UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POWER INTEGRATIONS, INC.
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(Name of Registrant as Specified In Its Charter)
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POWER INTEGRATIONS, INC.
477 N. Mathilda Avenue
Sunnyvale, California 94086
April 29, 1998
To Our Stockholders:
You are cordially invited to attend the Annual Meeting of Stockholders of
Power Integrations, Inc. on June 1, 1998 at 477 N. Mathilda Avenue, Sunnyvale,
California 94086 at 1:00 p.m., Pacific Daylight Time.
The matters expected to be acted upon at the meeting are described in
detail in the attached Notice of Annual Meeting of Stockholders and Proxy
Statement. Also enclosed is a copy of the 1997 Power Integrations, Inc. Annual
Report, which includes audited financial statements and certain other
information.
It is important that you use this opportunity to take part in the affairs
of Power Integrations, Inc. by voting on the business to come before this
meeting. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN,
DATE AND RETURN THE ACCOMPANYING PROXY PROMPTLY IN THE ENCLOSED POSTAGE-PREPAID
ENVELOPE. Returning the proxy does not deprive you of your right to attend the
meeting and vote your shares in person.
We look forward to seeing you at the meeting.
Sincerely,
/s/ Howard F. Earhart
Howard F. Earhart
President and Chief Executive Officer
POWER INTEGRATIONS, INC.
477 N. Mathilda Avenue
Sunnyvale, California 94086
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 1, 1998
Dear Stockholder:
You are invited to attend the Annual Meeting of Stockholders of Power
Integrations, Inc. (the "Company"), which will be held on June 1, 1998, at 1:00
p.m. Pacific Daylight Time at 477 N. Mathilda Avenue, Sunnyvale, California
94086, for the following purposes:
1. To elect two (2) Class I directors to hold office for a three-year term and
until their successors are elected and qualified.
2. To approve amendments to the Company's 1997 Stock Option Plan which (i)
provides that effective January 1, 1999, 600,000 shares which would
otherwise only be available for grant under such plan pursuant to
nonstatutory stock options may instead be granted pursuant to incentive
stock options, and (ii) limit the number of shares for which options may be
granted under such plan to any employee within any fiscal year to 200,000.
3. To ratify the appointment of Arthur Andersen LLP as the independent auditors
of the Company for the fiscal year ending December, 1998.
4. To transact such other business as may properly come before the meeting.
Stockholders of record at the close of business on April 13, 1998, are
entitled to notice of, and to vote at, this meeting and any adjournments
thereof. For ten days prior to the meeting, a complete list of the stockholders
entitled to vote at the meeting will be available for examination by any
stockholder for any purpose relating to the meeting during ordinary business
hours at the principal office of the Company.
By Order of the Board of Directors,
/s/ Robert G. Staples
Robert G. Staples
Secretary
Sunnyvale, California
April 29, 1998
STOCKHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND
RETURN IT IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. PROXIES ARE REVOCABLE, AND
ANY STOCKHOLDER MAY WITHDRAW HIS OR HER PROXY PRIOR TO THE TIME IT IS VOTED, OR
BY ATTENDING THE MEETING AND VOTING IN PERSON.
POWER INTEGRATIONS, INC.
477 N. Mathilda Avenue
Sunnyvale, California 94086
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
The accompanying proxy is solicited by the Board of Directors of Power
Integrations, Inc., a Delaware corporation (the "Company"), for use at the
Annual Meeting of Stockholders to be held June 1, 1998, or any adjournment
thereof for the purposes set forth in the accompanying Notice of Annual Meeting
of Stockholders. The date of this Proxy Statement is April 29, 1998, the
approximate date on which this Proxy Statement and the accompanying form of
proxy were first sent or given to stockholders.
GENERAL INFORMATION
Annual Report. An annual report for the year ended December 31, 1997, is
enclosed with this Proxy Statement.
Voting Securities. Only stockholders of record as of the close of business
on April 13, 1998, will be entitled to vote at the meeting and any adjournment
thereof. As of that date, there were 12,058,380 shares of Common Stock of the
Company ("Common Stock"), par value $.001 per share, issued and outstanding.
Stockholders may vote in person or by proxy. Each stockholder of shares of
Common Stock is entitled to one vote for each share of stock held on the
proposals presented in this Proxy Statement. The Company's bylaws provide that
a majority of all of the shares of the Company's capital stock entitled to vote,
whether present in person or represented by proxy, shall constitute a quorum for
the transaction of business at the meeting.
Solicitation of Proxies. The cost of soliciting proxies will be borne by
the Company. The Company will solicit stockholders by mail through its regular
employees, and will request banks and brokers, and other custodians, nominees
and fiduciaries, to solicit their customers who have stock of the Company
registered in the names of such persons and will reimburse them for their
reasonable, out-of-pocket costs. The Company may use the services of its
officers, directors, and others to solicit proxies, personally or by telephone,
without additional compensation. In addition, the Company has engaged the
services of Corporate Investor Communications, Inc. ("CIC"), a proxy
solicitation firm. The Company will pay approximately $3,000 for such services
and will reimburse CIC for their reasonable, out-of-pocket expenses.
Voting of Proxies. All valid proxies received prior to the meeting will be
voted. All shares represented by a proxy will be voted, and where a stockholder
specifies by means of the proxy a choice with respect to any matter to be acted
upon, the shares will be voted in accordance with the specification so made. If
no choice is indicated on the proxy, the shares will be voted in favor of the
proposal. A stockholder giving a proxy has the power to revoke his or her
proxy, at any time prior to the time it is voted, by delivery to the Secretary
of the Company at the Company's principal office, 477 N. Mathilda Avenue,
Sunnyvale, California 94086, of a written instrument revoking the proxy or a
duly executed proxy with a later date, or by attending the meeting and voting in
person.
1
PROPOSAL NUMBER ONE
ELECTION OF DIRECTORS
The Company has a classified Board of Directors which currently consists of
five (5) directors; two (2) of whom are Class I directors, two (2) of whom are
Class II directors, and one (1) who is a Class III director. Class I, Class II
and Class III directors serve until the Annual Meeting of Stockholders to be
held in 1998, 1999 and 2000, respectively, and until their respective successors
are duly elected and qualified. Directors in a class are elected for a term of
three years to succeed the directors in such class whose terms expire at such
annual meeting.
Management's nominees for election at the 1998 Annual Meeting of
Stockholders to Class I of the Board of Directors are Dr. William Davidow and
Steven J. Sharp. If elected, the nominees will serve as directors until the
Company's Annual Meeting of Stockholders in 2001, and until their successors are
elected and qualified. If the nominees decline to serve or become unavailable
for any reason, or if a vacancy occurs before the election (although management
knows of no reason to anticipate that this will occur), the proxies may be voted
for substitute nominees as the Board of Directors may designate.
The table below sets forth the names and certain information of the
Company's directors, including the Class I nominees to be elected at this
meeting.
Director
NAME PRINCIPAL OCCUPATION WITH THE COMPANY AGE Since
- ----------------------------------------- ------------------------------------- --- -------
Class I nominees to be elected at the 1998 Annual Meeting of Stockholders:
Dr. William Davidow Director 64 1988
Steven J. Sharp Director 56 1988
Class II directors whose terms expire at the 1999 Annual Meeting of Stockholders:
Dr. Edward C. Ross Chairman of the Board of Directors 56 1989
E. Floyd Kvamme Director 60 1989
Class III directors whose terms expire at the 2000 Annual Meeting of Stockholders:
Howard F. Earhart Director, President and 58 1995
Chief Executive Officer
Howard F. Earhart has served as President, Chief Executive Officer and as a
Director of the Company since January 1995. From 1990 to 1995 Mr. Earhart
served as an interim Chief Executive Officer for various high technology
companies including those discussed below. From July 1994 to March 1995, Mr.
Earhart served as Chief Executive Officer of Co-Active Computing, Inc., a
personal computer peer-to-peer network adapter company. From July 1994 to
January 1995, Mr. Earhart served as Chief Executive Officer of Reach Software, a
software company. From December 1993 to April 1994, Mr. Earhart served as Chief
Executive Officer of Quorum Software, a software company. From August 1993 to
September 1994, Mr. Earhart served as acting Chief Executive Officer of Digital-
F/X, a hardware and software company. From September 1992 to April 1993, Mr.
