o cyclical semiconductor industry conditions; and
o fluctuations in exchange rates, particularly the exchange rates
between the U.S. dollar and the Japanese yen.
Our quarterly results may be subject to seasonality. Historically, with the
exception of 2000, our revenues generally have increased in our third quarters
and then remained relatively flat in our fourth quarters, due to what we believe
are seasonal factors attributed to the high volume consumer markets for the end
products into which our ICs are sold. Our revenues have then followed a pattern
of being sequentially linear or somewhat down in the first and second quarters
of the following year.
We do not have long-term contracts with any of our customers and if they
fail to place, or if they cancel or reschedule orders for our products, our
operating results and business may suffer. Our business is characterized
26
by short-term customer orders and shipment schedules. 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. In addition, customer orders can be
canceled or rescheduled without significant penalty to the customer. In the past
we have experienced customer cancellations of substantial orders for reasons
beyond our control, and significant cancellations could occur again at any time.
Intense competition in the high-voltage power supply industry may lead to a
decrease in the average selling price and reduced sales volume of our products,
which may harm our business. The high-voltage power supply industry is intensely
competitive and characterized by significant price erosion. Our products face
competition from alternative technologies, including traditional linear
transformers and discrete switcher power supplies. If the price of competing
products decreases significantly, the cost effectiveness of our products will be
adversely affected. If power requirements for applications in which our products
are currently utilized go outside the cost effective range of our products,
these older alternative technologies can be used more cost effectively. 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. We believe our failure to compete successfully in the high-voltage
power supply business, including our ability to introduce new products with
higher average selling prices, would materially harm our operating results.
If demand for our products declines in the major end markets that we serve,
our net revenues will decrease. Applications of our products in the consumer,
communications and computer end markets, such as cellular phone chargers,
stand-by power supplies for PCs and main power supplies for TV set top boxes
have and will continue to account for a large percentage of our net revenues. We
expect that a significant level of our net revenues and operating results will
continue to be dependent upon these applications in the near term. The demand
for these products has been highly cyclical and has been subject to significant
economic downturns at various times. The announcements of economic slowdown by
major companies in some of the end markets we serve, indirectly through our
customers, have caused a slowdown in demand for some of our ICs. When our
customers are not successful in maintaining high levels of demand for their
products, their demand for our ICs decreases, which adversely affects our
operating results. Any significant downturn in demand in these markets would
cause our net revenues to decline and could cause the price of our stock to
fall.
Because the sales cycle for our products can be lengthy, we may incur
substantial expenses before we generate significant revenues, if any. 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 research and
development and sales and marketing resources without any assurance of success,
often precede volume sales, if any, by a year or more. 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. 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.
Our products must meet exacting specifications, and undetected defects and
failures may occur which may cause customers to return or stop buying our
products. Our customers generally 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. If defects and failures occur in our
products, we could experience lost revenue, increased costs, including warranty
expense and costs associated with customer support, delays in or cancellations
or rescheduling of orders or shipments and product returns or discounts, any of
which would harm our operating results.
We depend on third-party suppliers to provide us with wafers for our
products and if they fail to provide us sufficient wafers, our business will
suffer. We have supply arrangements for the production of wafers with
27
Matsushita and OKI. Although certain aspects of our relationships with
Matsushita and OKI are contractual, many important aspects of these
relationships depend on their continued cooperation and, in many instances,
their course of conduct deviates from the literal provisions of the contracts.
We cannot assure you that we will continue to work successfully with Matsushita
or OKI in the future, that they will continue to provide us with sufficient
capacity at their foundries to meet our needs, or that either of them will not
seek an early termination of its wafer supply agreement with us. We estimate
that it would take 9 to 12 months from the time we identified an alternate
manufacturing source before that source could produce wafers with acceptable
manufacturing yields in sufficient quantities to meet our needs.
Although we provide Matsushita and OKI with rolling forecasts of our
production requirements, their ability to provide wafers to us is limited by the
available capacity of the foundry in which they manufacture 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 harm our business.
If our third-party suppliers and independent subcontractors do not produce
our wafers and assemble our finished products at acceptable yields, our net
revenues may decline. 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 failure of Matsushita or OKI
to supply us wafers at acceptable yields could prevent us from selling our
products to our customers and would likely cause a decline in our net revenues.
In addition, our IC assembly process 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.
We cannot assure you that acceptable yields will be maintainable in the future.
Matsushita has licenses to our technology, which it may use to our
detriment. Our ability to take advantage of the potentially large Japanese
market for our products is largely dependent on Matsushita and its ability to
promote and deliver our products. Pursuant to our agreement with Matsushita,
Matsushita has the right to manufacture and sell products using our technology
to Japanese companies worldwide and to subsidiaries of Japanese companies
located in Asia. Although we receive royalties on Matsushita's sales, these
royalties are substantially lower than the gross profit we receive on direct
sales. We cannot assure you that Matsushita will not use the technology rights
we have granted it to develop or market competing products following any
termination of its relationship with us or after termination of Matsushita's
royalty obligation to us.
Our international sales activities 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 risks to us, including:
o potential insolvency of international distributors and
representatives;
o reduced protection for intellectual property rights in some countries;
o the impact of recessionary environments in economies outside the
United States;
o tariffs and other trade barriers and restrictions; and
o the burdens of complying with a variety of foreign laws.
Our failure to adequately address these risks could reduce our
international sales, which would materially adversely affect our operating
results. Furthermore, because substantially all of our foreign sales are
denominated in U.S. dollars, increases in the value of the dollar 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.
28
If our efforts to enhance existing products and introduce new products are
not successful, we may not be able to generate demand for our products. Our
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. New product introduction schedules are
subject to the risks and uncertainties that typically accompany development and
delivery of complex technologies to the market place, including product
development delays and defects. If we fail to develop and sell new products in a
timely manner, our net revenues could decline.
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 these products will achieve market acceptance. Our or
our customers' failure to develop and introduce new products successfully and in
a timely manner would harm our business and may cause the price of our common
stock to fall. In addition, customers may defer or return orders for existing
products in response to the introduction of new products. Although we maintain
reserves against returns, we cannot assure you that these reserves will be
adequate.
We rely on a continuous supply of power to conduct operations, and
California's current energy crisis could disrupt our business and increase our
expenses. California has experienced an energy crisis and a reoccurrence could
disrupt our operations and increase our expenses. In the event of an acute power
shortage, that is, when power reserves for California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout California. Most of our operations are
located in California, although part of our inventory is stored and shipped from
an overseas facility. We currently have only limited backup generators for
emergency alternate sources of power in the event of a blackout. If blackouts
interrupt our supply of power, we would be temporarily unable to continue
operations at our facilities. Any such interruption in our ability to continue
operations at our facilities could delay shipments of our products to customers,
and could result in lost revenue, which could harm our business and results of
operations.
