UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 0-25699
P L X T E C H N O L O G Y, I N C.
(Exact name of Registrant as specified in its charter)
Delaware 94-3008334
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
870 Maude Avenue, Sunnyvale, CA 94085
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (408) 774-9060
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 Exchange 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 [ ]
As of September 30, 2001, there were 23,250,700 shares of common stock, par
value $0.001 per share, outstanding.
This Report on Form 10-Q includes 25 pages with the Index to Exhibits located
on page 24.
PLX TECHNOLOGY, INC.
INDEX TO
REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2001
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets at September 30, 2001 and
December 31, 2000 ..................................................... 3
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2001 and 2000 .............................. 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2001 and 2000 .............................. 5
Notes to Condensed Consolidated Financial Statements ..................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ................. 23
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K ........................................... 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLX TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, DECEMBER 31,
2001 2000 (1)
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 11,113 $ 16,621
Short-term investments 1,586 3,340
Accounts receivable, net 5,974 4,772
Inventories 6,227 4,521
Deferred tax assets 4,099 4,099
Income tax receivable 1,267 --
Other current assets 591 1,290
--------- ---------
Total current assets 30,857 34,643
Property and equipment, net 33,984 31,277
Goodwill 8,825 11,308
Other intangible assets 2,314 2,964
Restricted cash and investments -- 33,146
Other assets 197 141
--------- ---------
Total assets $ 76,177 $ 113,479
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 2,490 $ 5,064
Accrued compensation and benefits 854 1,491
Accrued commissions 426 345
Deferred revenues 629 1,430
Income tax payable -- 833
Deferred tax liability 1,100 1,100
Other accrued expenses 963 1,518
--------- ---------
Total current liabilities 6,462 11,781
Long-term notes payable -- 28,500
STOCKHOLDERS' EQUITY
Common stock, par value 23 23
Additional paid in capital 78,004 79,715
Deferred compensation (5,016) (9,312)
Notes receivable for employee stock purchases (62) (50)
Accumulated other comprehensive income (loss) (22) 54
Retained earnings (3,212) 2,768
--------- ---------
Total stockholders' equity 69,715 73,198
--------- ---------
Total liabilities and stockholders' equity $ 76,177 $ 113,479
========= =========
----------
(1) The balance sheet at December 31, 2000 has been derived from the audited
financial statements as of that date. See notes to condensed consolidated
financial statements.
3
PLX TECHNOLOGY, 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 $ 10,513 $ 18,409 $ 32,405 $ 49,041
Cost of revenues 3,667 5,246 12,123 14,218
-------- -------- -------- --------
Gross margin 6,846 13,163 20,282 34,823
Operating expenses:
Research and development 4,009 4,643 14,511 11,272
Selling, general and administrative 3,380 4,437 11,176 11,538
Amortization of goodwill and purchased
intangible assets 1,044 1,044 3,132 1,493
In-process research and development -- -- -- 14,342
-------- -------- -------- --------
Total operating expenses 8,433 10,124 28,819 38,645
-------- -------- -------- --------
Income (loss) from operations (1,587) 3,039 (8,537) (3,822)
Interest income and other, net 252 567 550 1,604
-------- -------- -------- --------
Income (loss) before provision (benefit) for
income taxes (1,335) 3,606 (7,987) (2,218)
Provision (benefit) for income taxes (203) 1,626 (2,007) 5,159
-------- -------- -------- --------
Net income (loss) $ (1,132) $ 1,980 $ (5,980) $ (7,377)
======== ======== ======== ========
Basic net income (loss) per share $ (0.05) $ 0.09 $ (0.26) $ (0.33)
======== ======== ======== ========
Shares used to compute basic per share amounts 23,236 23,162 23,215 22,544
======== ======== ======== ========
Diluted net income (loss) per share $ (0.05) $ 0.08 $ (0.26) $ (0.33)
======== ======== ======== ========
Shares used to compute diluted per share amounts 23,236 24,743 23,215 22,544
======== ======== ======== ========
See notes to condensed consolidated financial statements.
