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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 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
(Address of principal executive offices) (Zip code)
(408) 414-9200
(Registrant's telephone number, including area code)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 31, 2001
-------------------------------- ----------------------------------
Common Stock, $.001 par value 27,928,951 shares
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POWER INTEGRATIONS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes To Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
TOPSwitch, TinySwitch and EcoSmart are trademarks of Power Integrations, Inc.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2001 2000
------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 42,584 $ 36,462
Short-term investments ........................................................ 24,419 26,972
Accounts receivable ........................................................... 9,278 9,189
Inventories ................................................................... 24,342 21,599
Deferred tax assets ........................................................... 6,054 6,054
Prepaid expenses and other current assets ..................................... 1,964 4,618
----------- ----------
Total current assets .................................................. 108,641 104,894
PROPERTY AND EQUIPMENT, net ........................................................ 24,555 22,497
----------- ----------
$133,196 $127,391
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capitalized lease obligations .............................. $ 554 $ 678
Accounts payable .............................................................. 6,255 7,490
Accrued payroll and related expenses .......................................... 3,205 2,980
Taxes payable and other accrued liabilities ................................... 1,295 4,175
Deferred income on sales to distributors ...................................... 1,798 2,566
----------- ----------
Total current liabilities ............................................. 13,107 17,889
----------- ----------
LONG TERM LIABILITIES:
Capitalized lease obligations, net of current portion ......................... 334 715
Deferred rent ................................................................. 349 --
----------- ----------
Total long term liabilities ........................................... 683 715
----------- ----------
STOCKHOLDERS' EQUITY:
Common stock .................................................................. 28 28
Additional paid-in capital .................................................... 79,127 74,049
Stockholder notes receivable .................................................. (38) (76)
Deferred compensation ......................................................... -- (41)
Cumulative translation adjustment ............................................. (119) (118)
Retained earnings ............................................................. 40,408 34,945
----------- ----------
Total stockholders' equity ............................................ 119,406 108,787
----------- ----------
$133,196 $127,391
=========== ==========
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ---------
NET REVENUES:
Product sales ............................................ $ 22,710 $ 27,377 $ 69,516 $ 83,601
License fees and royalties ............................... 293 483 930 1,281
---------- ---------- ---------- ---------
Total net revenues ............................... 23,003 27,860 70,446 84,882
COST OF REVENUES .............................................. 13,092 13,280 37,766 40,589
---------- ---------- ---------- ---------
GROSS PROFIT .................................................. 9,911 14,580 32,680 44,293
---------- ---------- ---------- ---------
OPERATING EXPENSES:
Research and development ................................. 3,586 3,084 10,828 9,570
Sales and marketing ...................................... 3,797 3,139 11,146 9,985
General and administrative ............................... 1,537 1,743 4,273 5,165
---------- ---------- ---------- ---------
Total operating expenses ......................... 8,920 7,966 26,247 24,720
---------- ---------- ---------- ---------
INCOME FROM OPERATIONS ........................................ 991 6,614 6,433 19,573
OTHER INCOME, net ............................................. 325 701 1,419 2,152
---------- ---------- ---------- ---------
INCOME BEFORE PROVISION FOR
INCOME TAXES ............................................... 1,316 7,315 7,852 21,725
PROVISION FOR INCOME TAXES .................................... 395 2,219 2,389 6,541
---------- ---------- ---------- ---------
NET INCOME .................................................... $ 921 $ 5,096 $ 5,463 $15,184
========== ========== ========== =========
EARNINGS PER SHARE:
Basic .................................................... $ 0.03 $ 0.19 $ 0.20 $ 0.56
========== ========== ========== =========
Diluted .................................................. $ 0.03 $ 0.18 $ 0.19 $ 0.53
========== ========== ========== =========
SHARES USED IN PER SHARE CALCULATION:
Basic .................................................... 27,758 27,325 27,622 27,127
========== ========== ========== =========
Diluted .................................................. 29,339 28,495 28,748 28,908
========== ========== ========== =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
Nine Months Ended September 30,
-------------------------------
2001 2000
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,463 $ 15,184
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ....................................... 4,873 2,977
Deferred compensation expense ....................................... 41 105
Deferred rent ....................................................... 349 --
Provision for accounts receivable and other allowances .............. 229 159