If our products do not penetrate additional markets, our business will not
grow as we predict. We believe that our future success depends in part upon our
ability to penetrate additional markets for our products. 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
net revenues and financial condition could be materially adversely affected.
In the event of an earthquake, terrorist act or other disaster, our
operations may be interrupted and our business would be harmed. Our principal
executive offices and operating facilities are located near San Francisco,
California. This area has been subject to severe earthquakes. In the event of an
earthquake, we may be temporarily unable to continue operations at our
facilities and we may suffer significant property damage. Any such interruption
in our ability to continue operations at our facilities could delay the
development and shipment of our products.
Like other U.S. companies, our business and operating results are subject
to uncertainties arising out of the recent terrorist attacks on the United
States, including the potential worsening or extension of the current global
economic slowdown, the economic consequences of current and potential military
actions or additional terrorist activities and associated political instability,
and the impact of heightened security concerns on domestic and international
travel and commerce. Such uncertainties could also lead to delays or
cancellations of customer orders, a general decrease in corporate spending or
our inability to effectively market and sell our products. Any of these results
could substantially harm our business and results of operations, causing a
decrease in our revenues.
If we are unable to adequately protect or enforce our intellectual property
rights, we could lose market share, incur costly litigation expenses or lose
valuable assets. Our 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. From time to time we have received, and we may receive in the future,
communications alleging possible infringement
29
of patents or other intellectual property rights of others. Litigation, which
could result in substantial cost to us, may be necessary to enforce our patents
or other intellectual property rights or to defend us against claimed
infringement of the rights of others. The failure to obtain necessary licenses
or other rights or litigation arising out of infringement claims could cause us
to lose market share and harm our business.
Moreover, the laws of some 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 must attract and retain qualified personnel to be successful and
competition for qualified personnel is intense in our market. 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 analog design engineers and 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 these
individuals or to otherwise attract, retain and motivate qualified personnel
could harm our business. 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.
We have adopted 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 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.
In February 1999, our board of directors adopted a Preferred Stock Purchase
Rights Plan intended to guard against hostile 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 have the effect
of making it more difficult for a third party to acquire a majority of our
outstanding voting stock.
The future trading price of our common stock could be subject to wide
fluctuations in response to a variety of factors. The price of our common stock
has been, and is likely to be, volatile. Factors including 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 and 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, may
harm the market price of our common stock.
30
Item 7A. Quantitative and Qualitative Disclosures 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 the carrying value and related weighted average
interest rates for our investment portfolio at December 31, 2001. All
investments mature, by policy, in 15 months or less.
(in thousands, except average interest rates)
Weighted
Average
Interest
Amount Rate
------ --------
Cash Equivalents:
U.S. corporate securities.......................... $44,800 3.28%
Tax-exempt securities.............................. 2,500 3.66%
-------
Total cash equivalents........................ 47,300 3.47%
------
Short-term Investments:
U.S. corporate securities.......................... $ 8,818 3.14%
Tax-exempt securities.............................. 5,906 3.29%
-------
Total short-term investments.................. 14,724 3.21%
-------
Total investment securities................... $62,024 3.34%
=======
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 do 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. We do maintain a Japanese yen
account with a U. S. Bank for payments to suppliers and for cash receipts from
Japanese suppliers and customers denominated in Japanese yen.
Item 8. Consolidated Financial Statements and Supplementary Data.
The Financial Statements and Supplementary Data required by this item are
set forth at the pages indicated at Item 14(a).
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
31
PART III
The SEC allows us to include information required in this report by
referring to other documents or reports we have already or will soon be filing.
This is called "Incorporation by Reference." We intend to file our definitive
proxy statement pursuant to Regulation 14A not later than 120 days after the end
of the fiscal year covered by this report, and certain information therein is
incorporated in this report by reference.
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Proposal No. 1--Election of Directors" and in Part I of this report under the
heading "Executive Officers of the Registrant."
The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to information set forth in the definitive Proxy Statement under the
heading "Executive Compensation and Other Matters."
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Executive Compensation and Other Matters."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading "Stock
Ownership of Certain Beneficial Owners and Management."
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Certain Relationships and Related Transactions."
32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this Form:
1. Financial Statements
Page
----
Report of Independent Public Accountants ........................... 34
Consolidated Balance Sheets ........................................ 35
Consolidated Statements of Operations .............................. 36
Consolidated Statements of Stockholders' Equity .................... 37
Consolidated Statements of Cash Flows .............................. 38
Notes to Consolidated Financial Statements ......................... 39
2. Financial Statement Schedules
All schedules, except Schedule II, Valuation and Qualifying Accounts,
have been omitted because the required information is not present or not
present in amounts sufficient to require submission of the schedules or
because the information required is included in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits
See Index to Exhibits. The Exhibits listed in the accompanying Index
to Exhibits are filed as part of this report.
(b) Reports on Form 8-K
None.