Earhart served as an advisor to the Chief Executive Officer of Raster Graphics,
an electrostatic plotter company. From August 1990 to January 1992, Mr. Earhart
served as Chief Executive Officer of Springer Technologies, a thin film magnetic
head company. Mr. Earhart also served as President of the Consumer Products
Group of Memorex Corporation.
Dr. William Davidow has served as a Director of the Company since its
inception. Dr. Davidow has been a general partner of Mohr, Davidow Ventures, a
venture capital company, since 1985. Dr. Davidow also serves as a director of
two public companies, Rambus, Inc. and The Vantive Corporation.
2
Steven J. Sharp is a founder of the Company and has served as a Director of
the Company since its inception. Mr. Sharp has served as President, Chief
Executive Officer and Chairman of the Board of TriQuint since September 1991.
Dr. Edward C. Ross has served as a Director of the Company since January
1989 and has served as the Chairman of the Board of Directors since January
1995. From January 1989 to January 1995, Dr. Ross served as President and Chief
Executive Officer of the Company. Dr. Ross has served as President, Technology
and Manufacturing Group of Cirrus Logic, Inc., a semiconductor company, since
September 1995.
E. Floyd Kvamme has served as a Director of the Company since September
1989. Mr. Kvamme has been a general partner of Kleiner Perkins Caufield &
Byers, a venture capital company, since 1984. Mr. Kvamme also serves as a
director of four public companies, TriQuint Semiconductor ("TriQuint"), Harmonic
Lightwaves, Photon Dynamics and Prism Solutions.
BOARD OF DIRECTOR'S COMMITTEES AND MEETINGS
During the year ended December 31, 1997, the Board of Directors held 6
meetings. Each incumbent director attended at least 75% of the aggregate of
such meetings of the Board and any Committee of the Board on which he served.
The Board of Directors has established an Audit Committee and a Compensation
Committee.
The Audit Committee's function is to review with the Company's independent
auditors and management, the annual financial statements and independent
auditors' opinion, review the scope and results of the examination of the
Company's financial statements by the independent auditors, approve all
professional services and related fees performed by the independent auditors,
recommend the retention of the independent auditors to the Board, subject to
ratification by the stockholders, and periodically review the Company's
accounting policies and internal accounting and financial controls. The Audit
Committee oversees actions taken by the Company's independent auditors,
recommends the engagement of auditors and reviews the Company's internal audits.
The members of the Audit Committee during fiscal 1997 were Dr. Ross and Mr.
Kvamme. During the year ended December 31, 1997, the Audit Committee held no
meetings.
The Compensation Committee's function is to make decisions concerning
salaries and incentive compensation for executive officers of the Company. The
members of the Compensation Committee during fiscal 1997 were Dr. Ross, Mr.
Kvamme and Dr. Davidow. During the year ended December 31, 1997, the
Compensation Committee held one (1) meeting. For additional information
concerning the Compensation Committee, see "REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION."
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
If a quorum is present and voting at the annual meeting of stockholders,
the nominees for Class I director receiving the highest number of votes will be
elected. Abstentions and broker non-votes will each be counted as present for
purposes of determining the presence of a quorum THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED ABOVE.
3
PROPOSAL NUMBER TWO
APPROVAL OF AMENDMENT OF
1997 STOCK OPTION PLAN
The Board of Directors adopted the Company's 1997 Stock Option Plan (the "1997
Plan") on June 3, 1997. Currently, the 1997 Plan provides that the maximum
number of shares issuable under the 1997 Plan will automatically be increased on
the first day of each fiscal year of the Company beginning on or after January
1, 1999 by an amount equal to 5% of the number of shares of the Company's Common
Stock which was issued and outstanding on the last day of the preceding fiscal
year. However, the 1997 Plan provides that the number of shares which may
cumulatively be available for issuance upon the exercise of incentive stock
options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), will remain fixed at 2,132,227 shares (the
"ISO Issuance Limit"). Because the use of ISOs is an important factor in
attracting and retaining qualified employees, the Board of Directors has amended
the 1997 Plan, subject to stockholder approval, to increase the ISO Issuance
Limit by 600,000 shares, to 2,732,227 shares, effective as of January 1, 1999.
Such increase in the ISO Issuance Limit contemplated by this amendment will be
effected without an increase in the total number of shares issuable under the
1997 Plan.
The Code limits the amount of compensation paid to a corporation's chief
executive officer and four other most highly compensated officers that the
corporation may deduct as an expense for federal income tax purposes. To enable
the Company to continue to deduct in full all amounts of ordinary income
recognized by its executive officers in connection with options granted under
the 1997 Plan, the Board of Directors has amended the 1997 Plan, subject to
stockholder approval, to limit to 200,000 the maximum number of shares for which
options may be granted to any employee in any fiscal year (the "Grant Limit").
However, the Company's stock option grants typically do not approach this limit.
The stockholders are now being asked to approve the increase in the ISO
Issuance Limit from 2,132,227 shares to 2,732,227 shares and the establishment
of the Grant Limit. The Board of Directors believes that approval of these
amendments is in the best interests of the Company and its stockholders because
the availability of an adequate stock option program is an important factor in
attracting, motivating and retaining qualified officers and employees essential
to the success of the Company and in aligning their long-term interests with
those of the stockholders.
SUMMARY OF THE PROVISIONS OF THE 1997 PLAN
The following summary of the 1997 Plan is qualified in its entirety by the
specific language of the 1997 Plan, a copy of which is available to any
stockholder upon request.
General. The 1997 Plan provides for the grant of ISOs and nonstatutory
stock options. As of April 13, 1998, the Company had outstanding options under
the 1997 Plan to purchase an aggregate of 232,666 shares at a weighted average
exercise price of $7.8883 per share. As of April 13, 1998, options to purchase
240,972 shares of Common Stock granted pursuant to the 1997 Plan had been
exercised, and there were 229,868 shares of Common Stock available for future
grants under the 1997 Plan.
Shares Subject to Plan. Currently, a maximum of 2,132,227 shares of the
authorized but unissued or reacquired Common Stock of the Company may be issued
upon the exercise of options granted pursuant to the 1997 Plan, which amount is
comprised of the sum of (i) 693,382 shares (new shares allocated for issuance
under the 1997 Plan), and (ii) 1,438,845 shares (shares subject to options
granted under the Company's 1988 Stock Option Plan which were outstanding on
June 3, 1997) (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. In addition, the number of shares
issuable under the 1997 Plan will be increased on the first day of each fiscal
year of the Company beginning on or after January 1, 1999 by a number of shares
equal to 5% of the number of shares of the Company's common stock issued and
outstanding on the last day of the preceding fiscal year. Currently, the ISO
Issuance Limit is 2,132,227 shares. Subject to stockholder approval, the Board
of Directors has amended the 1997 Plan to (i) increase the ISO Issuance Limit to
2,732,227 shares, effective
4
January 1, 1999, and (ii) establish the Grant Limit. In the event of any stock
dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments will be made to the shares subject to the 1997 Plan, the
ISO Issuance Limit, the Grant Limit and to outstanding options. To the extent
any outstanding option under the 1997 Plan expires or terminates prior to
exercise in full or if shares issued upon exercise of an option are repurchased
by the Company, the shares of Common Stock for which such option is not
exercised or the repurchased shares are returned to the 1997 Plan and will again
be available for issuance under the 1997 Plan.
Administration. The 1997 Plan is administered by the Board of Directors or
a duly appointed committee of the Board (hereinafter referred to as the
"Board"). With respect to the participation of individuals whose transactions
in the Company's equity securities are subject to Section 16 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the 1997 Plan must be
administered in compliance with the requirements, if any, of Rule 16b-3 under
the Exchange Act. Subject to the provisions of the 1997 Plan, the Board
determines the persons to whom options are to be granted, the number of shares
to be covered by each option, whether an option is to be an ISO or a
nonstatutory stock option, the terms of vesting and exercisability of each
option, including the effect thereon of an optionee's termination of service,
the type of consideration to be paid to the Company upon exercise of an option,
the duration of each option, and all other terms and conditions of the options.
The 1997 Plan also provides, subject to certain limitations, for indemnification
by the Company of any director, officer or employee against all reasonable
expenses, including attorneys' fees, incurred in connection with any legal
action arising from such person's action or failure to act in administering the
1997 Plan. The Board will interpret the 1997 Plan and options granted
thereunder, and all determinations of the Board will be final and binding on all
persons having an interest in the 1997 Plan or any option.