Change in operating assets and liabilities:
Accounts receivable ............................................ (318) (1,674)
Inventories .................................................... (2,743) (10,177)
Prepaid expenses and other current assets ...................... 2,654 (366)
Accounts payable ............................................... (1,235) (1,932)
Accrued liabilities ............................................ (1,351) 2,545
Deferred income on sales to distributors ....................... (768) (800)
------------- -----------
Net cash provided by operating activities ................. 7,194 6,021
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................. (6,931) (10,824)
Purchases of short-term investments ................................. (24,750) (22,940)
Proceeds from sales and maturities of short-term investments ........ 27,303 36,169
------------- -----------
Net cash provided by (used in) investing activities ....... (4,378) 2,405
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock .......................... 3,773 4,695
Proceeds from stockholder note repayment ............................ 38 125
Principal payments under capitalized lease obligations .............. (505) (953)
------------- -----------
Net cash provided by financing activities ................. 3,306 3,867
------------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................ 6,122 12,293
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......................... 36,462 27,883
------------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................... $ 42,584 $ 40,176
============= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .............................................. $ 53 $ 128
============= ===========
Cash paid for income taxes .......................................... $ 3,849 $ 3,051
============= ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts of
Power Integrations, Inc. (the Company), a Delaware corporation, and its wholly
owned subsidiaries. Significant inter-company accounts and transactions have
been eliminated.
While the financial information furnished is unaudited, the condensed
consolidated financial statements included in this report reflect all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for the fair presentation of the results of operations for
the interim periods covered and of the financial condition of the Company at the
date of the interim balance sheet. The results for interim periods are not
necessarily indicative of the results for the entire year. The condensed
consolidated financial statements should be read in conjunction with the Power
Integrations, Inc. consolidated financial statements for the year ended December
31, 2000 included in its Form 10-K.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents and Short-Term Investments
The Company considers cash invested in highly liquid financial instruments
with an original maturity of three months or less to be cash equivalents. Cash
investments in highly liquid financial instruments with original maturities
greater than three months but not longer than fifteen months are classified as
short-term investments. As of September 30, 2001, the Company's short-term
investments consisted of U.S. government backed securities, corporate commercial
paper and other high quality commercial and municipal securities, which were
classified as held to maturity and were valued using the amortized cost method
which approximates market.
Revenue Recognition
Product revenues consist of sales to original equipment manufacturers, or
OEMs, merchant power supply manufacturers and distributors. Revenues from
product sales to OEMs and merchant power supply manufacturers are recognized
upon shipment. Sales to distributors are made under terms allowing certain
rights of return and protection against subsequent price declines on the
Company's products held by the distributors. As a result of the Company's
distributor agreements, the Company defers recognition of revenue and the
proportionate costs of revenues derived from sales to distributors until the
distributors resell the Company's products to their customers. The margin
deferred as a result of this policy is reflected as "deferred income on sales to
distributors" in the accompanying condensed consolidated balance sheets.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Segment Reporting
During 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No.131 requires a new basis of determining reportable
business segments, i.e., the management approach. This approach requires that
business segment information used by management to assess performance and manage
company resources be the source for information disclosure. On this basis, the
Company is organized and operates as one business segment, that being the
design, development, manufacture and marketing of proprietary, high-voltage,
analog integrated circuits for use in power conversion markets.
6
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," which amends SFAS No. 133 to be
effective for all fiscal years beginning after June 15, 2000. In June 2000, SFAS
No. 133 was amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amended or modified certain
issues discussed in SFAS No. 133. SFAS No. 138 is also effective for all fiscal
years beginning after June 15, 2000. SFAS No. 133 and SFAS No. 138 establish
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statements also require that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. The Company does not engage in derivative instruments or
hedging activities. Accordingly, there was no impact on the Company's financial
statements from the adoption of SFAS No. 133 and SFAS No. 138 in the first
quarter of 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
has reviewed its revenue recognition policies and determined that they are in
compliance with SAB 101. Accordingly, there was no impact on the Company's
financial statements from adopting SAB 101 in the fourth quarter of 2000.