4
PLX TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,980) $ (7,377)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 1,989 969
Compensation expense recognized 17 2,285
Amortization of deferred compensation 2,237 387
Amortization of goodwill and other purchased intangible assets 3,133 1,493
In-process research and development -- 14,342
Income taxes -- (198)
Changes in operating assets and liabilities:
Accounts receivable (1,202) (3,604)
Inventories (1,706) 125
Income tax receivable (1,267) --
Other current assets 699 (2,584)
Other assets (56) (1,011)
Accounts payable (2,574) 1,914
Accrued compensation and benefits (637) 325
Accrued commissions 81 400
Deferred revenues (801) 37
Income tax payable (833) (175)
Other accrued expenses (555) 124
-------- --------
Net cash provided by (used in) operating activities (7,455) 7,452
-------- --------
INVESTING ACTIVITIES
Purchases of short term investments (3,180) (18,377)
Sales of short term investments 14,981 6,745
Maturities of short term investments 17,591 23,500
Purchases of long term investments (9,991) (6,867)
Sales of long term investments 11,618 --
Realized gain/loss on investments (198) --
Purchases of property and equipment (4,696) (1,823)
Cash acquired in Sebring acquisition -- 33
-------- --------
Net cash provided by investing activities 26,125 3,211
FINANCING ACTIVITIES
Proceeds from sale of common stock 414 1,189
Repurchase of common stock (83) --
Decrease in restricted cash and investments 4,025 --
Repayment of stockholder notes receivable (12) 38
Repayment of note payable (28,500) --
-------- --------
Net cash provided by (used in) financing activities (24,156) 1,227
-------- --------
Effect of exchange rate fluctuations on cash and cash equivalents (22) --
Increase (decrease) in cash and cash equivalents (5,508) 11,890
Cash and cash equivalents at beginning of the period 16,621 8,636
-------- --------
Cash and cash equivalents at end of the period $ 11,113 $ 20,526
======== ========
See notes to condensed consolidated financial statements.
5
PLX TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
PLX Technology, Inc. and its wholly-owned subsidiary (collectively, "PLX"
or the "Company") as of September 30, 2001 and for the three-month and
nine-month periods ended September 30, 2001 and 2000 have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. In the opinion of management, the condensed
consolidated financial statements include all adjustments (consisting only
of normal recurring accruals) that management considers necessary for a
fair presentation of our financial position, operating results and cash
flows for the interim periods presented. Operating results and cash flows
for interim periods are not necessarily indicative of results for the
entire year.
This financial data should be read in conjunction with the audited
consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.
USE OF 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 amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates and such differences may be material to the financial
statements.
COMPREHENSIVE INCOME (LOSS)
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income". The Company's comprehensive net
income (loss) for the three and nine months ended September 30, 2001 and
September 30, 2000 was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2001 2000 2001 2000
------- ------- ------- -------
(in thousands) (in thousands)
Net income (loss) $(1,132) $ 1,980 $(5,980) $(7,377)
Unrealized gains (losses)
on investments (143) 30 (54) 52
Cumulative translation adjustment (22) -- (22) --
------- ------- ------- -------
Comprehensive income (loss) $(1,297) $ 2,010 $(6,056) $(7,325)
======= ======= ======= =======
Accumulated other comprehensive income (loss) on the accompanying
Consolidated Balance Sheets is comprised of unrealized gains on
investments and cumulative translation adjustments.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Financial Instruments and Hedging Activities" ("SFAS 133"), which provides
a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. SFAS 133, as amended,
was adopted by the Company effective January 1, 2001 and did not
6
have an impact on the Company's results of operations or financial
position, as the Company holds no derivative financial instruments and
does not currently engage in hedging activities.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets." These standards
become effective for fiscal years beginning after December 15, 2001.
Beginning in the first quarter of 2002, goodwill and significantly all
other identified intangibles will no longer be amortized but will be
subject to annual impairment tests. Based on acquisitions completed as of
September 30, 2001, application of the non-amortization provisions of
these rules is currently expected to result in an increase in operating
income of approximately $4.2 million per year. The new rules also require
business combinations initiated after September 30, 2001 to be accounted
for using the purchase method of accounting and goodwill acquired after
September 30, 2001 to not be amortized. Goodwill existing at September 30,
2001 will continue to be amortized through the end of fiscal 2001. During
2002, the Company will test goodwill for impairment under the new rules,
applying a fair-value-based test. Through the end of fiscal 2001, the
Company will test goodwill for impairment using the current method, which
uses an undiscounted cash flow test.
2. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method)
or market (net realizable value). Inventories were as follows:
SEPTEMBER 30, DECEMBER 31,
------------- ------------
2001 2000
------------- ------------
(in thousands)
Work in Process $ 541 $ 646
Finished goods 5,686 3,875
------ ------
Total $6,227 $4,521
====== ======
3. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(in thousands) (in thousands)
Net income (loss) $ (1,132) $ 1,980 $ (5,980) $ (7,377)
-------- -------- -------- --------
Weighted average shares of common stock outstanding 23,241 23,300 23,220 22,702
Less weighted average shares of common stock subject to
repurchase 5 138 5 158
-------- -------- -------- --------
Shares used in computing basic net income (loss) per share 23,236 23,162 23,215 22,544
======== ======== ======== ========
Net income (loss) per share -- basic $ (0.05) $ 0.09 $ (0.26) $ (0.33)
======== ======== ======== ========
Shares used in computing basic net income (loss) per share 23,236 23,162 23,215 22,544
Effect of dilutive securities:
Stock options -- 1,443 -- --
Unvested restricted stock -- 138 -- --
-------- -------- -------- --------
Shares used in computing diluted net income (loss) per share 23,236 24,743 23,215 22,544
======== ======== ======== ========
Net income (loss) per share -- diluted $ (0.05) $ 0.08 $ (0.26) $ (0.33)
======== ======== ======== ========
7
For the three-month and nine-month periods ended September 30, 2001, the
effect of dilutive securities including all outstanding stock options and
shares subject to repurchase, totaling 3.6 million and 3.6 million shares,
respectively, have been excluded from the computation of diluted loss per
share, as their impact would be anti-dilutive. For the three-month and
nine-month periods ended September 30, 2000, the effect of dilutive
securities including all outstanding stock options and shares subject to
repurchase, totaling 1.4 million and 3.0 million shares, respectively,
have been excluded from the computation of diluted loss per share, as
their impact would be anti-dilutive.
4. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company has one operating segment, the sale of semiconductor devices.
The President has been identified as the Chief Operating Decision Maker
(CODM) because he has final authority over resource allocation decisions
and performance assessment. The CODM does not receive discrete financial
information about individual components of the Company's business.
Revenues by geographic region based on customer location were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
------- ------- ------- -------
(in thousands) (in thousands)
Revenues:
North America $ 6,046 $10,928 $18,073 $30,212
France 1,700 2,044 4,447 4,668
Europe - excluding France 1,160 2,725 4,287 7,463
Asia 1,607 2,712 5,598 6,698
------- ------- ------- -------
Total $10,513 $18,409 $32,405 $49,041
======= ======= ======= =======
For the three months ended September 30, 2001, two customers accounted for
45% of net revenues, taking into account sales through the Company's
distributors as well as direct sales. For the nine months ended September
30, 2001, two customers accounted for 32% of net revenues, taking into
account sales through the Company's distributors as well as direct sales.
For the three months ended September 30, 2001, one distributor accounted
for 16% of net revenues. For the nine months ended September 30, 2001, two
distributors accounted for 29% of net revenues.
5. DEBT REPAYMENT
On October 25, 2000, the Company signed a promissory note to borrow $28.5
million in connection with its purchase of a facility. The loan was
collaterized by cash, short-term and long-term investments of
approximately $33.4 million, which were classified as restricted cash. In
August 2001, the Company repaid all amounts owed under the loan, an
aggregate amount of $28.5 million. The Company liquidated short-term and
long-term securities in order to repay the loan.
6. BUSINESS COMBINATION
On May 19, 2000, the Company purchased Sebring Systems Inc., a development
stage company, that was developing SebringRing(TM), a silicon switch
fabric interconnect solution, for an aggregate purchase price, including
assumed liabilities, of $32.3 million. The transaction was accounted for
using purchase accounting. The allocation of the Company's purchase price
to the tangible and identifiable intangible assets acquired and
liabilities assumed is summarized below.
8
(in thousands)
Net tangible assets $ 1,165
In-process technology 14,342
Goodwill and other intangible assets:
Goodwill 13,339
Acquired employees 983
Tradename 355
Patents 2,132
-------
16,809
-------
Net assets acquired $32,316
=======
Acquired in-process technology was written-off in the second quarter of
fiscal 2000.
Approximately $14.3 million of the purchase price was allocated to the
acquired in-process technology. This amount was determined by identifying
research projects in areas for which technological feasibility had not
been established and no alternative future uses existed. PLX acquired
technology consisting of silicon switch fabric interconnect solutions. The
value was determined by estimating the expected cash flows from the
project once commercially viable, discounting the net cash flows to their
present value, and then applying a percentage of completion to the
calculated value as defined below.
The Company estimated, as of the acquisition date, the project was 85%
complete. The percentage of completion was determined using costs incurred
by Sebring prior to the acquisition date compared to the remaining
research and development to be completed to bring the project to
technological feasibility. As of June 30, 2001, the project was completed.
The product was taped out successfully and is currently being sampled.
UNAUDITED PRO FORMA FINANCIAL RESULTS
The unaudited pro forma financial information combines the historical
statements of operations of PLX Technology, Inc. and Sebring Systems, Inc.
for the nine-months ended September 30, 2000 and gives effect to the
transaction, including the amortization of goodwill and other intangible
assets and the recognition of deferred compensation, as if they occurred
at the beginning of the period.