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Power Integrations, Inc.:
We have audited the accompanying consolidated balance sheets of Power
Integrations, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Power Integrations, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14 (a) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
January 18, 2002
34
POWER INTEGRATIONS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
(In thousands, except share and per share amounts)
2001 2000
ASSETS ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 62,141 $ 36,462
Short-term investments........................................................... 14,724 26,972
Accounts receivable, net of allowances of $1,373 in 2001 and $1,068 in 2000...... 5,124 9,189
Inventories...................................................................... 23,622 21,599
Deferred tax assets.............................................................. 5,346 6,054
Prepaid expenses and other current assets........................................ 1,526 4,618
---------- ----------
Total current assets........................................................ 112,483 104,894
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Machinery and equipment.......................................................... 34,892 28,832
Leasehold improvements........................................................... 10,731 9,278
---------- ----------
45,623 38,110
Less: Accumulated depreciation and amortization.................................. (22,441) (15,613)
---------- ----------
23,182 22,497
---------- ----------
$135,665 $127,391
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capitalized lease obligations................................. $ 440 $ 678
Accounts payable................................................................. 4,641 7,490
Accrued payroll and related expenses............................................. 3,164 2,980
Taxes payable and other accrued liabilities...................................... 1,604 4,175
Deferred income on sales to distributors......................................... 1,798 2,566
---------- ----------
Total current liabilities................................................... 11,647 17,889
---------- ----------
LONG TERM LIABILITIES:
Capitalized lease obligations, net of current portion............................ 275 715
Deferred rent.................................................................... 441 --
---------- ----------
Total long term liabilities................................................. 716 715
---------- ----------
COMMITMENTS (NOTE 4)
STOCKHOLDERS' EQUITY:
Common Stock, $0.001 par value
Authorized-- 140,000,000 shares
Outstanding--28,010,596 shares in 2001 and 27,430,367 shares in 2000........ 28 28
Additional paid-in capital....................................................... 81,758 74,049
Stockholder notes receivable..................................................... (38) (76)
Deferred compensation............................................................ -- (41)
Cumulative translation adjustment................................................ (117) (118)
Retained earnings................................................................ 41,671 34,945
---------- ----------
Total stockholders' equity.................................................. 123,302 108,787
---------- ----------
$135,665 $127,391
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
35
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In thousands, except per share amounts)
2001 2000 1999
---------- ---------- ----------
NET REVENUES:
Product sales.................................................................... $ 92,919 $109,759 $102,655
License fees and royalties....................................................... 1,176 1,755 1,412
---------- ---------- ----------
Total net revenues........................................................... 94,095 111,514 104,067
COST OF REVENUES...................................................................... 51,252 53,876 46,794
---------- ---------- ----------
GROSS PROFIT.......................................................................... 42,843 57,638 57,273
---------- ---------- ----------
OPERATING EXPENSES:
Research and development......................................................... 14,471 12,521 10,764
Sales and marketing.............................................................. 14,485 12,953 11,085
General and administrative....................................................... 5,980 6,451 8,760
---------- ---------- ----------
Total operating expenses..................................................... 34,936 31,925 30,609
---------- ---------- ----------
INCOME FROM OPERATIONS................................................................ 7,907 25,713 26,664
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income.................................................................. 2,103 3,049 2,515
Interest expense................................................................. (104) (164) (302)
Other, net....................................................................... (250) (362) (66)
---------- ---------- ----------
Total other income........................................................... 1,749 2,523 2,147
---------- ---------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES...................................................................... 9,656 28,236 28,811
PROVISION FOR INCOME TAXES............................................................ 2,930 8,471 4,334
---------- ---------- ----------
NET INCOME............................................................................ $ 6,726 $19,765 $24,477
========== ========== ==========
EARNINGS PER SHARE:
Basic............................................................................ $ 0.24 $ 0.73 $ 0.94
========== ========== ==========
Diluted.......................................................................... $ 0.23 $ 0.69 $ 0.87
========== ========== ==========
SHARES USED IN PER SHARE CALCULATION:
Basic............................................................................ 27,714 27,179 25,958
========== ========== ==========
Diluted.......................................................................... 28,991 28,774 28,197
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
36
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In thousands)
Common Stock Additional Stockholder Cumulative Retained Total
----------------- Paid-In Notes Deferred Translation Earnings Stockholders'
Shares Amount Capital Warrants Receivable Compensation Adjustment (Deficit) Equity
------- ------- ------- -------- ---------- ------------ ---------- --------- -------
BALANCE AT
DECEMBER 31, 1998........ 24,994 $ 25 $57,276 $ 12 $ (274) $ (321) $ (57) $ (9,297) $47,364
Issuance of Common
Stock under employee
stock option plan,
net of repurchases..... 769 1 1,678 -- -- -- -- -- 1,679
Issuance of Common
Stock under employee
stock purchase plan.... 351 -- 1,267 -- -- -- -- -- 1,267
Exercise of warrants,
net.................... 354 -- 12 (12) -- -- -- -- --
Proceeds of stockholder
note repayment......... -- -- -- -- 73 -- -- -- 73
Income tax benefit from
employee stock option
plan................... -- -- 5,320 -- -- -- -- -- 5,320
Amortization of deferred
compensation........... -- -- -- -- -- 140 -- -- 140
Translation adjustment... -- -- -- -- -- -- (72) -- (72)
Net income............... -- -- -- -- -- -- -- 24,477 24,477
------- ------- ------- -------- ---------- ------------ ---------- --------- -------
BALANCE AT
DECEMBER 31, 1999........ 26,468 26 65,553 -- (201) (181) (129) 15,180 80,248
Issuance of Common
Stock under employee
stock option plan,
net of repurchases..... 704 2 2,919 -- -- -- -- -- 2,921
Issuance of Common
Stock under employee
stock purchase plan.... 258 -- 1,942 -- -- -- -- -- 1,942
Proceeds of stockholder
note repayment......... -- -- -- -- 125 -- -- -- 125
Income tax benefit from
employee stock option
plan................... -- -- 3,635 -- -- -- -- -- 3,635
Amortization of deferred
compensation........... -- -- -- -- -- 140 -- -- 140
Translation adjustment... -- -- -- -- -- -- 11 -- 11
Net income............... -- -- -- -- -- -- -- 19,765 19,765
------- ------- ------- -------- ---------- ------------ ---------- --------- -------
BALANCE AT
DECEMBER 31, 2000........ 27,430 28 74,049 -- (76) (41) (118) 34,945 108,787
Issuance of Common
Stock under employee
stock option plan,
net of repurchases..... 472 -- 3,770 -- -- -- -- -- 3,770
Issuance of Common
Stock under employee
stock purchase plan.... 109 -- 1,707 -- -- -- -- -- 1,707
Proceeds of stockholder
note repayment......... -- -- -- -- 38 -- -- -- 38
Income tax benefit from
employee stock option
plan................... -- -- 2,232 -- -- -- -- -- 2,232
Amortization of deferred
compensation........... -- -- -- -- -- 41 -- -- 41
Translation adjustment... -- -- -- -- -- -- 1 -- 1
Net income............... -- -- -- -- -- -- -- 6,726 6,726
------- ------- ------- -------- ---------- ------------ ---------- --------- -------
BALANCE AT
DECEMBER 31, 2001........ 28,011 $ 28 $81,758 $ -- $ (38) $ -- $ (117) $ 41,671 $123,302
======= ======= ======= ======== ========== ============ ========== ========= ========
The accompanying notes are an integral part of these consolidated financial statements.
37
POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In thousands)
2001 2000 1999
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,726 $ 19,765 $ 24,477
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................................... 6,944 4,189 3,231
Deferred compensation expense..................................................... 41 140 140
Deferred income taxes............................................................. 708 (2,136) (3,918)
Deferred rent..................................................................... 441 -- --
Provision for accounts receivable and other allowances............................ 1,119 1,084 129
Change in operating assets and liabilities:
Accounts receivable.......................................................... 2,946 (591) (5,170)
Inventories.................................................................. (2,023) (10,193) (2,561)
Prepaid expenses and other current assets.................................... 3,092 (3,197) (610)
Accounts payable............................................................. (2,849) 966 656
Taxes payable and other accrued liabilities.................................. (154) 4,989 5,716
Deferred income on sales to distributors..................................... (768) (800) 800
---------- ---------- ----------
Net cash provided by operating activities............................... 16,223 14,216 22,890
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................... (7,629) (16,214) (6,592)
Purchases of short-term investments............................................... (30,750) (31,349) (52,070)
Proceeds from sales and maturities of short-term investments...................... 42,998 38,166 38,524
---------- ---------- ----------
Net cash provided by (used in) investing activities..................... 4,619 (9,397) (20,138)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock........................................ 5,477 4,863 2,946
Proceeds from stockholder note repayment.......................................... 38 125 73
Principal payments under capitalized lease obligations............................ (678) (1,228) (2,064)
---------- ---------- ----------
Net cash provided by financing activities............................... 4,837 3,760 955
---------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................................. 25,679 8,579 3,707
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....................................... 36,462 27,883 24,176
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................. $62,141 $36,462 $27,883
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Capitalized lease obligations incurred for property and equipment................. $ -- $ -- $ 772
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................................ $ 65 $ 161 $ 312
========== ========== ==========
Cash paid for income taxes........................................................ $3,849 $4,756 $3,208
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
38
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. THE COMPANY:
Power Integrations, Inc. (the "Company"), which was incorporated in
California on March 25, 1988 and reincorporated in Delaware in December 1997
(see note 6), designs, develops, manufactures and markets proprietary,
high-voltage, analog integrated circuits for use primarily in AC to DC power
conversion that address the following major market segments: communications,
consumer, computer and industrial electronics.