Eligibility. Generally, all employees, directors and consultants of the
Company or of any present or future parent or subsidiary corporations of the
Company are eligible to participate in the 1997 Plan. In addition, the 1997
Plan also permits the grant of options to prospective employees, consultants and
directors in connection with written offers of employment or engagement. As of
April 13, 1998, the Company had approximately 145 employees, including 7
executive officers and 5 directors. Any person eligible under the 1997 Plan may
be granted a nonstatutory option. However, only employees may be granted ISOs.
Terms and Conditions of Options. Each option granted under the 1997 Plan
is evidenced by a written agreement between the Company and the optionee
specifying the number of shares subject to the option and the other terms and
conditions of the option, consistent with the requirements of the 1997 Plan.
The exercise price per share must equal at least the fair market value of a
share of the Company's Common Stock on the date of grant of an ISO and at least
85% of the fair market value of a share of the Common Stock on the date of grant
of a nonstatutory stock option. The exercise price of any ISO granted to a
person who at the time of grant owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or any parent or
subsidiary corporation of the Company (a "10% Stockholder") must be at least
110% of the fair market value of a share of the Company's Common Stock on the
date of grant. The fair market value of the Company's Common Stock is based on
the trading price of the Company's shares in the Nasdaq National Market.
Generally, the exercise price may be paid in cash, by check, or in cash
equivalent, by tender of shares of the Company's Common Stock owned by the
optionee having a fair market value not less than the exercise price, by the
assignment of the proceeds of a sale or a loan with respect to some or all of
the shares of Common Stock being acquired upon the exercise of the option, by
means of a promissory note, by any lawful method approved by the Board or by any
combination of these. The Board may nevertheless restrict the forms of payment
permitted in connection with any option grant.
Options granted under the 1997 Plan will become exercisable and vested at
such times as specified by the Board. Generally, options granted under the 1997
Plan are exercisable on and after the date of grant, subject to the right of the
Company to reacquire at the optionee's exercise price any unvested shares held
by the optionee upon termination of employment or service with the Company or if
the optionee attempts to transfer any unvested shares. Shares subject to
options generally vest in installments, subject to the optionee's continued
employment or service. Currently, the maximum term of ISOs granted under the
1997 Plan is ten years, except that an ISO
5
granted to a 10% Stockholder may not have a term longer than five years. The
1997 Plan authorizes the Board to grant nonstatutory stock options having a term
in excess of ten years. Options are nontransferable by the optionee other than
by will or by the laws of descent and distribution and are exercisable during
the optionee's lifetime only by the optionee.
Change in Control. The 1997 Plan provides that a "Change in Control"
occurs in the event of (i) a sale or exchange by the stockholders of more than
50% of the Company's voting stock, (ii) a merger or consolidation involving the
Company, (iii) the sale, exchange or transfer of all or substantially all of the
assets of the Company, or (iv) a liquidation or dissolution of the Company,
wherein, upon any such event, the stockholders of the Company immediately before
such event do not retain direct or indirect beneficial ownership of at least 50%
of the total combined voting power of the voting stock of the Company, its
successor, or the corporation to which the assets of the Company were
transferred. Upon a Change in Control, the Board may arrange for the acquiring
or successor corporation to assume or substitute new options for the options
outstanding under the 1997 Plan. To the extent that the options outstanding
under the 1997 Plan are not assumed, substituted for, or exercised prior to such
event, they will terminate.
Termination or Amendment. Unless sooner terminated, no ISOs may be granted
under the 1997 Plan after June 2, 2007. The Board may terminate or amend the
1997 Plan at any time, but, without stockholder approval, the Board may not
amend the 1997 Plan to increase the total number of shares of Common Stock
reserved for issuance thereunder, change the class of persons eligible to
receive ISOs, or expand the class of persons eligible to receive nonstatutory
stock options. No amendment may adversely affect an outstanding option without
the consent of the optionee, unless the amendment is required to preserve the
option's status as an ISO or is necessary to comply with any applicable law.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF THE 1997 PLAN
The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law of participation in the
1997 Plan and does not attempt to describe all possible federal or other tax
consequences of such participation or tax consequences based on particular
circumstances.
ISOs. An optionee recognizes no taxable income for regular income tax
purposes as the result of the grant or exercise of an ISO qualifying under
Section 422 of the Code. Optionees who do not dispose of their shares for two
years following the date the option was granted or within one year following the
exercise of the option will normally recognize a mid-term or long-term capital
gain or loss equal to the difference, if any, between the sale price and the
purchase price of the shares. If an optionee satisfies such holding periods
upon a sale of the shares, the Company will not be entitled to any deduction for
federal income tax purposes. If an optionee disposes of shares within two years
after the date of grant or within one year from the date of exercise (a
"disqualifying disposition"), the difference between the fair market value of
the shares on the determination date (as discussed under "Nonstatutory Stock
Options" below) and the option exercise price (not to exceed the gain realized
on the sale if the disposition is a transaction with respect to which a loss, if
sustained, would be recognized) will be taxed as ordinary income at the time of
disposition. Any gain in excess of that amount will be a capital gain. If a
loss is recognized, there will be no ordinary income, and such loss will be a
capital loss. A capital gain or loss will be mid-term or long-term if the
optionee's holding period is more than 12 months. Any ordinary income
recognized by the optionee upon the disqualifying disposition of the shares
generally should be deductible by the Company for federal income tax purposes,
except to the extent such deduction is limited by applicable provisions of the
Code or the regulations thereunder.
The difference between the option exercise price and the fair market value
of the shares on the determination date of an ISO (as discussed below) is an
adjustment in computing the optionee's alternative minimum taxable income and
may be subject to an alternative minimum tax which is paid if such tax exceeds
the regular tax for the year. Special rules may apply with respect to certain
subsequent sales of the shares in a disqualifying disposition, certain basis
adjustments for purposes of computing the alternative minimum taxable income on
a subsequent sale of the shares and certain tax credits which may arise with
respect to optionees subject to the alternative minimum tax.
6
Nonstatutory Stock Options. Options not designated or qualifying as ISOs
will be nonstatutory stock options. Nonstatutory stock options have no special
tax status. An optionee generally recognizes no taxable income as the result of
the grant of such an option. Upon exercise of a nonstatutory stock option, the
optionee normally recognizes ordinary income in an amount equal to the
difference between the option exercise price and the fair market value of the
shares on the determination date (as defined below). If the optionee is an
employee, such ordinary income generally is subject to withholding of income and
employment taxes. The "determination date" is the date on which the option is
exercised unless the shares are subject to a substantial risk of forfeiture and
are not transferable, in which case the determination date is the earlier of (i)
the date on which the shares are transferable or (ii) the date on which the
shares are not subject to a substantial risk of forfeiture. If the
determination date is after the exercise date, the optionee may elect, pursuant
to Section 83(b) of the Code, to have the exercise date be the determination
date by filing an election with the Internal Revenue Service not later than 30
days after the date the option is exercised. Upon the sale of stock acquired by
the exercise of a nonstatutory stock option, any gain or loss, based on the
difference between the sale price and the fair market value on the determination
date, will be taxed as capital gain or loss. A capital gain or loss will be
mid-term or long-term if the optionee's holding period is more than 12 months.
No tax deduction is available to the Company with respect to the grant of a
nonstatutory option or the sale of the stock acquired pursuant to such grant.
The Company generally should be entitled to a deduction equal to the amount of
ordinary income recognized by the optionee as a result of the exercise of a
nonstatutory option, except to the extent such deduction is limited by
applicable provisions of the Code or the regulations thereunder.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the votes cast on the proposal at the
Annual Meeting of Stockholders, at which a quorum representing a majority of all
outstanding shares of Common Stock of the Company is present, either in person
or by proxy, is required for approval of this proposal. Votes for and against,
abstentions and broker non-votes will each be counted as present for purposes of
determining the presence of a quorum. However, abstentions and broker non-votes
will have no effect on the outcome of this vote.
The Board of Directors believes that approval of the increase in the ISO
Issuance Limit and the establishment of the Grant Limit is in the best interests
of the Company and its stockholders and for the reasons stated above.
THEREFORE, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL
OF AN INCREASE IN THE ISO ISSUANCE LIMIT AND THE ESTABLISHMENT OF THE GRANT
LIMIT.
7
PROPOSAL NUMBER THREE
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of the Company has selected Arthur Andersen LLP as
independent auditors to audit the financial statements of the Company for the
fiscal year ending December 31, 1998. Arthur Andersen LLP has acted in such
capacity since its appointment during the fiscal year ended December 31, 1990.