In July 2001, the Financial Accounting Standards Board issued SFAS No.'s
141 and 142, "Business Combinations" and "Goodwill and Other Intangibles",
respectively. SFAS No. 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142,
effective January 1, 2002, goodwill is no longer subject to amortization over
its estimated useful life. Rather, goodwill is subject to at least an annual
assessment for impairment, applying a fair-value based test. Additionally, an
acquired intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirer's intent to do so. The Company does not expect the
adoption of SFAS No. 141 and SFAS No. 142 to have a material impact on its
financial statements.
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.
3. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
September 30, December 31,
2001 2000
-----------------------------
Raw materials ............................................... $ 1,542 $ 1,520
Work-in-process ............................................. 13,740 13,409
Finished goods .............................................. 9,060 6,670
--------- ---------
$24,342 $21,599
========= =========
7
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. SIGNIFICANT CUSTOMERS AND EXPORT SALES:
Customer Concentration
The Company's end user base is highly concentrated and a relatively small
number of OEMs and distributors accounted for a significant portion of the
Company's net revenues. Ten customers accounted for approximately 77.4% and
67.7% of total net revenues for the three months ended September 30, 2001 and
2000, respectively, and approximately 73.1% and 68.9% of total net revenues for
the nine months ended September 30, 2001 and 2000, respectively.
The following customers accounted for more than 10% of total net revenues:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------------
Customer 2001 2000 2001 2000
-------- -------------------------------------------------------
A ............................. 19.0% 21.3% 22.8% 21.1%
B ............................. 16.3% * 12.2% *
C ............................. 14.5% * * *
------------
* less than 10% or no sales
Customers A & B are distributors of the company's products and customer C
is a merchant power supply manufacturer who in turn sells its manufactured
power supplies to third party customers.
Export Sales
The Company markets its products in North America and in foreign countries
through its sales personnel and a worldwide network of independent sales
representatives and distributors. As a percentage of total net revenues, export
sales, which consist of domestic sales to customers in foreign countries, are
comprised of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------------
2001 2000 2001 2000
-------------------------------------------------------
Taiwan ........................ 35.4% 21.3% 28.9% 21.7%
Hong Kong/China ............... 24.0% 24.3% 27.9% 22.6%
Western Europe ................ 16.6% 18.0% 17.9% 18.5%
Korea ......................... 9.0% 7.9% 9.1% 10.6%
Singapore ..................... 5.7% -- 4.3% --
Japan ......................... 1.2% 3.0% 1.7% 2.5%
Thailand ...................... 1.0% 1.9% 1.0% 2.7%
Other ......................... 1.6% 4.3% 1.6% 3.7%
-------- -------- -------- --------
Total foreign ....... 94.5% 80.7% 92.4% 82.3%
======== ======== ======== ========
Product Sales
Sales of our TOPSwitch products accounted for 99.5% and 97.7% of net
revenues from product sales for the three months ended September 30, 2001 and
2000, respectively, and 98.3 % and 97.7% of net revenues from product sales for
the nine months ended September 30, 2001 and 2000, respectively. TOPSwitch
products include TOPSwitch, TOPSwitch II, TOPSwitch FX, TopSwitch GX, TinySwitch
and TinySwitch II.
8
POWER INTEGRATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. EARNINGS PER SHARE:
Earnings per share are calculated in accordance with SFAS No. 128,
"Earnings per Share." SFAS No. 128 requires companies to compute earnings per
share under two different methods (basic and diluted). Basic earnings per share
are calculated by dividing net income by the weighted average shares of common
stock outstanding during the period. Diluted earnings per share are calculated
by dividing net income by the weighted average shares of outstanding common
stock and common stock equivalents during the period. Common stock equivalents
included in the diluted calculation consist of dilutive shares issuable upon the
exercise of outstanding common stock options and shares issuable under the
employee stock purchase plan using the treasury stock method.