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would
have occurred if the transactions had been consummated at the dates
indicated, nor is it necessarily indicative of future operating results of
the combined companies and should not be construed as representative of
these amounts for any future periods.
NINE MONTHS ENDED SEPTEMBER 30, 2000
------------------------------------
(UNAUDITED)
(in thousands, except per share amounts)
Net revenues $49,041
Net income $ 1,570
Net income per share -- basic $ 0.07
Number of shares used in per share calculations -- basic 22,544
Net income per share -- diluted $ 0.07
Number of shares used in per share calculations -- diluted 24,142
9
7. STOCK REPURCHASE
In January 2001, the Board of Directors of the Company approved a stock
repurchase program whereby up to 2,000,000 shares of its Common Stock may
be purchased in the open market or in privately negotiated transactions.
As of September 30, 2001, 10,000 shares had been repurchased.
8. INCOME TAXES
The income tax benefit for the three months ended September 30, 2001 was
$203,000 on a pretax loss of $1.3 million, compared to an income tax
expense of $1.6 million on a pretax income of $3.6 million for the three
months ended September 30, 2000. The income tax benefit for the nine
months ended September 30, 2001 was $2.0 million on a pretax loss of $8.0
million, compared to an income tax expense of $5.2 million on a pretax
loss of $2.2 million for the nine months ended September 30, 2000. The
2001 income tax benefit differs from the expected benefit derived by
applying the applicable U.S. federal statutory rate to the loss from
operations primarily due to non-deductible acquisition related items
partially offset by the benefit of tax exempt interest and research and
development tax credits. Our 2000 income tax expense differs from the
expected benefit derived by applying the applicable U.S. federal statutory
rate to the loss from operations primarily due to non-deductible
acquisition related items partially offset by the benefit of research and
development tax credits.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report on Form 10-Q contains forward-looking statements, including
statements regarding our expectations, hopes, intentions, beliefs or strategies
regarding the future. Such forward-looking statements include, but are not
limited to, the length of our sales cycle, under the sub-heading "Overview" and
our anticipated expense levels for amortization of goodwill and purchased
intangible assets, and deferred compensation, as well as the sufficiency of our
existing resources and cash generated from operations to meet our capital
requirements under the sub-heading "Results of Operations." Actual results could
differ materially from those projected in any forward-looking statements for the
reasons detailed below under the sub-heading "Factors That May Affect Future
Operating Results" and in other sections of this Report on Form 10-Q. All
forward-looking statements included in this Form 10-Q are based on information
available to us on the date of this Report on Form 10-Q, and we assume no
obligation to update the forward-looking statements, or to update the reasons
why actual results could differ from those projected in the forward-looking
statements. See "Factors That May Affect Future Operating Results" below, as
well as such other risks and uncertainties as are detailed in our Securities and
Exchange Commission reports and filings for a discussion of the factors that
could cause actual results to differ materially from the forward-looking
statements.
The following discussion should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.
OVERVIEW
PLX was founded in 1986, and since 1994 we have focused on development of I/O
interface semiconductors and related software and development tools that are
used in systems incorporating the PCI standard. In 1994 and 1995, a significant
portion of our revenues was derived from the sale of semiconductor devices that
perform similar functions as our current products, except they were based on a
variety of industry standards. Our revenues since 1996 have been derived
predominantly from the sale of semiconductor devices based on the PCI standard
to a large number of customers in a variety of applications including networking
and telecommunications, enterprise storage, imaging, industrial and other
embedded applications as well as in related adapter cards. We generate a small
portion of our revenues from sales of our software and development tools.
We utilize a "fabless" semiconductor business model whereby we purchase packaged
and tested semiconductor devices from independent manufacturing foundries. This
approach allows us to focus on defining, developing, and marketing our products
and eliminates the need for us to invest large amounts of capital in
manufacturing facilities and work-in-process inventory.
We rely on a combination of direct sales personnel and distributors and
manufacturers' representatives throughout the world to sell a significant
portion of our products. We pay manufacturers' representatives a commission on
sales while we sell products to distributors at a discount from the selling
price. We generally recognize revenues at the time of title passage. Revenues
from sales to distributors that are made under agreements which allow the return
of products unsold by the distributor are not recognized until the distributor
ships the product to its customer. See "Certain Factors That May Affect Future
Operating Results -- A Large Portion of Our Revenues Is Derived From Sales to
Third-Party Distributors Who May Terminate Their Relationships with Us at Any
Time."
Our gross margins have fluctuated in the past and are expected to fluctuate in
the future due to changes in product mix, the position of our products in their
respective life cycles, and specific product manufacturing costs.