The Company is subject to a number of risks including, among others, the
volume and timing of orders received by the Company from its customers;
competitive pressures on selling prices; the volume and timing of orders placed
by the Company with its foundries; the availability of raw materials;
fluctuations in manufacturing yields, whether resulting from the transition to
new foundries or from other factors; changes in product mix, including the
impact of new product introductions on existing products; the Company's ability
to develop and bring to market new products and technologies on a timely basis;
the introduction of products and technologies by the Company's competitors;
market acceptance of the Company's and its customers' products; the timing of
investments in research and development and sales and marketing; cyclical
semiconductor industry conditions; fluctuations in exchange rates, particularly
exchange rates between the U.S. dollar and the Japanese yen; and changes in the
international business climate and economic conditions.
All of the wafers used by the Company are manufactured by two offshore
independent foundries. Although there are a number of other suppliers that could
provide similar services, a change in suppliers could cause a delay in
manufacturing and possible loss of sales, which could adversely affect operating
results.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation and Foreign Currency Translation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of intercompany transactions
and balances. The functional currencies of the Company's subsidiaries are the
local currencies. Accordingly, all assets and liabilities are translated into
U.S. dollars at the current exchange rates as of the applicable balance sheet
date. Revenues and expenses are translated at the average exchange rate
prevailing during the period. Cumulative gains and losses from the translation
of the foreign subsidiaries' financial statements have been included in
stockholders' equity.
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 December 31, 2001 and 2000, the Company's
short-term investments consist 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.
39
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below summarizes the carrying value of the Company's investments
by major security type (in thousands):
December 31,
--------------------
2001 2000
------- -------
Cash Equivalents:
U.S. corporate securities .................... $44,800 $ --
Tax-exempt securities ........................ 2,500 25,950
------- -------
Total cash equivalents .................. 47,300 25,950
------- -------
Short-term Investments:
U.S. corporate securities .................... $ 8,818 $ --
Tax-exempt securities ........................ 5,906 25,949
------- -------
Total short-term investments ............ 14,724 25,949
------- -------
Total investment securities ............. $62,024 $51,899
======= =======
Inventories
Inventories (which consist of costs associated with the purchases of wafers
from offshore foundries and of packaged components from several offshore
assembly manufacturers, as well as internal labor and overhead associated with
the testing of both wafers and packaged components) are stated at the lower of
cost (first in, first-out) or market. Provisions, when required, are made to
reduce excess and obsolete inventories to their estimated net realizable values.
Inventories consist of the following (in thousands):
December 31,
-------------------
2001 2000
------- -------
Raw materials ........................... $ 1,571 $ 1,520
Work-in-process ......................... 12,528 13,409
Finished goods .......................... 9,523 6,670
------- -------
$23,622 $21,599
======= =======
Property and Equipment
Depreciation and amortization of property and equipment are provided using
the straight-line method over the shorter of the estimated useful lives of the
assets (over a period of one to four years), or over the applicable lease term.
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $2.9 million and $4.4
million, as of December 31, 2001 and 2000, respectively. Related accumulated
amortization on these leased assets was approximately $2.7 million and $3.3
million, as of December 31, 2001 and 2000, respectively.
40
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
Earnings per share are calculated in accordance with 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 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.
A summary of the earnings per share calculation is as follows (in
thousands, except per share amounts):
December 31,
----------------------------
2001 2000 1999
------- ------- -------
Basic earnings per share:
Net income ................................... $ 6,726 $19,765 $24,477
======= ======= =======
Weighted average common shares ............... 27,714 27,179 25,958
======= ======= =======
Basic earnings per share ................ $ 0.24 $ 0.73 $ 0.94
======= ======= =======
Diluted earnings per share:
Net income ................................... $ 6,726 $19,765 $24,477
======= ======= =======
Weighted average common shares ............... 27,714 27,179 25,958
Weighted average common share equivalents:
Options ................................. 1,273 1,569 2,170
Employee stock purchase plan ............ 4 26 69
------- ------- -------
Diluted weighted average common shares ....... 28,991 28,774 28,197
======= ======= =======
Diluted earnings per share .............. $ 0.23 $ 0.69 $ 0.87
======= ======= =======
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and the presentation of comprehensive income and its components. SFAS
No. 130, requires companies to report a new measurement of income to include
unrealized gains and losses, net of the tax effect that have historically been
excluded from net income and reflected instead in stockholders' equity.
Comprehensive income for the Company consists of net income plus the effect of
foreign currency translation adjustments, which is not material for each of the
three years ended December 31, 2001. Accordingly, comprehensive income closely
approximates actual net income.
Segment Reporting
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." establishes standards for reporting and the presentation of
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 integrated circuits for use primarily in the AC to DC power
conversion markets.
41
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 addresses financial accounting and reporting for the long-lived assets to be
held and used, and disposed of. The statement will be effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company does not expect the adoption of SFAS No. 144 to have a material impact
on its financial statements.
Revenue Recognition, Significant Customers
Product revenues consist of sales to OEMs and merchant power supply
manufacturers and to distributors. Revenues from product sales to OEM and
merchant power supply manufacturers are recognized upon shipment. The Company
provides for estimated sales returns and allowances related to such sales at the
time of shipment, which is based on historical returns, current economic trends,
levels of inventories and changes in customer demand and acceptance of the
Company's products. During 2001, 2000 and 1999, sales to distributors of the
Company's products accounted for approximately 51%, 50% and 40% of net revenues,
respectively. Sales to distributors are made under terms allowing certain rights
of return and protection against subsequent price declines of the Company's
products held by the distributors. Pursuant to the Company's distributor
agreements, the Company protects its distributors' exposure related to the
impact of price reductions as well as products at distributors that are slow
moving or have been discontinued. These agreements, which may be canceled by
either party on a specified notice, generally contain a provision for the return
of the Company's product in the event the agreement with the distributor is
terminated. Accordingly, the Company defers recognition of revenue and the
proportionate costs of revenues derived from sales to distributors until such
distributors resell the Company's products to their customers. The margin
deferred as a result of this policy is reflected as "deferred income on sales to
distributors" in the accompanying consolidated balance sheets.