The following table sets forth the calculation of basic and diluted
earnings per share (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
2001 2000 2001 2000
-------------------------- ---------------------------
Basic earnings per share:
Net income .............................................. $ 921 $ 5,096 $ 5,463 $ 15,184
------- ------- ------- --------
Weighted average common shares .......................... 27,758 27,325 27,622 27,127
------- ------- ------- --------
Basic earnings per share ........................... $ 0.03 $ 0.19 $ 0.20 $ 0.56
======= ======= ======= ========
Diluted earnings per share:
Net income .............................................. $ 921 $ 5,096 $ 5,463 $ 15,184
------- ------- ------- --------
Weighted average common shares .......................... 27,758 27,325 27,622 27,127
Weighted average common share equivalents:
Options ............................................ 1,569 1,168 1,120 1,750
Employee stock purchase plan ....................... 12 2 6 31
------- ------- ------- --------
Diluted weighted average common shares .................. 29,339 28,495 28,748 28,908
------- ------- ------- --------
Diluted earnings per share .................... $ 0.03 $ 0.18 $ 0.19 $ 0.53
======= ======= ======= ========
6. PROVISION FOR INCOME TAXES:
Income tax expense for the nine-month periods ended September 30, 2001 and
2000 includes a provision for Federal, state and foreign taxes based on the
annual estimated effective tax rate applicable to the Company and its
subsidiaries for the year. The difference between the statutory rate and the
Company's effective tax rate for the nine months ended September 30, 2001 and
2000 is primarily due to the beneficial impact of international sales, research
and development credits and Federal tax-exempt investments.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements, which
reflect our current views with respect to future events and financial
performance. In this report, the words "anticipates," "believes," "expects,"
"future," "intends," "should," "will" and similar expressions identify
forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties, including those discussed in the "Factors That
May Affect Future Results of Operations" and elsewhere in this report, that
could cause actual results to differ materially from historical or anticipated
results. We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report.
The following management's discussion and analysis of financial condition
and results of operations should be read in conjunction with management's
discussion and analysis of financial condition and results of operations
included in our Form 10-K for the year ended December 31, 2000.
Overview
We design, develop, manufacture and market proprietary, high-voltage,
analog integrated circuits, or ICs, for use primarily in AC to DC power
conversion markets. We have targeted high-volume power supply markets, including
the consumer, communications, computer and 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 250 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 3 watts to 20 watts. All of
our products introduced since 1998 incorporate our EcoSmart technology.
10
Results of Operations
The following table sets forth certain operating data as a percentage of
total net revenues for the periods indicated.
Percentage of Percentage of
Total Net Revenues for Total Net Revenues for
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
------- ------ -------- -------
Net revenues:
Product sales ........................................... 98.7% 98.3% 98.7% 98.5%
License fees and royalties .............................. 1.3 1.7 1.3 1.5
------- ------ -------- -------
Total net revenues ................................. 100.0 100.0 100.0 100.0
Cost of revenues ............................................. 56.9 47.7 53.6 47.8
------- ------ -------- -------
Gross profit ................................................. 43.1 52.3 46.4 52.2
------- ------ -------- -------
Operating expenses:
Research and development ................................ 15.6 11.1 15.4 11.3
Sales and marketing ..................................... 16.5 11.3 15.8 11.7
General and administrative .............................. 6.7 6.2 6.1 6.1
------- ------ -------- -------
Total operating expenses ........................... 38.8 28.6 37.3 29.1
------- ------ -------- -------
Income from operations ....................................... 4.3 23.7 9.1 23.1
Other income, net ............................................ 1.4 2.6 2.0 2.5
------- ------ -------- -------
Income before provision for income taxes ..................... 5.7 26.3 11.1 25.6
------- ------ -------- -------
Provision for income taxes ................................... 1.7 8.0 3.4 7.7
------- ------ -------- -------
Net income ................................................... 4.0% 18.3% 7.7% 17.9%
======= ====== ======== =======
Comparison of the Three and Nine Months Ended September 30, 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 for the quarter ended
September 30, 2001 were $23.0 million compared to $27.9 million for the third
quarter of 2000, a decrease of $4.9 million, or 17.4%. Net revenues for the nine
months ended September 30, 2001 were $70.4 million compared to $84.9 million for
the comparable period of 2000, a decrease of $14.5 million or 17.0%.
Net revenues from product sales represented $22.7 million and $27.4 million
in the third quarter of 2001 and 2000, respectively. Net revenues from product
sales represented $69.5 million and $83.6 million in the nine months ended
September 30, 2001 and 2000, respectively. The decline in net revenues from
product sales for the three months and nine months ended September 30, 2001 was
generally in all of our end markets and due primarily to the unfavorable
economic conditions during the period. With the results of the nine months ended
September 30, 2001 and our outlook for the quarter ending December 31, 2001, we
expect our full year revenue mix as a percentage of net revenues in the end
markets which we serve to be approximately 33% in the consumer market category,
33% in the communications category, 20% in the computer category, 7% in the
industrial category and 7% in all other. We also expect the mix of our products
families for the full year to be approximately 60% for TOPSwitch I and II, 25%
for TINYSwitch I and II and 15% for TOPSwitch FX and GX.
