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June 4,
2009
To Power
Integrations Stockholders:
This
letter is to inform you of a commitment to amend our equity incentive plans, as
well as a change to the agenda for our 2009 Annual Meeting of Stockholders,
scheduled for June 8, 2009.
As you
may know, RiskMetrics Group (RMG), formerly ISS, has recommended that
stockholders withhold their votes from seven of the eight directors up for
election. This recommendation stems from a tender offer executed in
December 2008, under which Power Integrations repurchased 2.4 million
out-of-the-money employee stock options for $9.0 million. According
to RMG, this action was tantamount to a repricing of options, which they view
unfavorably unless done with the approval of stockholders.
We
respectfully disagree with the RMG recommendation, and note that Proxy
Governance, Inc., another proxy-advisory firm, has recommended votes in favor of
all eight directors, while Glass Lewis & Co. has recommended in favor of
seven of the eight. The board of directors, of which I am a member,
carefully weighed the costs and benefits of the tender offer and concluded that
it was in the best interests of our stockholders. Our rationale for
the tender offer was as follows:
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We
do not believe the tender offer should be characterized as a
“repricing.” We recognize that the repricing of options is
inherently dilutive to stockholders, and repricing is expressly prohibited
under the terms of our 2007 Equity Incentive Plan. By contrast,
the tender offer was an anti-dilutive measure that reduced the number of
outstanding options by approximately 30%. Employees choosing to
tender options did not, and will not, receive new grants intended to
replace the tendered options. In fact, we expect to grant
substantially fewer options overall in 2009 compared to
2008.
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In
crafting the tender offer, the board was careful to offer prices that
would ensure a healthy level of participation without
overpaying. To that end, all prices offered were below the
Black-Scholes values of the options at the time of the
offer. In the end, less than half of the eligible options were
actually tendered – an indication that the pricing was not overly
generous.
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The
tender offer was important for employee morale and
retention. At the time of the tender offer, not only had
virtually all of our outstanding options fallen well out of the money, but
we had also implemented a salary freeze, suspended 401(k) profit-sharing
contributions, eliminated bonuses, curtailed a number of employee benefits
and eliminated a small number of positions in response to the drastic
downturn in demand for semiconductor products in late
2008.
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Stock-based
compensation expenses associated with the tendered options were
accelerated into the fourth quarter of 2008, removing approximately $2
million per quarter from our ongoing run rate of GAAP operating
expenses.
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Submission
of the tender offer for a stockholder vote was not practicable as it would
have required a costly special
meeting.
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While the
board stands behind its decision to conduct the tender offer, we also wish to be
responsive to feedback from the investment community. As such, the
board has committed to modify our equity incentive plans to require stockholder
approval for any future exchanges of stock options for cash or for new options
with lower strike prices. The changes will be adopted formally at our
next regularly scheduled board meeting. The language in substantially the form
to be added to our plans appears below.
In order
to give stockholders adequate time to assimilate this information and cast their
votes accordingly, we are extending the time available for the voting of
proxies. Our annual meeting will begin as scheduled on June 8, 2009
at 10:00 a.m. Pacific time, and will then be adjourned until June 18 at 10:00
a.m. Pacific time, at which time the meeting will be reconvened and the votes
will be tallied.
Sincerely,
/s/ Balu
Balakrishnan
Balu
Balakrishnan
President
and CEO
Power
Integrations, Inc.
Form of
language to be added to Power Integrations’ equity incentive plans:
Notwithstanding
anything to the contrary set forth herein, except in connection with a corporate
transaction involving the company (including, without limitation, any stock
dividend, stock split, extraordinary cash dividend, recapitalization,
reorganization, merger, consolidation, split-up, spin-off, combination, or
exchange of shares), the terms of outstanding awards may not be amended to
reduce the exercise price of outstanding Options or SARs or cancel outstanding
Options or SARs in exchange for cash, other awards or Options or SARs with an
exercise price that is less than the exercise price of the original Options or
SARs without stockholder approval.