A representative of Arthur Andersen LLP is expected to be present at the Annual
Meeting of Stockholders with the opportunity to make a statement if the
representative desires to do so, and is expected to be available to respond to
appropriate questions.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the votes cast at the Annual Meeting
of Stockholders, at which a quorum representing a majority of all outstanding
shares of Common Stock of the Company is present and voting, either in person or
by proxy, is required for approval of this proposal. Abstentions and broker
non-votes will each be counted as present for purposes of determining the
presence of a quorum, but will not be counted as having been voted on the
proposal. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 1998.
8
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of February 13,
1998, with respect to the beneficial ownership of the Company's Common Stock by
(i) each person known by the Company to be the beneficial owner of more than 5%
of the Company's Common Stock, (ii) each director and director nominee of the
Company, (iii) the Chief Executive Officer, and the five other highest
compensated executive officers of the Company whose salary and bonus for the
year ended December 31, 1997 exceeded $100,000 (the "Named Executive Officers"),
and (iv) all executive officers and directors of the Company as a group.
NAME AND ADDRESS OF BENEFICIAL OWNERS SHARES OWNED(1)
- ------------------------------------- ----------------------------------------
NUMBER OF
SHARES PERCENTAGE
------------------- ------------------
5% STOCKHOLDERS
Mohr, Davidow Ventures II............................................. 1,019,777 8.44%
3000 Sand Hill Road
Bldg. 1, Suite 240
Menlo Park, CA 94025
Funds affiliated with
Kleiner Perkins Caufield & Byers(2).................................. 893,443 7.39%
2750 Sand Hill Road
Menlo Park, CA 94025
Funds affiliated with
InterWest Partners(3)................................................ 736,347 6.09%
3000 Sand Hill Road
Bldg. 3, Suite 255
Menlo Park, CA 94025
EXECUTIVE OFFICERS AND DIRECTORS
Howard F. Earhart(4).................................................. 382,352 3.15%
Balu Balakrishnan(5).................................................. 257,352 2.13%
Vladimir Rumennik(6).................................................. 169,117 1.39%
Daniel M. Selleck(7).................................................. 132,349 1.09%
Robert G. Staples(8).................................................. 99,263 *
Clifford J. Walker(9)................................................. 88,234 *
Dr. Edward C. Ross(10)................................................ 216,470 1.78%
Dr. William Davidow(11)............................................... 1,019,777 8.44%
E. Floyd Kvamme(12)................................................... 928,443 7.68%
Steven J. Sharp(13)................................................... 50,643 *
All executive officers and directors as a group (11 persons)(14)...... 3,421,205 27.60%
___________________________
* Less than 1%
(1) Except as indicated in the footnotes to this table, the Company believes
that the persons named in the table have sole voting and dispositive power
with respect to all shares of Common Stock shown as beneficially owned by
them, subject to community property laws, where applicable. A person is
deemed to be the beneficial owner of securities that can be acquired by
such person within 60 days upon the exercise of options. Percentages are
based on 12,083,740 shares of Common Stock outstanding on February 13,
1998.
9
(2) Includes 878,468 shares held by Kleiner Perkins Caufield & Byers IV, and
14,975 shares held by KPCB Zaibatsu Fund I.
(3) Includes 731,814 shares held by InterWest Partners V, L.P. and 4,533 shares
held by InterWest Investors V.
(4) Includes 165,294 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 102,941 shares issuable upon
exercise of options.
(5) Includes 69,117 shares subject to a right of repurchase in favor of the
Company which lapses over time.
(6) Includes 50,881 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 54,082 shares issuable upon
exercise of options.
(7) Includes 48,675 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 22,058 shares issuable upon
exercise of options.
(8) Includes 49,925 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 18,382 shares issuable upon
exercise of options.
(9) Includes 49,093 shares subject to a right of repurchase in favor of the
Company which lapses over time. Also includes 18,382 shares issuable upon
exercise of options.
(10) Includes 95,823 shares issuable upon exercise of options.
(11) Represents all shares held by entities affiliated with Mohr, Davidow
Ventures, II. Mr. Davidow, as a general partner of Mohr, Davidow Ventures,
may be deemed to beneficially own shares, but Mr. Davidow disclaims
beneficial ownership of all such shares except to the extent of his
proportional interest therein.
(12) Represents 893,443 shares held by entities affiliated with Kleiner Perkins
Caufield & Byers ("KPCB"). Mr. Kvamme, as a general partner of KPCB, may
be deemed to beneficially own shares, but Mr. Kvamme disclaims beneficial
ownership of all such shares except to the extent of his proportional
interest therein.
(13) Includes 2,117 shares held by Sutro & Co. Keough Custodian FBO Steven
Sharp.
(14) See footnotes 4 through 13. Includes 432,323 shares subject to a right of
repurchase in favor of the Company which lapses over time, and 311,668
shares issuable upon exercise of options.
10
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the total
compensation of the Named Executive Officers for the fiscal years ended December
31, 1996 and 1997:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------------------------------------------------------------------
LONG TERM
COMPENSATION
AWARDS
-------------------
ALL NO. OF SECURITIES
OTHER UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(1) COMPENSATION(2) OPTIONS
- ------------------------------------------ ---- --------- -------- --------------- ------------------
Howard F. Earhart.......................... 1997 $180,000 $237,600 $660 73,529
President and Chief Executive Officer 1996 $180,000 $120,000 $536 ---
Balu Balakrishnan.......................... 1997 $155,000 $147,600 $660 22,058
Vice President, Engineering and New 1996 $155,000 $ 77,500 $536 ---
Business Development
Vladimir Rumennik.......................... 1997 $145,000 $118,500 $660 22,058
Vice President, Technology Development 1996 $145,000 $ 60,000 $536 7,352
Daniel M. Selleck.......................... 1997 $140,000 $138,000 $660 22,058
Vice President, Worldwide Sales 1996 $140,000 $ 72,000 $536 22,058
Robert G. Staples.......................... 1997 $120,000 $118,000 $660 14,705
Chief Financial Officer, Vice President, 1996 $120,000 $ 48,000 $536 18,382
Finance and Administration and Secretary
Clifford J. Walker......................... 1997 $120,000 $118,000 $660 25,735
Vice President, Corporate Development 1996 $120,000 $ 48,000 $536 18,382
___________________________
(1) Amounts shown are on a full year basis and include cash and noncash
compensation earned by executive officers.
(2) Represents premiums paid by the Company for life insurance coverage.
11
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides certain information concerning options to
purchase the Company's Common Stock granted during the year ended December 31,
1997 to the Named Executive Officers:
INDIVIDUAL GRANTS IN FISCAL 1997
POTENTIAL REALIZABLE VALUE
% OF TOTAL AT ASSUMED ANNUAL RATES
OPTIONS OF STOCK PRICE
GRANTED TO APPRECIATION FOR
EMPLOYEES OPTION TERM(4)
OPTIONS IN FISCAL EXERCISE EXPIRATION ----------------------------
NAME GRANTED(1) YEAR(2) PRICE(3) DATE 5% 10%
- ---- ---------- --------- -------- ---------- ------------- --------------
Howard F. Earhart.......... 73,529 12.41% $1.70 06/03/07 $78,611 $199,217
Balu Balakrishnan.......... 22,058 3.72% $1.70 06/03/07 $23,583 $ 59,763
Vladimir Rumennik.......... 22,058 3.72% $1.70 06/03/07 $23,583 $ 59,763
Daniel M Selleck........... 22,058 3.72% $1.70 06/03/07 $23,583 $ 59,763
Robert G. Staples.......... 14,705 2.48% $1.70 06/03/07 $15,721 $ 39,841
Clifford J. Walker......... 25,735 4.34% $1.70 06/03/07 $27,514 $ 69,725
___________________________
(1) Options granted in fiscal 1997 are immediately available and generally vest
fully within three years from the grant date. The Company has a repurchase
right for unvested shares. Under the terms of the 1997 Plan, the
administrator retains discretion, subject to the 1997 Plan limits, to
modify the terms of outstanding options and to reprice outstanding options.
The options have a term of 10 years, subject to earlier termination in
certain situations related to termination of employment. See "APPROVAL OF
AMENDMENT OF 1997 STOCK OPTION PLAN" and "DESCRIPTION OF EMPLOYEE BENEFIT
PLANS" for a description of the material payment terms of the options.
(2) Based on a total of 592,412 options granted to all employees and
consultants during fiscal 1997.