The time period between initial customer evaluation and design completion can
range from six to twelve months or more. Furthermore, there is typically an
additional six to twelve month or greater period after design completion before
a customer commences volume production of equipment incorporating our products.
Due to these lengthy sales cycles, we may experience significant fluctuations in
new orders from month to month. Consequently, if anticipated sales and shipments
in any quarter do not occur when expected, expenses and inventory levels could
be disproportionately high, and our results for that quarter and future quarters
could be materially and adversely affected.
11
Our long-term success will depend on our ability to introduce new products.
While new products typically generate little or no revenues during the first
twelve months following their introduction, our revenues in subsequent periods
depend upon these new products. Due to the lengthy sales cycle and additional
time for customers to commence volume production, significant revenues from our
new products typically occur only twelve to twenty-four months after product
introduction. As a result, revenues from newly introduced products have, in the
past, produced a small percentage of our total revenues in the year the product
was introduced. See "Certain Factors That May Affect Future Operating Results --
Our Lengthy Sales Cycle Can Result in Uncertainty and Delays with Regard to Our
Expected Revenues."
RESULTS OF OPERATIONS
The following table summarizes historical results of operations as a percentage
of net revenues for the periods shown.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2001 2000 2001 2000
----- ----- ----- -----
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 34.9 28.5 37.4 29.0
----- ----- ----- -----
Gross margin 65.1 71.5 62.6 71.0
Operating expenses:
Research and development 38.1 25.2 44.8 23.0
Selling, general and administrative 32.2 24.1 34.5 23.5
Amortization of goodwill and
purchased intangible assets 9.9 5.7 9.6 3.0
In-process research and development -- -- -- 29.3
----- ----- ----- -----
Total operating expenses 80.2 55.0 88.9 78.8
----- ----- ----- -----
Income (loss) from operations (15.1) 16.5 (26.3) (7.8)
Interest income and other, net 2.4 3.1 1.7 3.3
----- ----- ----- -----
Income (loss) before provision (benefit)
for income taxes (12.7) 19.6 (24.6) (4.5)
Provision (benefit) for income taxes (1.9) 8.8 (6.2) 10.5
----- ----- ----- -----
Net income (loss) (10.8)% 10.8% (18.4)% (15.0)%
NET REVENUES
Net revenues for the three months ended September 30, 2001 were $10.5 million, a
decrease of 43% from $18.4 million for the three months ended September 30,
2000. For the nine months ended September 30, 2001, net revenues were $32.4
million, a decrease of 34% from $49.0 million for the nine months ended
September 30, 2000. The decrease was primarily due to lower unit shipments
resulting from the current economic slowdown in the technology sector. For the
three months ended September 30, 2001, two customers accounted for 45% of net
revenues, taking into account sales through our distributors as well as direct
sales. For the nine months ended September 30, 2001, two customers accounted for
32% of net revenues, taking into account sales through our distributors as well
as direct sales. For the three months ended September 30, 2001, one distributor
accounted for 16% of net revenues. For the nine months ended September 30, 2001,
two distributors accounted for 29% of net revenues.
GROSS PROFIT
Gross profit represents net revenues less the cost of revenues. Cost of revenues
includes the cost of purchasing packaged semiconductor devices from our
independent foundries, our operating costs associated with the procurement,
storage, and shipment of products. Gross profit for the three months ended
September 30, 2001 was $6.8 million, a decrease of 48% from $13.2 million for
the three months ended September 30, 2000. For the nine months ended September
30, 2001, gross profit was $20.3 million, a decrease of 42% from $34.8 million
for the nine
12
months ended September 30, 2000. Gross profit as a percentage of net revenues
was 65.1% for the three months ended September 30, 2001, as compared to 71.5%
for the three months ended September 30, 2000. For the nine months ended
September 30, 2001, gross profit as a percentage of net revenues was 62.6%, as
compared to 71.0% for the nine months ended September 30, 2000. The decline in
our gross profit was primarily due to a $1.3 million charge taken in the second
quarter related to excess inventory as well as a shift in our product mix.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salaries and related
costs of employees engaged in research, design, and development activities. In
addition, expenses for outside engineering consultants and non-recurring
engineering at our independent foundries are included in research and
development expenses. Research and development expenses for the three months
ended September 30, 2001 were $4.0 million, a decrease of 14% from $4.6 million
for the three months ended September 30, 2000. The decrease in absolute dollars
was primarily due to a one-time compensation charge related to a severance
agreement in the third quarter of 2000, partially offset by increased headcount
and higher costs to support our continuing efforts to develop new products. For
the nine months ended September 30, 2001, research and development expenses were
$14.5 million, an increase of 29% from $11.3 million in the nine months ended
September 30, 2000. The increase in absolute dollars was primarily due to the
addition of personnel for the development of new products and the enhancement of