International sales were $21.7 million in the third quarter of 2001
compared to $22.5 million for the same period in 2000, a decrease of $0.8
million, or 3.6%, which represented 94.5% of net revenues compared to 80.7% in
the comparable period of 2000. International sales were $65.1 million for the
nine months ended September 30, 2001
11
compared to $69.8 million for the same period in 2000, a decrease of $4.7
million, or 6.7%, which represented 92.4% of net revenues compared to 82.3% in
the comparable period of 2000. The increase in our international sales as a
percentage of net revenues, for the three month and nine month periods ended
September 30, 2001, was attributable primarily to a major OEM changing its
sourcing of our products from North America to a merchant power supply
manufacturer located in Asia. 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 77.6% and 61.7% of
our product sales for the three months ended September 30, 2001 and 2000,
respectively, and 74.2% and 63.2% of our product sales for the nine months ended
September 30, 2001 and 2000, respectively. We expect international sales to
continue to account for a large portion of our net revenues.
Direct sales for the third quarter of 2001 were divided 49.0% to
distributors and 51.0% to original equipment manufacturers, or OEMs, and
merchant power supply manufacturers, compared to 50.1% to distributors and 49.9%
to OEMs and merchant power supply manufacturers for the same quarter in 2000.
For the nine months ended September 30, 2001, direct sales were divided 50.6% to
distributors and 49.4% to OEMs and merchant power supply manufacturers, compared
to 49.5% to distributors and 50.5 % to OEMs and merchant power supply
manufacturers for the same period in 2000. For the quarter ended September 30,
2001, sales to one customer accounted for 19.0% of net revenues, and for the
quarter ended September 30, 2000, that same customer accounted for 21.3% of net
revenues. A second customer accounted for 16.3% of net revenues for the quarter
ended September 30, 2001. For the nine month periods ended September 30, 2001
and 2000, sales to the first customer accounted for 22.8% and 21.1% of net
revenues respectively, and for the nine months ended September 30, 2001, sales
to the second customer accounted for 12.2% of net revenues. Both of these
customers are distributors. A third customer, who is a merchant power supply
manufacturer, accounted for 14.5% of net revenues for the quarter ended
September 30, 2001. There were no other customers accounting for sales of more
than 10% during the periods reported.
Cost of revenues; Gross profit. Gross profit is equal to net revenues less
cost of revenues. Our cost of revenues consists primarily of costs associated
with the purchase of wafers, the assembly and packaging of our products, and
internal labor and overhead associated with the testing of both wafers and
packaged components. Gross profit for the third quarter of 2001 was $9.9
million, or 43.1% of net revenues, compared to $14.6 million, or 52.3% of net
revenues for the same period in 2000. Gross profit for the nine months ended
September 30, 2001 was $32.7 million, or 46.4% of net revenues, compared to
$44.3 million, or 52.2% of net revenues for the same period in 2000. The
decrease in gross profit percentage for the three months and nine months ended
September 30, 2001 was due primarily to lower sales volumes, lost manufacturing
efficiencies due to new product introductions and the adverse impact of
increased pressure from customers for lower pricing, partially offset by a
decrease in wafer costs and assembly costs. We expect our gross margins to
remain in a range of 43% to 45% over the next few quarters, but we cannot assure
you that our gross profit will remain at these levels in future periods.