(3) All options were granted at an exercise price equal to the fair market
value of the Common Stock as determined by the Board of Directors on the
date of grant. The Common Stock was not publicly traded at the time of the
option grants to the officers.
(4) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could
be achieved for the respective options if exercised at the end of the
option term. The assumed 5% and 10% rates of stock price appreciation are
provided in accordance with rules of the Securities and Exchange Commission
and do not represent the Company's estimate or projection of the future
Common Stock price. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock, overall market
conditions and the option holders' continued employment through the vesting
period. This table does not take into account any appreciation in the
price of the Common Stock from the date of grant to date.
12
AGGREGATE OPTION EXERCISES FOR FISCAL 1997 AND FISCAL 1997 YEAR-END VALUES
The following table provides certain information concerning exercises of
options to purchase the Company's Common Stock during the year ended December
31, 1997, and unexercised options held as December 31, 1997, by the Named
Executive Officers:
AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT 12/31/97(1) MONEY OPTIONS AT 12/31/97(2)
---------------------- ----------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED(3) VESTED UNVESTED VESTED UNVESTED
- ------------------------- ----------- ----------- ------ -------- ------ --------
Howard F. Earhart......... 235,293 $192,449 --- 105,883 $ --- $925,417
Balu Balakrishnan......... 110,292 $ 94,999 --- --- $ --- $ ---
Vladimir Rumennik......... 115,028 $111,080 16,143 37,939 $136,645 $291,839
Daniel M. Selleck......... 110,291 $ 84,998 7,499 14,559 $ 59,167 $114,871
Robert G. Staples......... 80,881 $ 78,749 6,250 12,132 $ 49,313 $ 95,721
Clifford J. Walker........ 69,852 $ 52,449 6,250 12,132 $ 49,313 $ 95,721
___________________________
(1) These options are immediately exercisable in full at the date of grant, but
shares purchased on exercise of unvested options are subject to repurchase
right in favor of the Company which lapses ratably over 50 months for the
Company's 1988 Stock Option Plan (the "1988 Plan") or 48 months for the
1997 Plan and entitles the Company to repurchase unvested shares at their
original issuance price.
(2) Calculated on the basis of the fair market value of the underlying
securities as of December 31, 1997 of $9.25 per share, as reported as the
closing price on the National Association of Securities Dealers Automated
Quotations System, minus the aggregate exercise price.
(3) Fair market price on date of exercise, less exercise price.
No compensation intended to serve as incentive for performance to occur
over a period longer than one fiscal year was paid pursuant to a long-term
incentive plan during fiscal 1997 to any Named Executive Officer. The Company
does not have any defined benefit or actuarial plan under which benefits are
determined primarily by final compensation or average final compensation and
years of service with any of the Named Executive Officers.
13
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash for services provided as a
Director. Directors are reimbursed for all travel and related expenses incurred
in connection with attending board and committee meetings. Upon adoption of the
1997 Outside Directors Stock Option Plan, directors who are not employees of the
Company will receive yearly grants of options to purchase Common Stock. See
"DESCRIPTION OF EMPLOYEE BENEFIT PLANS--Summary of the Provisions of the
Directors Plan."
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Pursuant to an employment offer letter from the Company to Mr. Pausa dated
May 30, 1997, Mr. Pausa shall receive severance payment in the amount of
$120,000 in the event he is involuntarily terminated, other than "for cause,"
within the first eighteen months of his employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Compensation Committee is composed of William Davidow, E. Floyd Kvamme
and Edward Ross. No interlocking relationships exist between any member of the
Company's Compensation Committee and any member of any other company's board of
directors or compensation committee. The Compensation Committee makes
recommendations regarding the Company's employee stock plans and makes decisions
concerning salaries and bonus compensation for executive officers of the
Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1997, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company was or is
to be a party in which the amount involved exceeds $60,000, and in which any
director, executive officer or holder of more than 5% any class of voting
securities of the Company and members of such person's immediate family had or
will have a direct or indirect material interest other than the transactions
described below.
On July 25, 1997, in connection with the purchase of Common Stock upon
exercise of stock options granted to Howard F. Earhart, the Company loaned to
Mr. Earhart $125,000, at an interest rate of 6.65% pursuant to a Promissory Note
and Pledge Agreement due on July 25, 2002 or at the Company's option upon (i)
termination of Mr. Earhart's employment with the Company, (ii) a default in the
payment of any installment or principle and/or interest when due, (iii) a sale
of the Pledged Stock (as defined below) or (iv) acceleration being reasonably
necessary for the Company to comply with any regulations promulgated by the
Board of Governors of the Federal Reserve System affecting the extension of
credit in connection with the Company's securities. The loan is secured by
73,529 shares of Common Stock (the "Pledged Stock").
On July 28, 1997, in connection with the purchase of Common Stock upon
exercise of stock options granted to Clements Edward Pausa under the 1997 Plan,
the Company loaned to Mr. Pausa $131,250, at an interest rate of 6.65% pursuant
to a Promissory Note and Pledge Agreement due on July 28, 2002 or at the
Company's option upon (i) the termination of Mr. Pausa's employment with the
Company (ii) a default in the payment of any installment or principle and/or
interest when due, (iii) a sale of the Pledged Stock (as defined below) or (iv)
acceleration being reasonably necessary for the Company to comply with any
regulations promulgated by the Board of Governors of the Federal Reserve System
affecting the extension of credit in connection with the Company's securities.
The loan is secured by 77,205 shares of Common Stock (the "Pledged Stock").
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers, directors and persons who beneficially own
more than 10% of the Company's Common Stock to file initial
14
reports of ownership and reports of changes in ownership with the Securities and
Exchange Commission ("SEC"). Such persons are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms filed by such
persons.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers,
directors and persons who beneficially own more than 10% of the Company's Common
Stock were complied with in fiscal 1997.
CHANGES TO BENEFIT PLANS
The Company has proposed to approve amendments to the 1997 Plan which (i)
provides that effective January 1, 1999, 600,000 shares which would otherwise
only be available for grant under such plan pursuant to nonstatutory stock
options may instead be granted pursuant to incentive stock options, and (ii)
limit the number of shares for which options may be granted under such plan to
any employee within any fiscal year to 200,000. See "PROPOSAL NUMBER
TWO--APPROVAL OF AMENDMENT OF 1997 STOCK OPTION PLAN."
15
The following table sets forth grants of stock options received under the
1997 Plan during the fiscal year ended December 31, 1997 by (i) the Named
Executive Officers, (ii) all current executive officers as a group; (iii) all
current directors who are not executive officers as a group, and (iv) all
employees, who are not executive officers, as a group.
NEW PLAN BENEFITS
1997 PLAN (1)
-----------------------------------------
NAME AND POSITION EXERCISE PRICE NO. OF SHARES
- ------------------------------------------------------------------------ ----------------- -----------------
Howard F. Earhart........................................................ $1.70 73,529
President and Chief Executive Officer
Balu Balakrishnan........................................................ $1.70 22,058
Vice President, Engineering and New Business Development
Vladimir Rumennik........................................................ $1.70 22.058
Vice President, Technology Development
Daniel M. Selleck........................................................ $1.70 22,058
Vice President, Worldwide Sales
Robert G. Staples........................................................ $1.70 14,705
Chief Financial Officer, Vice President, Finance and Administration and
Secretary
Clifford J. Walker....................................................... $1.70 25,735
Vice President, Corporate Development
Executive Group
(7 persons).............................................................. $1.70-$8.00 257,348
Non-Executive Director
Group (4 persons)........................................................ N/A 0 (2)
Non-Executive Officer
Employee Group........................................................... $1.70-$8.84 188,254
___________________________
(1) Only employees are eligible to participate in the 1997 Plan.
(2) All under Outside Director group
16
REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
Dr. William Davidow, E. Floyd Kvamme and Dr. Edward C. Ross are members of
the Compensation Committee ("Committee"). Each of these individuals is a non-
employee member of the Company's Board of Directors. For fiscal year ended
1997, all decisions concerning executive compensation were made by the
Committee. The Committee is responsible for setting and administering the
policies governing annual compensation of the executive officers of the Company.
The Committee reviews the President's recommendations regarding the performance
and compensation levels for executive officers, other than the Company's
President and Chief Executive Officer.
OVERVIEW
The goals of the Company's executive officer compensation policies are to
attract, retain and reward executive officers who contribute to the Company's
success, to align executive officer compensation with the Company's performance
and to motivate executive officers to achieve the Company's business objectives.