existing products, as well as payments to outside consultants where specific
resources were needed in the development process. Research and development
expenses as a percentage of net revenues were 38.1% for the three months ended
September 30, 2001, as compared to 25.2% for the three months ended September
30, 2000. For the nine months ended September 30, 2001, research and development
expenses were 44.8% as a percentage of net revenues, as compared to 23.0% for
the nine months ended September 30, 2000. This percentage increase was primarily
due to lower net revenues coupled with amortization of deferred compensation
associated with the May 2000 acquisition of Sebring Systems, increased headcount
and higher costs to support our continuing efforts to develop new products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist primarily of employee
related expenses, professional fees, trade show and other promotional expenses,
and sales commissions to manufacturers' representatives. Selling, general and
administrative expenses for the three months ended September 30, 2001 were $3.4
million, a decrease of 24% from $4.4 million for the three months ended
September 30, 2000. For the nine months ended September 30, 2001, selling,
general and administrative expenses were $11.2 million, a decrease of 3% from
$11.5 million for the nine months ended September 30, 2000. The decrease in
absolute dollars was primarily due to a decrease in sales commissions to
manufacturers' representatives as a result of lower revenues and a decrease in
discretionary spending. Selling, general and administrative expenses as a
percentage of net revenues were 32.2% for the three months ended September 30,
2001, as compared to 24.1% for the three months ended September 30, 2000. For
the nine months ended September 30, 2001, selling, general and administrative
expenses as a percentage of net revenues increased to 34.5%, as compared to
23.5% for the nine months ended September 30, 2000. The percentage increases for
the three and nine months ended September 30, 2001 were primarily due to a
decline in revenues.
AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLE ASSETS
Amortization of goodwill and purchased intangible assets for the three months
ended September 30, 2001 and 2000 were both $1.0 million. For the nine months
ended September 30, 2001, amortization of goodwill and purchased intangible
assets was $3.1 million, as compared to $1.5 million for the nine months ended
September 30, 2000. Amortization of goodwill and purchased intangible assets
includes the amortization of goodwill and other purchased intangible assets
relating to the May 2000 acquisition of Sebring Systems. The amount for the nine
months ended September 30, 2000 reflects amortization beginning on the date of
the acquisition through the end of the third quarter. We expect that
amortization of goodwill and purchased intangible assets will be constant
through the quarter ending December 31, 2001. However, effective January 1,
2002, in accordance with SFAS No. 142, we will cease amortization of goodwill
and significantly all other identified intangibles.
IN-PROCESS RESEARCH AND DEVELOPMENT
The $14.3 million expensed to in-process research and development in the nine
months ended September 30, 2000 were related to the acquisition of Sebring
Systems.
13
DEFERRED COMPENSATION
In connection with the grant of restricted stock and stock options to our
employees during 1997 and 1998, we recorded aggregate deferred compensation of
$361,000, representing the difference between the deemed value of our common
stock for accounting purposes and the restricted stock purchase price or stock
option exercise price at the date of grant. The amount of deferred compensation
is presented as a reduction of stockholders' equity and amortized ratably over
the vesting period of the applicable stock grants. We also recorded deferred
compensation of $12.3 million related to stock options granted below fair market
value to employees in relation to the acquisition of Sebring Systems in May
2000. Additionally, we recorded deferred compensation of $3.5 million in
connection with the grant of stock options below fair market value to our
employees in September 2000. Amortization of deferred compensation was
approximately $656,000 and $936,000 for each of the three months ended September
30, 2001 and 2000, respectively, and has substantially all been included in
research and development expenses in our results of operations. For each of the
nine months ended September 30, 2001 and 2000, amortization of deferred
compensation was approximately $2,237,000 and $387,000, respectively. The amount
of deferred compensation is amortized ratably over the vesting period of the
applicable stock grants. We expect to record a compensation expense related to
deferred compensation of approximately $700,000 per quarter through September
30, 2003.
INTEREST INCOME AND OTHER, NET
Interest income and other, net reflects interest earned on average cash, cash
equivalents, short-term and long-term investment balances. Interest income and
other, net decreased to $252,000 for the three months ended September 30, 2001
from $567,000 for the three months ended September 30, 2000. For the nine months
ended September 30, 2001, interest income and other, net decreased to $550,000
from $1,604,000 in the nine months ended September 30, 2000. The decrease was
primarily due to interest earned on lower cash and investment balances plus
interest expense related to the November 2000 loan of $28.5 million in
connection with our purchase of a facility in Sunnyvale, California, partially
offset by rental income from two tenants in the new facility.