Research and development expenses. Research and development expenses
consist primarily of employee-related expenses, expensed material and facility
costs associated with the development of new processes and new products. We also
expense prototype wafers and mask sets related to new products as research and
development costs until new products are released to production. Research and
development expenses for the third quarter of 2001 were $3.6 million compared to
$3.1 million for the same period in 2000, an increase of $0.5 million, or 16.3%,
which represented 15.6% and 11.1% of our net revenues in each period,
respectively. Research and development expenses for the first nine months of
2001 were $10.8 million compared to $9.6 million for the same period in 2000, an
increase of $1.2 million, or 13.2%, which represented 15.4% and 11.3% of net
revenues in each period, respectively. The increase for the three months and
nine months ended September 30, 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 to 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
offices and applications engineering. Sales and marketing expenses for the third
quarter of 2001 were $3.8 million compared to $3.1 million for the same period
in 2000, an increase of $0.7 million, or 21.0%, which represented 16.5% and
11.3% of our net revenues in each period, respectively. Sales and marketing
expenses for the first nine months of 2001 were $11.1 million compared to $10.0
million for the same period in 2000, an increase of $1.1 million, or 11.6%,
which represented 15.8% and 11.7% of our net revenues in each period,
respectively. The increase for the three months and nine months ended September
30, 2001 resulted primarily from the addition of
12
personnel to support our sales effort and the increased activity in application
engineering. Included in the above marketing expenses are costs associated with
applications engineering representing $1.0 million and $0.6 million for the
three months ended September 30, 2001 and 2000, respectively, and $2.8 million
and $2.1 million for the nine months ended September 30, 2001 and 2000,
respectively. We expect sales and marketing expenses to continue to increase in
absolute dollars but to 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. For the quarters ended September 30, 2001 and 2000,
general and administrative expenses were $1.5 million and $1.7 million,
respectively, which represented 6.7% and 6.2% of our net revenues in each
period. For the nine months ended September 30, 2001 and 2000, general and
administrative expenses were $4.3 million and $5.2 million, respectively, which
represented 6.1% of our net revenues in both periods. The decrease in spending,
for the comparable nine month periods, was attributable primarily to a reduction
in professional and legal expenses following the settlement last year of our
patent infringement lawsuit, which we initiated with Motorola. We expect general
and administrative expenses to increase in absolute dollars, but to fluctuate as
a percentage of our net revenues.
Other income, net. Other income, net, for the third quarter of 2001
decreased by $0.4 million compared to the same period in 2000, and for the nine
months ended September 30, 2001, decreased by $0.7 million compared to the same
period in 2000. The decrease for each of the three and nine month periods ended
September 30, 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 represents Federal,
state and foreign taxes. The provision for income taxes was $0.4 million for the
third quarter of 2001 compared to $2.2 million for the same period in 2000. The
provision for income taxes was $2.4 million for the first nine months of 2001
compared to $6.5 million for the same period in 2000. Our estimated effective
tax rate used for both 2001 and 2000 was 30%. The difference between the
statutory rate and our effective tax rate for both years is due primarily to the
beneficial impact of international sales, research and development credits and
Federal tax-exempt investments.
Liquidity and Capital Resources
At September 30, 2001, we had approximately $67.0 million in cash, cash
equivalents and short-term investments. In addition, under a revolving line of
credit 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 these foundries to us. The balance of this
credit line is unused and available. The line of credit agreement, which expires
on July 1, 2002, contains financial covenants requiring that we maintain
profitability on a quarterly basis and not pay or declare dividends without the
bank's prior consent. We have financed a significant portion of our machinery
and equipment through capital equipment leases. There was no additional
equipment financing during the nine months ended September 30, 2001.
As of September 30, 2001, we had working capital, defined as current assets
less current liabilities, of approximately $95.5 million, an increase of
approximately $8.5 million from December 31, 2000. Our operating activities
generated cash of $7.2 million and $6.0 million in the nine months ended
September 30, 2001 and 2000, respectively. Cash generated in the first nine
months of 2001 was principally the result of net income in the amount of $5.5
million, depreciation and amortization, and a decrease in prepaid expenses,
partially offset by an increase in inventory and a decrease in accounts payable
and accrued liabilities. Cash generated in the first nine months of 2000 was
principally the result of net income in the amount of $15.2 million,
depreciation and amortization, and an increase in accrued liabilities, partially
offset by an increase in inventory and a decrease in accounts payable.
Our investing activities were a net transfer to cash and cash equivalents
from short-term investments of $2.6 million in the nine months ended September
30, 2001, and a net transfer from short-term investments to cash and cash
equivalents of $13.2 million in the nine months ended September 30, 2000.
Purchases of property and equipment were $6.9 million and $10.8 million in the
nine months ended September 30, 2001 and 2000, respectively.