The Company uses salary, bonus compensation and option grants to attain these
goals. The Committee reviews compensation surveys and other data to enable the
Committee to compare the Company's compensation package with that of similarly-
sized high technology companies in the Company's geographic area.
SALARY
Base salaries of executive officers are reviewed annually, and if deemed
appropriate, adjustments are made based on individual executive officer
performance, scope of responsibilities and levels paid by similarly-sized high
technology companies in the Company's geographic area. Commencing with the 1998
fiscal year, in determining the salaries of the executive officers, the
Committee will consider information provided by the Company's Chief Financial
Officer, as well as salary surveys and similar data prepared by AON Consulting
Radford Division, an employment compensation consulting firm.
The President and Chief Executive Officer is responsible for evaluating the
performance of all other executive officers and recommends salary adjustments
which are reviewed and approved by the Committee. In addition to considering
the performance of individual executive officers and information concerning
competitive salaries, significant weight is placed on the financial performance
of the Company in considering salary adjustments.
BONUS COMPENSATION
Cash bonuses for each executive officer are set annually by the Committee
and are specifically weighted for identified financial, management, strategic
and operational goals. Performance against the established goals is determined
quarterly and annually by the Committee and, based on such determination, the
Committee approves payment of appropriate bonuses. In addition to quarterly and
annual bonus compensation, executive officers may earn additional bonus awards
for patent applications or publications.
STOCK OPTIONS
The Company strongly believes that equity ownership by executive officers
provides incentives to build stockholder value and align the interests of
executive officers with the stockholders. The size of an initial option grant
to an executive officer has generally been determined with reference to
similarly-sized high technology companies in the Company's geographic area for
similar positions, the responsibilities and future contributions of the
executive officer, as well as recruitment and retention considerations. In
fiscal 1997, the President and Chief Executive Officer recommended to the Board
of Directors, and the Board of Directors approved, stock option grants under the
1997 Plan to certain of the executive officers.
17
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Howard F. Earhart has served as the President and Chief Executive Officer
of the Company since January 1995. Mr. Earhart's fiscal 1997 compensation,
including a base salary of $180,000 was set by the Committee in fiscal 1996.
The Committee reviewed Mr. Earhart's performance with regard to quarterly
performance objectives, weighted among specific personal and corporate
objectives, in determining his eligibility for bonus compensation. Mr.
Earhart's bonus compensation for fiscal 1997 was $237,600. In addition, the
Board of Directors granted Mr. Earhart options to purchase an aggregate of
73,529 shares of the Company's Common Stock based on attainment of predetermined
financial and other corporate goals.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Company has considered the provisions of the Code and the related
regulations of the Internal Revenue Service which restrict deductibility of
executive compensation paid to each of the five most highly compensated
executive officers at the end of any fiscal year to the extent such compensation
exceeds $1,000,000 for any of such officers in any year and does not qualify for
an exception under the statute or regulations. Income from options granted
under the 1988 Plan and 1997 Plan should qualify for an exemption from these
restrictions. The Committee does not believe that other components of the
Company's compensation will be likely to exceed $1,000,000 for any executive
officer in the foreseeable future and therefore concluded that no further action
with respect to qualifying such compensation for deductibility was necessary at
this time. In the future, the Committee will continue to evaluate the
advisability of qualifying its executive compensation for deductibility of such
compensation. The Committee's policy is to qualify its executive compensation
for deductibility under applicable tax laws as practicable.
COMPENSATION COMMITTEE
Dr. William Davidow
E. Floyd Kvamme
Dr. Edward C. Ross
18
COMPARISON OF STOCKHOLDER RETURN
Set forth below is a line graph comparing the annual percentage change in
the cumulative total return on the Company's Common Stock with the cumulative
total return of the CRSP Total Return Index for the Nasdaq Stock Market (U.S.
Companies) ("Nasdaq US") and the Hambrecht & Quist Technology Index ("H&Q
Index") for the period commencing on December 11, 1997(1) and ending on December
31, 1997.(2)
COMPARISON OF CUMULATIVE TOTAL RETURN FROM DECEMBER 11, 1997
THROUGH DECEMBER 31, 1997
POWER INTEGRATIONS, INC., NASDAQ STOCK MARKET - US INDEX AND HAMBRECHT
& QUIST TECHNOLOGY INDEX
[PERFORMANCE GRAPH APPEARS HERE]
December 11, 1997 December 31, 1997
----------------- -----------------
Power Integrations, Inc. $100.00 $113.80
Nasdaq US $100.00 $102.30
H&Q Index $100.00 $103.97
___________________________
(1) The Company's initial public offering commenced on December 12, 1997. For
purposes of this presentation, the Company has assumed that its initial
offering price of $8.00 would have been the closing sales price on December
11, 1997, the day prior to commencement of trading.
(2) Assumes that $100.00 was invested on December 11, 1997 in the Company's
Common Stock at the Company's initial offering price of $8.00 and at the
closing sales price for each index on that date and that all dividends were
reinvested. No dividends have been declared on the Common Stock.
Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.
19
DESCRIPTION OF OTHER EMPLOYEE BENEFIT PLANS
The following is a brief summary of the 1988 Plan as in effect as of the
date of this Proxy Statement. The Company has terminated the 1988 Plan and will
not grant any additional options thereunder in the future, although options
outstanding under the 1988 Plan will remain subject to the terms and conditions
of the 1988 Plan.
SUMMARY OF THE PROVISIONS OF THE 1988 PLAN
The following summary of the 1988 Plan is qualified in its entirety by the
specific language of the 1988 Plan, a copy of which is available to any
stockholder upon request.
The 1988 Plan provides for the grant of stock options to employees
(including officers), directors and consultants of the Company and any parent or
subsidiary corporation of the Company. The 1988 Plan provides for the grant of
ISOs or nonstatutory stock options, although ISOs may be granted only to
employees. As of April 13, 1998, options to purchase an aggregate 628,859
shares of Common Stock at a weighted average exercise price of $1.054 were
outstanding under the 1988 Plan. Options granted under the 1988 Plan will
remain outstanding in accordance with their terms, but no further options will
be granted under the 1988 Plan.
The 1988 Plan is administered by the Board. The Board will interpret the
1988 Plan and options granted thereunder, and all determinations of the Board
will be final and binding on all persons having an interest in the 1988 Plan or
any option.
Options granted under the 1988 Plan will become exercisable and vested at
such times as specified by the Board. Generally, options granted under the 1988
Plan are exercisable on and after the date of grant, subject to the right of the
Company to reacquire at the optionee's exercise price any unvested shares held
by the optionee upon termination of employment or service with the Company or if
the optionee attempts to transfer any unvested shares. Shares subject to
options generally vest in installments, subject to the optionee's continued
employment or service.
The 1988 Plan provides that a "Transfer in Control" occurs in the event of
(i) a sale or exchange by the stockholders of more than 50% of the Company's
voting stock, (ii) a merger or consolidation involving the Company, or (iii) the
sale, exchange or transfer of all or substantially all of the assets of the
Company, wherein, upon any such event, the stockholders of the Company
immediately before such event do not retain direct or indirect beneficial
ownership of at least 50% of the voting stock of the Company, its successor, or
the corporation to which the assets of the Company were transferred. Upon a
Transfer of Control, the Board may arrange for the acquiring or successor
corporation to assume or substitute new options for the options outstanding
under the 1988 Plan. To the extent that the options outstanding under the 1988
Plan are not assumed, substituted for, or exercised prior to such event, they
will terminate.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF THE 1988 PLAN
The federal income tax consequences of the options granted under the 1988
Plan are the same as the federal income tax consequences described for stock
options granted pursuant to the 1997 Plan set forth above.
The following is a brief summary of the Power Integrations, Inc. 1997
Employee Stock Purchase Plan (the "Purchase Plan") as in effect as of the date
of this Proxy Statement.
SUMMARY OF THE PROVISIONS OF THE PURCHASE PLAN
The following summary of the Purchase Plan is qualified in its entirety by
the specific language of the Purchase Plan, a copy of which is available to any
stockholder upon request.
General. The Purchase Plan is intended to qualify as an "employee stock
purchase plan" under section 423 of the Code. Each participant in the Purchase
Plan is granted at the beginning of each offering under
20
the plan (an "Offering") the right to purchase through accumulated payroll
deductions up to a number of shares of the Common Stock of the Company (a
"Purchase Right") determined on the first day of the Offering. The Purchase
Right is automatically exercised on the last day of each purchase period within
the Offering unless the participant has withdrawn from participation in the
Offering or in the Purchase Plan prior to such date.