The Company has entered into a separate wafer supply and technology license
agreement with an unaffiliated wafer foundry. The wafer supply agreement, which
expires in June 2005, is renewable. In connection with the technology license
agreement, the Company is entitled to receive a royalty on sales of products by
the foundry, which incorporates the Company's technology into its own products.
For the years ended December 31, 2001, 2000 and 1999, revenue recognized under
this agreement was approximately $1.2 million, $1.7 million and $1.4 million,
respectively.
The Company's end user base is highly concentrated and a relatively small
number of OEMs, directly or indirectly through merchant power supply
manufacturers, accounted for a significant portion of the Company's revenue. For
the years ended December 31, 2001, 2000 and 1999, ten customers accounted for
approximately 74%, 69% and 68% of net revenues, respectively.
The following customers accounted for more than 10% of total net revenues:
Year Ended December 31,
---------------------------------
Customer 2001 2000 1999
-------- -------- -------- --------
A ........................... 22% 22% 16%
B ........................... 13% 10% 11%
C ........................... 11% -- --
42
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Export Sales
The Company markets its products in North America and in foreign countries
through its sales personnel and a worldwide network of independent sales
representatives and distributors. Export sales, which consist of domestic sales
to customers in foreign countries are comprised of the following:
Year Ended December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
Taiwan ................................ 31% 25% 19%
Hong Kong/China ....................... 27% 24% 20%
Western Europe ........................ 17% 17% 16%
Korea ................................. 10% 10% 13%
Japan ................................. 2% 2% 2%
Other ................................. 6% 6% 8%
---------- ---------- ----------
Total export sales ............... 93% 84% 78%
========== ========== ==========
Product Sales
Sales of TOPSwitch and TinySwitch products accounted for 98%, 98% and 97%
of total net revenues in 2001, 2000 and 1999, respectively. TOPSwitch products
include TOPSwitch, TOPSwitch II, TOPSwitch-FX, and TOPSwitch-GX. TinySwitch
products include TinySwitch and TinySwitch II. The Company's revenue mix for
2001 in the end markets which it serves was approximately 36% in the
communications category, 31% in the consumer category, 19% in the computer
category, 7% in the industrial electronics category and 7% in all other.
Foreign Currency Risk
The Company does not currently employ a foreign currency hedge program
utilizing foreign currency forward exchange contracts, as the foreign currency
translations and risks to date have not been significant. The Company maintains
a Japanese yen bank account with a U.S. bank for payments to suppliers and for
cash receipts from Japanese suppliers and customers denominated in yen. For the
year ended December 31, 2001, the Company realized a foreign exchange
transaction loss of approximately $112,000. For the year ended December 31,
2000, the realized gains and losses netted to zero, and for the year ended
December 31, 1999, the Company realized a foreign exchange transaction gain of
approximately $123,000. These amounts are included in "other income (expense),"
in the accompanying consolidated statements of operations.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. On an on-going basis, the Company evaluates its estimates, including
those related to revenue recognition and allowances for receivables and
inventories. These estimates are based on historical facts and various other
assumptions that the Company believes to be reasonable at the time the estimates
are made.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company has cash investment policies that limit cash
investments to short-term, low risk investments. With respect to trade
receivables, the Company performs ongoing credit evaluations of its customers'
financial condition and requires letters of credit whenever deemed necessary.
Additionally, the Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends related to past losses and other relevant
43
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
information. As of December 31, 2001 and 2000, approximately 75% and 78% of
accounts receivable, respectively, were concentrated with ten customers.
3. BANK LINE OF CREDIT:
The Company has a $10.0 million revolving line of credit agreement with a
bank, which expires on July 1, 2002, and restricts the Company from entering
into certain transactions and contains certain financial covenants. Advances
under the agreement bear interest at a fixed rate of the bank's LIBOR rate plus
1.5% per annum or at the bank's variable interest rate. The Company has the
option to choose between the two rates. As of December 31, 2001 and 2000, there
were no amounts due under the bank line of credit. The agreement also covers
advances for commercial letters of credit and standby letters of credit, used
primarily for the shipment of wafers from wafer supply manufacturers to the
Company, provided that at no time will the aggregate sum of all advances exceed
$10.0 million. As of December 31, 2001, there were outstanding letters of credit
totaling approximately $3.8 million, and as of December 31, 2000, there were
outstanding letters of credit totaling approximately $3.4 million.
4. COMMITMENTS:
The Company leases its facilities under noncancellable operating leases,
which expire at various dates through September 2010. The lease for the
Company's main corporate facility in San Jose, California expires in September
2010 and contains two conditional five-year options, which if exercised would
extend the lease to September 2020. Rental payments for the San Jose facility
provide for increased cash payments through the lease term. Rent expense under
all operating leases was approximately $1.7 million, $2.1 million and $1.1
million in 2001, 2000 and 1999, respectively.
A portion of the Company's machinery and equipment is leased under
agreements accounted for as capital leases. The Company had no new capital
leasing arrangements during 2001 and 2000 and leased approximately $772,000 of
equipment during 1999. In 1998, the Company entered into a capital lease line of
credit agreement, which allowed for combined borrowings of up to $4.4 million to
finance the acquisition of property and equipment. This agreement expired on
June 30, 1999.
Future minimum lease payments under all noncancellable operating and
capital lease agreements as of December 31, 2001 are as follows (in thousands):
Fiscal Year Operating Capital
----------- --------- -------
2002 $ 1,831 $ 463
2003 1,858 241
2004 2,119 42
2005 2,186 --
2006 2,261 --
Thereafter 9,183 --
------- -----
Total minimum lease payments ..................... $19,438 746
=======
Less: Amounts representing interest
on capital leases (4.4% to 12.0%) .............. (31)
-----
715
Less: Current portion ............................ (440)
-----
Long-term portion ................................ $ 275
=====
44
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. PREFERRED STOCK PURCHASE RIGHTS PLAN:
In February 1999, the Company adopted a Preferred Stock Purchase Rights
Plan (the "Plan") designed to enable all stockholders to realize the full value
of their investment and to provide for fair and equal treatment for all
stockholders in the event that an unsolicited attempt is made to acquire the
Company. Under the Plan, stockholders received one right to purchase one
one-thousandth of a share of a new series of preferred stock for each
outstanding share of common stock held of record at the close of business on
March 12, 1999 at $150.00 per right, when someone acquires 15 percent or more of
the Company's common stock or announces a tender offer which could result in
such person owning 15 percent or more of the common stock. Each one
one-thousandth of a share of the new preferred stock has terms designed to make
it substantially the economic equivalent of one share of common stock. Prior to
someone acquiring 15 percent, the rights can be redeemed for $0.001 each by
action of the board of directors. Under certain circumstances, if someone
acquires 15 percent or more of the common stock, the rights permit the
stockholders other than the acquirer to purchase the Company's common stock
having a market value of twice the exercise price of the rights, in lieu of the
preferred stock. Alternatively, when the rights become exercisable, the board of
directors may authorize the issuance of one share of common stock in exchange
for each right that is then exercisable. In addition, in the event of certain
business combinations, the rights permit the purchase of the common stock of an
acquirer at a 50 percent discount. Rights held by the acquirer will become null
and void in both cases. The rights expire on February 23, 2009.