PROVISION FOR INCOME TAXES
The income tax benefit for the three months ended September 30, 2001 was
$203,000 on a pretax loss of $1.3 million, compared to an income tax expense of
$1.6 million on a pretax income of $3.6 million for the three months ended
September 30, 2000. The income tax benefit for the nine months ended September
30, 2001 was $2.0 million on a pretax loss of $8.0 million, compared to income
tax expense of $5.2 million on a pretax loss of $2.2 million for the nine months
ended September 30, 2000. The 2001 income tax benefit differs from the expected
benefit derived by applying the applicable U.S. federal statutory rate to the
loss from operations primarily due to non-deductible acquisition-related items
partially offset by the benefit of tax exempt interest and research and
development tax credits. Our 2000 income tax expense differs from the expected
benefit derived by applying the applicable U.S. federal statutory rate to the
loss from operations primarily due to non-deductible acquisition related items
partially offset by the benefit of research and development tax credits.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, we had $24.4 million in working capital and $11.1 million
in cash and cash equivalents. Our operating activities used cash of $7.5 million
during the nine months ended September 30, 2001, and generated cash of $7.5
million during the nine months ended September 30, 2000. The $7.5 million of
cash used by operations was primarily attributable to a net loss of $6.0
million, a decrease in accounts payable of $2.6 million, an increase in
inventories of $1.7 million, an increase in income tax receivable of $1.3
million, and an increase in accounts receivable of $1.2 million, partially
offset by non-cash charges of $7.4 million.
Our investing activities provided cash of $26.1 million and $3.2 million for the
nine months ended September 30, 2001 and the nine months ended September 30,
2000, respectively. Cash provided by investing activities for the nine months
ended September 30, 2001 was primarily attributable to the liquidation of
short-term and long-term securities in connection with the repayment of the
$28.5 million loan, partially offset by purchases of $13.2 million in short-term
and long-term investments and $4.7 million in property and equipment. Financing
activities used cash of $24.2 million during the nine months ended September 30,
2001 and generated cash of $1.2 million during the nine months ended September
30, 2000. Cash used by financing activities for the nine months ended September
30, 2001 is primarily related to the repayment of the $28.5 million loan.
14
In January 2001, our Board of Directors approved a stock repurchase program
whereby up to 2,000,000 shares of our common stock may be purchased in the open
market or in privately negotiated transactions. As of September 30, 2001, 10,000
shares had been repurchased.
In August 2001, we paid all amounts owed under the loan from Wells Capital
Management, an aggregate amount of $28.5 million. This loan was secured with
approximately $33.4 million in restricted cash and investments. We liquidated
these restricted cash and investments in order to repay the loan. Approximately
$5.0 million became available to us for operating working capital after the
repayment of the loan.
We believe that our existing resources, together with cash expected to be
generated from our operations will be sufficient to meet our capital
requirements for at least the next twelve months.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This quarterly report on Form 10-Q contains forward-looking statements which
involve risks and uncertainties. Our actual results could differ materially from
those anticipated by such forward-looking statements as a result of certain
factors, including those set forth below.
RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO FACTORS WHICH ARE NOT WITHIN OUR
CONTROL Our quarterly operating results have fluctuated significantly in the
past and are expected to fluctuate significantly in the future based on a number
of factors, many of which are not under our control. Our operating expenses,
which include product development costs and selling, general and administrative
expenses, are relatively fixed in the short-term. If our revenues are lower than
we expect because we sell fewer semiconductor devices, delay the release of new
products or the announcement of new features, or for other reasons, we may not
be able to quickly reduce our spending in response.
Other circumstances that can affect our operating results include:
- general economic conditions,
- our ability to develop, introduce and market new products and technologies
on a timely basis,
- the timing of significant orders, order cancellations and reschedulings,
- changes in our pricing policies or those of our competitors or suppliers,
including decreases in unit average selling prices of our products,
- introduction of products and technologies by our competitors,
- shifts in our product mix toward lower margin products,
- the availability of production capacity at the fabrication facilities that
manufacture our products, and
- the availability and cost of materials to our suppliers.
These factors are difficult to forecast, and these or other factors could
adversely affect our business. Any shortfall in our revenues would have a direct
impact on our business. In addition, fluctuations in our quarterly results could
adversely affect the market price of our common stock in a manner unrelated to
our long-term operating performance.