Shares Subject to Plan. A maximum of 250,000 of the Company's authorized
but unissued or reacquired shares of Common Stock may be issued under the
Purchase Plan, subject to appropriate adjustment in the event of a stock
dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the Company's capital structure or in the
event of any merger, sale of assets or other reorganization of the Company. If
any Purchase Right expires or terminates, the shares subject to the unexercised
portion of such Purchase Right will again be available for issuance under the
Purchase Plan.
Administration. The Purchase Plan is administered by the Board. Subject
to the provisions of the Purchase Plan, the Board determines the terms and
conditions of Purchase Rights granted under the plan. The Board will interpret
the Purchase Plan and Purchase Rights granted thereunder, and all determinations
of the Board will be final and binding on all persons having an interest in the
Purchase Plan or any Purchase Rights. The Purchase Plan provides, subject to
certain limitations, for indemnification by the Company of any director, officer
or employee against all reasonable expenses, including attorney's fees, incurred
in connection with any legal action arising from such person's action or failure
to act in administering the Plan.
Eligibility. Any employee of the Company or of any present or future
parent or subsidiary corporation of the Company designated by the Board for
inclusion in the Purchase Plan is eligible to participate in an Offering under
the Purchase Plan so long as the employee is customarily employed for at least
20 hours per week and 5 months per calendar year. However, no employee who owns
or holds options to purchase, or as a result of participation in the Purchase
Plan would own or hold options to purchase, five percent or more of the total
combined voting power or value of all classes of stock of the Company or of any
parent or subsidiary corporation of the Company is entitled to participate in
the Purchase Plan.
Offerings. Generally, each Offering of Common Stock under the Purchase
Plan is for a period of twenty-four months (an "Offering Period"). Offering
Periods under the Purchase Plan are overlapping, with a new Offering Period
beginning every six months. However, employees may only participate in one
offering at a time. Offering Periods will generally commence on the first days
of February and August of each year and end on the last days of the second
following January and July, respectively. However, the first Offering Period
commenced on December 12, 1997, the effective date of the Company's registration
of its Common Stock with the Securities and Exchange Commission (the "Effective
Date") and will end on January 31, 2000. Each Offering Period will generally be
comprised of four six-month purchase periods ("Purchase Periods"), although the
first Purchase Period of the first Offering Period will commence on the
Effective Date and end on July 31, 1998. Shares are purchased on the last day
of each Purchase Period ("Purchase Dates"). The Board may establish a different
term for one or more Offerings or Purchase Periods or different commencement or
ending dates for an Offering or a Purchase Period.
Participation and Purchase of Shares. Participation in the Purchase Plan
is limited to eligible employees who authorize payroll deductions prior to the
start of an Offering Period. Payroll deductions may not exceed 15% (or such
other rate as the Board determines) of an employee's compensation for any pay
period during the Offering Period. Once an employee becomes a participant in
the Purchase Plan, that employee will automatically participate in each
successive Offering Period until such time as that employee withdraws from the
Purchase Plan, becomes ineligible to participate in the Purchase Plan, or
terminates employment.
Subject to certain limitations, each participant in an Offering has a
Purchase Right equal to the lesser of that number of whole shares determined by
dividing $50,000 by the fair market value of a share of Common Stock on the
first day of the Offering Period or 5,000 shares, provided that these dollar and
share amounts will be prorated for any Offering Period that is other than 24
months in duration. No participant may purchase under the Purchase Plan shares
of the Company's Common Stock having a fair market value exceeding $25,000 in
any
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calendar year (measured by the fair market value of the Company's Common Stock
on the first day of the Offering Period in which the shares are purchased).
At the end of each Purchase Period, the Company issues to each participant
in the Offering the number of shares of the Company's Common Stock determined by
dividing the amount of payroll deductions accumulated for the participant during
that Purchase Period by the purchase price, limited in any case by the number of
shares subject to the participant's Purchase Right for that Offering. The price
per share at which shares are sold at the end of an Offering Period generally
equals 85% of the lesser of the fair market value per share of the Company's
Common Stock on the first day of the Offering Period or the Purchase Date. The
fair market value of the Common Stock on any relevant date generally will be the
closing price per share on such date as reported on the Nasdaq National Market.
Any payroll deductions under the Purchase Plan not applied to the purchase of
shares will be returned to the participant, unless the amount remaining is less
than the amount necessary to purchase a whole share of Common Stock, in which
case the remaining amount may be applied to the next Purchase Period or Offering
Period.
A participant may withdraw from an Offering at any time without affecting
his or her eligibility to participate in future Offerings. However, once a
participant withdraws from an Offering, that participant may not again
participate in the same Offering.
Change in Control. The Purchase Plan provides that in the event of a
Change in Control, the acquiring or successor corporation may assume the
Company's rights and obligations under the Purchase Plan or substitute
substantially equivalent Purchase Rights for such corporation's stock. If the
acquiring or successor corporation elects not to assume or substitute for the
outstanding Purchase Rights, the Board may adjust the last day of the Offering
Period to a date on or before the date of the Change in Control. Any Purchase
Rights that are not assumed, substituted for, or exercised prior to the Change
in Control will terminate.
Termination or Amendment. The Purchase Plan will continue until terminated
by the Board or until all of the shares reserved for issuance under the plan
have been issued. The Board may at any time amend or terminate the Purchase
Plan. However, the approval of the Company's stockholders is required, within
twelve months of the adoption of any amendment that (i) increases the number of
shares authorized for issuance under the Purchase Plan or (ii) changes the
definition of the corporations which may be designated by the Board as
corporations whose employees may participate in the Purchase Plan.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE PLAN
The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law of participation in the
Purchase Plan and does not attempt to describe all possible federal or other tax
consequences of such participation or tax consequences based on particular
circumstances.
A participant recognizes no taxable income either as a result of commencing
to participate in the Purchase Plan or purchasing shares of the Company's Common
Stock under the terms of the Purchase Plan.
If a participant disposes of shares purchased under the Purchase Plan
within two years from the first day of the applicable Offering Period or within
one year from the purchase date (a "disqualifying disposition"), the participant
will realize ordinary income in the year of such disposition equal to the amount
by which the fair market value of the shares on the purchase date exceeds the
purchase price. The amount of the ordinary income will be added to the
participant's basis in the shares, and any additional gain or resulting loss
recognized on the disposition of the shares will be a capital gain or loss. A
capital gain or loss will be mid-term or long-term if the participant's holding
period is more than twelve months.
If the participant disposes of shares purchased under the Purchase Plan at
least two years after the first day of the applicable Offering Period and at
least one year after the purchase date, the participant will realize ordinary
income in the year of disposition equal to the lesser of (i) the excess of the
fair market value of the shares on the date of disposition over the purchase
price or (ii) 15% of the fair market value of the shares on the first day of the
22
applicable Offering Period. The amount of any ordinary income will be added to
the participant's basis in the shares, and any additional gain recognized upon
the disposition after such basis adjustment will be a mid-term or long-term
capital gain. If the fair market value of the shares on the date of disposition
is less than the purchase price, there will be no ordinary income and any loss
recognized will be a mid-term or long-term capital loss.
If the participant still owns the shares at the time of death, the lesser
of (i) the excess of the fair market value of the shares on the date of death
over the purchase price or (ii) 15% of the fair market value of the shares on
the first day of the Offering Period in which the shares were purchased will
constitute ordinary income in the year of death.
The Company should be entitled to a deduction in the year of a
disqualifying disposition equal to the amount of ordinary income recognized by
the participant as a result of the disposition, except to the extent such
deduction is limited by applicable provisions of the Code or the regulations
thereunder. In all other cases, no deduction is allowed to the Company.
The following is a brief summary of the Power Integrations, Inc. 1997
Outside Directors Stock Option Plan (the "Directors Plan") as in effect as of
the date of this Proxy Statement.
SUMMARY OF THE PROVISIONS OF THE DIRECTORS PLAN
The following summary of the Directors Plan is qualified in its entirety by
the specific language of the Directors Plan, a copy of which is available to any
stockholder upon request.
General. The Directors Plan provides for the automatic grant of
nonstatutory stock options to nonemployee directors of the Company.