6. STOCKHOLDERS' EQUITY:
Preferred Stock
With the closing of the Company's IPO in December 1997, all of the
outstanding convertible preferred stock automatically converted into common
stock. Upon conversion of the outstanding preferred stock to common stock, such
preferred stock was retired. The Company is authorized to issue 3,000,000 shares
of new $0.001 par value preferred stock, of which none was issued or outstanding
during each of the three years ended December 31, 2001.
Common Stock
As of December 31, 2001, the Company was authorized to issue 140,000,000
shares of $0.001 par value common stock. On October 25, 1999, the Company's
Board of Directors approved a two-for-one split of the Company's common stock,
in the form of a 100 percent stock dividend, which was applicable to
stockholders of record at the close of business on November 8, 1999, and
effective on November 22, 1999. All references to share and per-share data for
all periods presented have been adjusted to give effect to this two-for-one
stock split.
1988 Stock Option Plan
In June 1988, the board of directors approved the 1988 Stock Option Plan
(the "1988 Plan"), whereby the board of directors may grant options to key
employees, directors and consultants to purchase the Company's common stock at
exercise prices of not less than 85% of the fair value of the shares at the date
of grant. Options expire ten years after the date of grant (five years if the
option is granted to a ten percent owner optionee) and generally vest over 50
months. Options granted under the 1988 Plan will remain outstanding in
accordance with their terms, but effective July 1997, the board of directors had
determined that no further options would be granted under the 1988 Plan.
1997 Stock Option Plan
In June 1997, the board of directors approved the 1997 Stock Option Plan
(the "1997 Plan"), whereby the board of directors may grant options to key
employees, directors and consultants to purchase the Company's common stock at
exercise prices of not less than 85% of the fair value of the shares at the date
of grant. The 1997 Plan allows for annual increases on the first day of the
Company's fiscal year (beginning in 1999) by a number of shares equal to five
percent of the number of shares of common stock issued and outstanding on the
last day of
45
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the preceding fiscal year. As of December 31, 2001, the 1997 Plan's maximum
share reserve is 8,209,091 shares, which is comprised of the sum of (i)
5,266,127 shares (new shares allocated to the 1997 Plan) and (ii) 2,942,964
shares granted pursuant to the 1988 Plan (the "1988 Plan Options"). The number
of shares available for issuance under the 1997 Plan, at any time, is reduced by
the number of shares remaining subject to the 1988 Plan Options. Options expire
ten years after the date of grant (five years if the option is granted to a ten
percent owner optionee) and generally vest over 48 months.
1997 Outside Directors Stock Option Plan
In September 1997, the board of directors approved an Outside Director
Stock Option Plan (the "Directors Plan"). A total of 800,000 shares of common
stock have been reserved for issuance under the Directors Plan. The Directors
Plan provides for the grant of nonstatutory stock options to nonemployee
directors of the Company. The Directors Plan is designed to work automatically
without administration; however, to the extent administration is necessary, it
will be performed by the board of directors. The Directors Plan provides that
each current and future nonemployee director of the Company will be granted an
option to purchase 30,000 shares of common stock on the effective date or the
date on which the optionee first becomes a nonemployee director of the Company
after the effective date as the case may be (the "Initial Grant"). Thereafter,
each nonemployee director who has served on the board of directors continuously
for 6 months will be granted an additional option to purchase 10,000 shares of
common stock (an "Annual Grant"). Subject to an optionee's continuous service
with the Company, approximately 1/3rd of an Initial Grant will become
exercisable one year after the date of grant and 1/36th of the Initial Grant
will become exercisable monthly thereafter. Each Annual Grant will become
exercisable in twelve monthly installments beginning in the 25th month after the
date of grant, subject to the optionee's continuous service. The exercise price
per share of all options granted under the Directors Plan will equal the fair
market value of a share of common stock on the date of grant. Options granted
under the Directors Plan have a term of ten years and are non-transferable. In
the event of certain changes in control of the Company, options outstanding
under the Directors Plan will become immediately exercisable and vested in full.
1998 Nonstatutory Stock Option Plan
In July 1998, the board of directors approved the 1998 Nonstatutory Stock
Option Plan (the "1998 Plan"), whereby the board of directors may grant
nonstatutory options to employees and consultants to purchase the Company's
common stock at exercise prices of not less than 85% of the fair value of the
shares at the date of grant. As of December 31, 2001, the maximum share reserve
under this plan was 1,000,000 shares. Options expire ten years after the date of
grant (five years if the option is granted to a ten percent owner optionee) and
generally vest over 48 months.
The following table summarizes option activity under the Company's option
plans:
(prices are weighted average prices)
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Options outstanding,
Beginning of year ............ 3,811,319 $14.59 3,329,075 $10.40 2,666,422 $ 3.11
Granted ..................... 2,151,612 $13.46 1,523,285 $18.97 1,704,875 $18.06
Exercised ................... (480,156) $ 7.93 (706,969) $ 4.22 (769,316) $ 2.15
Cancelled ................... (411,050) $17.88 (334,072) $14.78 (272,906) $11.23
--------- --------- ---------
Options outstanding,
end of year .................. 5,071,725 $14.47 3,811,319 $14.59 3,329,075 $10.40
========= ========= =========
Exercisable, end of year ......... 1,747,639 $12.64 1,072,644 $ 9.81 723,496 $ 3.71
========= ========= =========
46
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options issued under the 1988, 1997 and 1998 plans may be exercised at any
time prior to their expiration. Options issued under the Directors Plan are
exercisable upon vesting. In addition, the Company has the right, upon
termination of an optionholder's employment or service with the Company, at its
discretion, to repurchase any unvested shares issued under the 1988, 1997 and
1998 plans at the original purchase price. Under the terms of the option plans,
an option holder may not sell shares obtained upon the exercise of an option
until the option has vested as to those shares. As of December 31, 2001, there
were 2,039 shares of common stock issued under the 1988, 1997 and 1998 plans
that are subject to repurchase by the Company at $14.22 per share.