13
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 June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," which amends SFAS No. 133 to be
effective for all fiscal years beginning after June 15, 2000. In June 2000, SFAS
No. 133 was amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amended or modified certain
issues discussed in SFAS No. 133. SFAS No. 138 is also effective for all fiscal
years beginning after June 15, 2000. SFAS No. 133 and SFAS No. 138 establish
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statements also require that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. We do not engage in derivative instruments or hedging
activities. Accordingly, there was no impact on our financial statements from
the adoption of SFAS No. 133 and SFAS No. 138 in the first quarter of 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. We have
reviewed our revenue recognition policies and determined that they are in
compliance with SAB 101. Accordingly, there was no impact on our financial
statements from adopting SAB 101 in the fourth quarter of 2000.
In July 2001, the Financial Accounting Standards Board issued SFAS No.'s
141 and 142, "Business Combinations" and "Goodwill and Other Intangibles",
respectively. SFAS No. 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142,
effective January 1, 2002, goodwill is no longer subject to amortization over
its estimated useful life. Rather, goodwill is subject to at least an annual
assessment for impairment, applying a fair-value based test. Additionally, an
acquired intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirer's intent to do so. We do not expect the adoption of
SFAS No. 141 and SFAS No. 142 to have a material impact on our financial
statements.
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 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 could 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;
14
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.
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 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 penalty to them. 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, including battery chargers for cellular telephones, drop
below current power levels, these older alternative technologies can be used
more cost effectively than our TOPSwitch-based switchers.
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 recent 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. This decline in demand contributed to a decline in our net
revenues during the three month and nine month periods ended September 30, 2001.
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
15
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 could 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 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 produce wafers for us is limited by
the available capacities of the foundries in which these wafers are
manufactured. 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, which is available from only one vendor, and
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 Japanese market for our products
is primarily 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 would 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.
16
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.
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
failure, 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 power supply to conduct operations, and
California's current energy crisis could disrupt our business and increase our
expenses. California is in the midst of an energy crisis that 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. We currently have only limited backup generators for emergency
alternate sources of power in the event of a blackout. If blackouts interrupt
our power supply, 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
17
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 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 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. 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 have neither long-term employment contracts with, nor 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. We have adopted a preferred stock purchase
rights plan that is 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. 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.
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.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.
There has not been a material change in our exposure to interest rate and
foreign currency risks since the date of our 2000 Annual Report on Form 10-K.
Interest Rate Risk. Our exposure to market risk for changes in interest
rates relates primarily to our investment portfolio. We do not use derivative
financial instruments in our investment portfolio. We invest in high-credit
quality issuers and, by policy, limit the amount of credit exposure to any one
issuer. As stated in our policy, we ensure the safety and preservation of our
invested principal funds by limiting default risk, market risk and reinvestment
risk. We mitigate default risk by investing in safe and high-credit quality
securities and by constantly positioning our portfolio to respond appropriately
to a significant reduction in a credit rating of any investment issuer,
guarantor or depository. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity.
The table below presents principal amounts and related weighted average
interest rates for our investment portfolio at September 30, 2001. All
investments mature, by policy, in 15 months or less.
(in thousands, except average interest rates)
Carrying Average
Amount Interest Rate
---------- -------------
Cash Equivalents:
Tax-exempt securities .................... $ 33,450 2.48%
--------- ----------
Total cash equivalents .............. 33,450 2.48%
--------- ----------
Short-term Investments:
U.S. corporate securities ................ 6,500 4.31%
U.S. government securities ............... 6,000 4.68%
Tax-exempt securities .................... 11,250 3.70%
--------- ----------
Total short-term investments ........ 23,750 4.23%
--------- ----------
Total investment securities ......... $ 57,200 3.79%
========= ==========
Foreign Currency Exchange Risk. We transact business in various foreign
countries. Our primary foreign currency cash flows are in Asia 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.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
The following exhibit is attached hereto and filed herewith:
4.3 Amendment to Rights Agreement between Bank Boston, N.A. and
Power Integrations, Inc. dated February 24, 1999, effective as
of October 9, 2001.
b. Reports on Form 8-K.
None.
20
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.
Dated: November 9, 2001 By: /s/ JOHN M. COBB
----------------------------------
John M. Cobb
Chief Financial Officer
21