Shares Subject to Plan. A maximum of 200,000 shares of the authorized but
unissued or reacquired shares of the Common Stock of the Company may be issued
upon the exercise of options granted pursuant to the Directors Plan. In the
event of any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification, or similar change in the capital structure of the
Company, appropriate adjustments will be made to the shares subject to the
Directors Plan, to the terms of automatic option grants under the plan, and to
outstanding options. To the extent that any outstanding option under the
Directors Plan expires or terminates prior to exercise in full or if shares
issued upon the exercise of an option are repurchased by the Company, the shares
of Common Stock for which such option is not exercised or the repurchased shares
are returned to the plan and become available for future grants.
Administration. The Directors Plan is administered by the Board. The
Directors Plan provides, subject to certain limitations, for indemnification by
the Company of any director, officer or employee against all reasonable
expenses, including attorneys' fees, incurred in connection with any legal
action arising from such person's action or failure to act in administering the
Directors Plan. The Board is authorized to interpret the Directors Plan and
options granted thereunder, and all determinations of the Board will be final
and binding on all persons having an interest in the Directors Plan or any
option.
Eligibility. Only directors of the Company who are not at the time of
option grant employees of the Company or of any parent or subsidiary corporation
of the Company (the "Outside Directors") are eligible to participate in the
Directors Plan. Currently, the Company has four nonemployee directors.
Automatic Grant of Options. The Directors Plan provides that each Outside
Director who is serving as an Outside Director on the Effective Date or is first
elected or appointed as an Outside Director after the Effective Date
automatically will be granted an option to purchase 15,000 shares of Common
Stock on the Effective Date or date of such initial election or appointment,
respectively (an "Initial Option"). The Directors Plan also provides for the
annual automatic grant of an additional option to purchase 5,000 shares of
Common Stock, on each anniversary of (a) the Effective Date (for Outside
Directors holding office on the Effective Date), or (b) the date of
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initial election or appointment to the Board (for Outside Directors first
elected or appointed after the Effective Date), provided such person remains an
Outside Director on such date (an "Annual Option").
Terms and Conditions of Options. Each option granted under the Directors
Plan will be evidenced by a written agreement between the Company and the
Outside Director specifying the number of shares subject to the option and the
other terms and conditions of the option, consistent with the requirements of
the Directors Plan. The exercise price of any option granted under the Directors
Plan must equal the fair market value, as determined pursuant to the plan, of a
share of the Company's Common Stock on the date of grant. Generally, the fair
market value of the Common Stock will be the closing price per share on the date
of grant as reported on the Nasdaq National Market. No option granted under the
Directors Plan is exercisable after the expiration of 10 years after the date
such option is granted, subject to earlier termination in the event the
optionee's service with the Company ceases or in the event of a Change in
Control of the Company, as discussed below. One-third of the shares subject to
an Initial Option will vest and become exercisable one year after the date of
grant and the remaining shares will vest and become exercisable in equal monthly
installments over the following 24 months. Shares subject to Annual Options vest
and become exercisable in twelve monthly installments, with the first
installment vesting 25 months after the date of grant.
Generally, the exercise price may be paid in cash, by check, or in cash
equivalent, by tender of shares of the Company's Common Stock owned by the
optionee having a fair market value not less than the exercise price, by the
assignment of the proceeds of a sale or loan with respect to some or all of the
shares of Common Stock being acquired upon the exercise of the option, or by any
combination of these. During the lifetime of the optionee, the option may be
exercised only by the optionee. An option may not be transferred or assigned,
except by will or the laws of descent and distribution.
Change in Control. The Directors Plan provides that in the event of a
Change in Control, all outstanding options will become immediately exercisable
and vested as of the date ten (10) days prior to the Change in Control. In
addition, the acquiring or successor corporation may assume or substitute
substantially equivalent options for the options outstanding under the Directors
Plan. To the extent that the options outstanding under the Directors Plan are
not assumed, substituted for, or exercised prior to the Change in Control, they
will terminate.
Termination or Amendment. The Directors Plan will continue until
terminated by the Board or until all of the shares reserved for issuance under
the plan have been issued. The Board may terminate or amend the Directors Plan
at any time, but, without stockholder approval, the Board may not amend the
Directors Plan to increase the total number of shares of Common Stock reserved
for issuance thereunder or adopt any other amendment that would require approval
of the Company's stockholders under any applicable law, regulation or rule. No
termination or amendment of the Directors Plan may adversely affect an
outstanding option without the consent of the optionee, unless such termination
or amendment is necessary to comply with any applicable law.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF THE DIRECTORS PLAN
The federal income tax consequences of the options granted under the
Directors Plan are the same as the federal income tax consequences described for
nonstatutory stock options granted pursuant to the 1997 Plan set forth above.
24
STOCKHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL MEETING
Proposals of stockholders intended to be presented at the next Annual
Meeting of the Stockholders of the Company must be received by the Company at
its offices at 477 N. Mathilda Avenue, Sunnyvale, California 94086, not later
than December 14, 1998, and satisfy the conditions established by the Securities
and Exchange Commission for stockholder proposals to be included in the
Company's proxy statement for that meeting.
TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the only business which the Board of
Directors intends to present or knows that others will present at the meeting is
as set forth above. If any other matter or matters are properly brought before
the meeting, or any adjournment thereof, it is the intention of the persons
named in the accompanying form of proxy to vote the proxy on such matters in
accordance with their best judgment.
By Order of the Board of Directors
/s/ Robert G. Staples
Robert G. Staples
Secretary
April 29, 1998
25
POWER INTEGRATIONS, INC.
Proxy for the Annual Meeting of Stockholders
To be held on June 1, 1998
Solicited by the Board of Directors
The undersigned hereby appoints Howard F. Earhart and Robert G. Staples,
and each of them, with full power of substitution, to represent the undersigned
and to vote all of the shares of stock in Power Integrations, Inc., a Delaware
corporation (the "Company"), which the undersigned is entitled to vote at the
Annual Meeting of Stockholders of the Company to be held at 477 N. Mathilda
Avenue, Sunnyvale, California 94086 at 1:00 p.m., local time, and at any
adjournment or postponement thereof (i) as hereinafter specified upon the
proposals listed on the reverse side and as more particularly described in the
Proxy Statement of the Company dated April 29, 1998 (the "Proxy Statement"),
receipt of which is hereby acknowledged, and (ii) in their discretion upon such
other matters as may properly come before the meeting.
THE SHARES REPRESENTED HEREBY SHALL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, SUCH SHARES SHALL BE VOTED FOR PROPOSALS 1, 2 AND 3.
-----------
SEE REVERSE
SIDE
CONTINUED AND TO BE SIGNED ON REVERSE SIDE -----------
1
Please mark
[X] votes as in
this example
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO
SIGN AND PROMPTLY MAIL THIS PROXY IN THE RETURN ENVELOPE SO THAT YOUR STOCK
MAY BE REPRESENTED AT THE MEETING.
A vote FOR the following proposals is recommended by the Board of
Directors:
1. To elect the following two (2) persons as Class I directors to hold office
for a three-year term and until their respective successors are elected and
qualified:
Dr. William Davidow
[_] FOR [_] WITHHELD
Steven J. Sharp
[_] FOR [_] WITHHELD
2. To approve amendments to the Company's 1997 Stock Option Plan which (i)
provides that effective January 1, 1999, 600,000 shares which would otherwise
only be available for grant under such plan pursuant to nonstatutory stock
options may instead be granted pursuant to incentive stock options, and (ii)
limit the number of shares for which options may be granted under such plan to
any employee within any fiscal year to 200,000.
[_] FOR [_] AGAINST [_] ABSTAIN
3. To consider, approve and ratify the appointment of Arthur Andersen LLP as
independent public auditors for the Company for the fiscal year ending December
31, 1998.
[_] FOR [_] AGAINST [_] ABSTAIN
MARK HERE FOR [_] MARK HERE IF [_]
ADDRESS CHANGE AND YOU PLAN TO
NOTE AT LEFT ATTEND THE
MEETING
PLEASE SIGN HERE. Sign exactly as your name(s) Signature: ______________________ Date: _______________
appears on your stock certificate. If shares of
stock are held of record in the names of two or Signature: ______________________ Date: _______________
more persons or in the name of husband and wife,
whether as joint tenants or otherwise, both or all
of such persons should sign the Proxy. If shares
of stock are held of record by a corporation, the
Proxy should be executed by the President or Vice
President and the Secretary or Assistant Secretary.
Executors or administrators or other fiduciaries
who execute the Proxy for a deceased stockholder
should give their full title. Please date the
Proxy.
2