The Company accounts for its Plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Had compensation
expense for the Plans been determined under a fair value method consistent with
SFAS No. 123, "Accounting for Stock Based Compensation," and related
interpretations the Company's net income would have been decreased to the
following pro forma amounts (in thousands, except per share information):
Year Ended December 31,
------------------------
2001 2000 1999
---- ---- ----
Net income (loss):
As reported .......................... 6,726 19,765 24,477
Pro forma ............................ (5,046) 9,428 18,891
Basic earnings per share:
As reported .......................... $ 0.24 $ 0.73 $ 0.94
Pro forma ............................ $ (0.18) $ 0.35 $ 0.73
Diluted earnings per share:
As reported .......................... $ 0.23 $ 0.69 $ 0.87
Pro forma ............................ $ (0.17) $ 0.33 $ 0.67
The weighted-average grant date fair value of options granted during fiscal
years 2001, 2000 and 1999 was $10.79, $15.72 and $11.85, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2001, 2000 and 1999: risk-free interest rates of
4.46, 5.77 and 5.63 percent, respectively; expected dividend yields of zero
percent; expected lives of 4.0, 4.2 and 1.5 years for 2001, 2000 and 1999,
respectively; expected volatility of 96%, 97% and 84% for 2001, 2000 and 1999,
respectively.
The following table summarizes the stock options outstanding at December
31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Life Price Outstanding Price
----- ----------- ----- ----- ----------- -----
$ 0.26--$2.55 154,464 4.65 $ 0.93 154,464 $ 0.93
$ 4.00--$4.38 487,071 6.44 $ 4.33 420,591 $ 4.32
$ 4.42--$6.03 75,080 6.18 $ 4.89 71,119 $ 4.90
$ 6.78--$10.25 26,525 7.53 $ 9.72 7,760 $ 9.15
$11.06--$16.91 3,420,228 8.68 $13.36 809,715 $13.59
$17.89--$26.38 570,163 9.02 $21.58 127,066 $24.12
$26.50--$36.88 241,475 7.95 $34.53 126,105 $34.29
$37.50--$44.75 90,650 7.94 $42.80 25,956 $41.83
$48.56--$51.50 6,069 7.86 $50.10 4,863 $49.87
--------- ---- ------ --------- ------
$ 0.26--$51.50 5,071,725 8.29 $14.47 1,747,639 $12.64
========= ==== ====== ========= ======
47
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 Employee Stock Purchase Plan
Under the 1997 Employee Stock Purchase Plan (the "Purchase Plan"),
1,500,000 shares of common stock are reserved for issuance to eligible
employees. The Purchase Plan permits employees to purchase common stock through
payroll deductions, which may not exceed 15 percent of an employee's
compensation, at 85% of the lower of the fair market value of the Company's
common stock on the first or the last day of each offering period. As of
December 31, 2001, 902,188 shares had been purchased and 597,812 shares were
reserved for future issuance under the Purchase Plan.
Non-employee Stock Options
In 2001, 2000 and 1999, the Company granted to non-employees options to
acquire 3,500, 18,700 and 3,000 shares of common stock under the 1997 Stock
Option Plan, at weighted average exercise prices of $12.10, $11.97 and $14.22
per share. As of December 31, 2001, 27,900 options were outstanding and 13,491
options were exercisable at exercise prices ranging from $0.85 to $15.06. The
weighted average exercise price of the outstanding options was $10.11, and the
weighted average remaining contractual life was 9 years. In 2001, 2000 and 1999,
the Company incurred consulting charges of $187,000, $45,000, and $174,000.
Pursuant to the provisions of SFAS No. 123, the fair value of options issued was
determined based on the fair value of the consideration received, where such
amount was reliably measurable, or the fair value of the equity instruments
issued, in which case, the fair value was estimated as services were provided
using the Black-Scholes model with the following weighted average assumptions
used for grants in 2001, 2000 and 1999: risk-free interest rates of 5.20 percent
to 6.80 percent; expected dividend yields of zero percent; expected lives of 10
years; and expected volatility of 90%.
Stockholder Notes Receivable
In July 1997, in connection with the purchase of common stock upon exercise
of stock options granted to certain officers and employees of the Company, the
Company loaned to these officers and employees an aggregate of $405,000, at an
interest rate of 6.65% pursuant to Promissory Note and Pledge Agreements. These
loans, which are secured by 238,231 shares of common stock, are full recourse
notes, and are due in full without regard to the value of the Company's common
stock in July 2002, or at the Company's option upon (i) termination of
employment with the Company, (ii) a default in the payment of any installment or
principal and/or interest when due, (iii) a sale of the pledged stock or (iv)
acceleration being reasonably necessary for the Company to comply with any
regulations promulgated by the Board of Governors of the Federal Reserve System
affecting the extension of credit in connection with the Company's securities.
As of December 31, 2001, the unpaid principal portion of these loans was
$38,000.
Deferred Compensation
In connection with the issuance of stock options to employees and
consultants prior to December 1997, the Company recorded deferred compensation
in the aggregate amount of approximately $566,000, representing the difference
between the fair market value of the Company's common stock and the exercise
price of the stock options at the date of grant. The Company amortized the
deferred compensation expense over the shorter of the period in which the
employee, director or consultant provides services or the applicable vesting
period, which was typically over 48 months. Amortization expense was $41,000 in
2001 and $140,000 in each of the years ended December 31, 2000, and 1999.
Compensation expense is decreased in the period of forfeiture for any accrued,
but unvested compensation arising from the early termination of an option
holder's services. Since recording the deferred compensation in 1997, there have
been no forfeitures. The total amount of the deferred compensation was fully
amortized by December 31, 2001.
Shares Reserved
As of December 31, 2001, the Company had 6,301,666 shares of common stock
reserved for future issuance under Stock Option and Stock Purchase Plans.
48
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. INCOME TAXES:
The Company accounts for income taxes under SFAS No. 109 "Accounting for
Income Taxes." SFAS No. 109 provides for an asset and a liability approach to
accounting for income taxes under which deferred income taxes are provided based
upon enacted tax laws and rates applicable to the periods in which taxes become
payable.
The components of the provision for income taxes are as follows (in
thousands):
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Current provision:
Federal .................................. $1,949 $10,214 $ 7,621
State .................................... 273 393 616
Foreign .................................. -- -- 15
------ ------- -------
2,222 10,607 8,252
------ ------- -------
Deferred provision (benefit):
Federal .................................. 514 (1,759) 1,125
State .................................... 194 (377) 99
------ ------- -------
708 (2,136) 1,224
------ ------- -------
Net decrease in valuation allowance ........... -- -- (5,142)
------ ------- -------
$2,930 $ 8,471 $ 4,334
====== ======= =======
The provision for income taxes differs from the amount, which would result
by applying the applicable Federal income tax rate to income before provision
for income taxes as follows:
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Provision computed at Federal statutory rate ....... 35.0% 35.0% 35.0%
State tax provision, net of Federal benefit ........ 3.1 3.1 3.1
Change in valuation allowance ...................... -- -- (17.9)
Research and development credits ................... (4.5) (2.9) (3.4)
Foreign sales corporation .......................... (4.7) (4.9) (2.5)
Non deductible expenses and other .................. 1.4 (0.3) 0.7
---- ---- -----
30.3% 30.0% 15.0%
===== ===== =====
The components of the net deferred income tax asset were as follows (in
thousands):
December 31,
------------
2001 2000
---- ----
Tax credit carry-forwards........................... $1,588 $1,155
Inventory reserves.................................. 1,950 2,218
Accounts receivable allowances...................... 434 467
Accrued vacation.................................... 255 294
Other cumulative temporary differences.............. 1,119 1,920
------ ------
$5,346 $6,054
====== ======
Realization of the deferred tax asset is dependent on generating sufficient
future taxable income. Although realization is not assured, management believes
it is more likely than not that all of the deferred tax asset will be realized.
49
POWER INTEGRATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 2001, the Company had research and development tax
credit carryforwards of approximately $2.2 million. These carry-forwards expire
in 2021 for Federal income tax purposes. There is no expiration of research and
development tax credit carryforwards for the State of California. The United
States Tax Reform Act of 1986 contains provisions that limit research and
development credits available to be used in any given year upon the occurrence
of certain events.
8. LEGAL PROCEEDINGS:
In August 1998, the Company filed a complaint in the U.S. District Court,
District of Delaware, alleging that Motorola had infringed two of the Company's
circuit patents. On October 15, 1999, the jury returned a unanimous verdict in
favor of the Company and determined that Motorola had willfully infringed one of
the Company's patents and awarded the Company $32.3 million in compensatory
damages. In March 2000, the Company and Motorola entered into a settlement
agreement, pursuant to which, the Court issued a permanent injunction
prohibiting Motorola from selling the ICs that were the subject of the lawsuit.
Additionally, the Company agreed not to collect the money judgment from Motorola
and will continue as a preferred supplier of high-voltage power conversion ICs
for cellular phone chargers that Motorola manufactures.
50
POWER INTEGRATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Balance at
Beginning of Costs and End of
Classification Period Expenses Deductions Period
- -------------------------------------------------------------- ------------ ---------- ---------- ----------
Allowances for doubtful accounts and customer returns:
Year ended December 31, 1999 ............................. $1,293 $ 129 $ (432) $ 990
Year ended December 31, 2000 ............................. $ 990 $1,084 $(1,006) $1,068
Year ended December 31, 2001 ............................. $1,068 $1,119 $ (814) $1,373
51
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.
By: /s/ JOHN M COBB
Dated: March 22, 2002 --------------------------------
John M. Cobb
Chief Financial Officer
52
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Balu Balakrishnan and John M. Cobb his
true and lawful attorney-in-fact and agent, with full power of substitution and,
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments to this Report on Form 10-K, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE
CAPACITIES AND ON THE DATES INDICATED.
Dated: March 22, 2002 By: /s/ BALU BALAKRISHNAN
-----------------------------------------
Balu Balakrishnan
President, Chief Executive Officer
(Principal Executive Officer)
Dated: March 22, 2002 By: /s/ JOHN M. COBB
-----------------------------------------
John M. Cobb
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
Dated: March 22, 2002 By: /s/ HOWARD F. EARHART
-----------------------------------------
Howard F. Earhart
Chairman of the Board
Dated: March 22, 2002 By: /s/ ALAN D. BICKELL
-----------------------------------------
Alan D. Bickell
Director
Dated: March 22, 2002 By: /s/ NICHOLAS E. BRATHWAITE
-----------------------------------------
Nicholas E. Brathwaite
Director
Dated: March 22, 2002 By: /s/ R. SCOTT BROWN
-----------------------------------------
R. Scott Brown
Director
Dated: March 22, 2002 By: /s/ E. FLOYD KVAMME
-----------------------------------------
E. Floyd Kvamme
Director
53
Dated: March 22, 2002 By: /s/ STEVEN J. SHARP
----------------------------------------
Steven J. Sharp
Director
54
POWER INTEGRATIONS, INC
EXHIBITS
TO
FORM 10-K ANNUAL REPORT
For the Year Ended
December 31, 2001
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.1 Restated Certificate of Incorporation. (1)
3.2 Form of Certificate of Designation, Preferences and Rights of the Terms of the Series A Preferred Stock. (2)
3.3 Certificate of Amendment to Restated Certificate of Incorporation.
3.4 By-Laws. (3)
3.5 Amendment to By-Laws. (2)
4.1 Fifth Amended and Restated Rights Agreement dated April 27, 1995, as amended, by and among us and
certain of our investors. (3)
4.2 Investors' Rights Agreement dated as of May 22, 1996 between us and Hambrecht & Quist Transition
Capital, LLC. (3)
10.1 Form of Indemnification Agreement for directors and officers. (3)
10.2 1988 Stock Option Plan and forms of agreements thereunder. (3)
10.3 1997 Stock Option Plan and forms of agreements thereunder. (3)
10.4 1997 Outside Directors Stock Option Plan and forms of agreements thereunder. (3)
10.5 1997 Employee Stock Purchase Plan and forms of agreements thereunder. (3)
10.6 Wafer Supply Agreement between us and OKI, dated as of October 1, 1998. (4)
10.7 Master Equipment Lease Agreement between us and Metlife Capital Limited Partnership, dated as of
July 31, 1998. (4)
10.8 Loan Agreement between us and Union Bank of California, N.A., dated as of October 16, 1998. (1)
10.9 Amendment Number One, dated as of February 26, 1999, to the Wafer Supply Agreement between us and
OKI, dated as of October 1, 1998. (5)
10.10 Lease agreement dated as of December 29, 1999 between us and Lincoln - RECP Hellyer OPCO, LLC, a
Delaware limited liability company. (6)
55
10.11 Wafer Supply Agreement between us and Matsushita, dated as of June 29, 2000. (7)
10.12 Technology License Agreement between us and Matsushita, dated as of June 29, 2000. (7)
10.13 First Amendment to Loan Agreement dated October 16, 1998 between us and Union Bank of California,
N.A., dated August 1, 2000. (7)
21.1 List of subsidiaries. (3)
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney (See signature page).
99.1 Letter to SEC regarding Arthur Andersen LLP representations.
- -------------
(1) As filed with the SEC in our annual report on Form 10-K on March 16, 1999.
(2) As filed with the SEC in our Current Report on Form 8-K on March 12, 1999.
(3) As filed with the SEC in our Registration Statement on Form S-1 on
September 11, 1997.
(4) As filed with the SEC in our quarterly report on Form 10-Q on November 10,
1998.
(5) As filed with the SEC in our quarterly report on Form 10-Q on May 10, 1999.
(6) As filed with the SEC in our annual report on Form 10-K on March 29, 2000.
(7) As filed with the SEC in our quarterly report on Form 10-Q on November 10,
2000.
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