WE ARE EXPOSED TO GENERAL ECONOMIC AND MARKET CONDITIONS
Our business is subject to the effects of general economic conditions in the
United States and globally, and, in particular, market conditions in the
communications and networking industries. In recent quarters, our operating
results have been adversely affected as a result of unfavorable economic
conditions and reduced capital spending in
15
the United States, Europe, and Asia. If the economic conditions in the United
States and globally do not improve, or if we experience a worsening in the
global economic slowdown, we may continue to experience material adverse impacts
on our business, operating results, and financial condition, including reduced
revenue.
OUR LENGTHY SALES CYCLE CAN RESULT IN UNCERTAINTY AND DELAYS WITH REGARD TO OUR
EXPECTED REVENUES
Our customers typically perform numerous tests and extensively evaluate our
products before incorporating them into their systems. The time required for
test, evaluation and design of our products into a customer's equipment can
range from six to twelve months or more. It can take an additional six to twelve
months or more before a customer commences volume shipments of equipment that
incorporates our products. Because of this lengthy sales cycle, we may
experience a delay between the time when we increase expenses for research and
development and sales and marketing efforts and the time when we generate higher
revenues, if any, from these expenditures.
In addition, the delays inherent in our lengthy sales cycle raise additional
risks of customer decisions to cancel or change product plans. When we achieve a
design win, there can be no assurance that the customer will ultimately ship
products incorporating our products. Our business could be materially adversely
affected if a significant customer curtails, reduces or delays orders during our
sales cycle or chooses not to release products incorporating our products.
RAPID TECHNOLOGICAL CHANGE COULD MAKE OUR PRODUCTS OBSOLETE
We operate in an industry that is subject to evolving industry standards, rapid
technological changes, rapid changes in customer demands and the rapid
introduction of new, higher performance products with shorter product life
cycles. As a result, we expect to continue to make significant investments in
research and development. However, we may not have adequate funds from
operations or otherwise to devote to research and development, forcing us to
reduce our research and development efforts. Also, we must manage product
transitions successfully, since announcements or introductions of new products
by us or our competitors could adversely affect sales of our existing products
because these existing products can become obsolete or unmarketable for specific
purposes. There can be no assurance that we will be able to develop and
introduce new products or enhancements to our existing products on a timely
basis or in a manner which satisfies customer needs or achieves widespread
market acceptance. Any significant delay in releasing new products could
adversely affect our reputation, give a competitor a first-to-market advantage
or allow a competitor to achieve greater market share. The failure to adjust to
rapid technological change could harm our business, financial condition, results
of operations and cash flows.
FAILURE OF OUR PRODUCTS TO GAIN MARKET ACCEPTANCE WOULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION
We believe that our growth prospects depend upon our ability to gain customer
acceptance of our products and technology. Market acceptance of products depends
upon numerous factors, including compatibility with existing manufacturing
processes and products, perceived advantages over competing products and the
level of customer service available to support such products. Moreover,
manufacturers often rely on a limited number of equipment vendors to meet their
manufacturing equipment needs. As a result, market acceptance of our products
may be adversely affected to the extent potential customers utilize a
competitor's manufacturing equipment. There can be no assurance that growth in
sales of new products will continue or that we will be successful in obtaining
broad market acceptance of our products and technology.
We expect to spend a significant amount of time and resources to develop new
products and refine existing products. In light of the long product development
cycles inherent in our industry, these expenditures will be made well in advance
of the prospect of deriving revenues from the sale of any new products. Our
ability to commercially introduce and successfully market any new products is
subject to a wide variety of challenges during this development cycle, including
start-up bugs, design defects and other matters that could delay introduction of
these products to the marketplace. In addition, since our customers are not
obligated by long-term contracts to purchase our products, our anticipated
product orders may not materialize, or orders that do materialize may be
cancelled. As a result, if we do not achieve market acceptance of new products,
we may not be able to realize sufficient sales of our products in order to
recoup research and development expenditures. The failure of any of our new
products to achieve market acceptance would harm our business, financial
condition, results of operation and cash flows.
16
WE MUST MAKE SIGNIFICANT RESEARCH AND DEVELOPMENT EXPENDITURES PRIOR TO
GENERATING REVENUES FROM PRODUCTS
To establish market acceptance of a new semiconductor device, we must dedicate
significant resources to research and development, production and sales and
marketing. We incur substantial costs in developing, manufacturing and selling a
new product, which often significantly precede meaningful revenues from the sale
of this product. Consequently, new products can require significant time and
investment to achieve profitability. Investors should note that our efforts to
introduce new semiconductor devices or other products or services may not be
successful or profitable. In addition, products or technologies developed by
others may render our products or technologies obsolete or noncompetitive.
We record as expenses the costs related to the development of new semiconductor
devices and other products as these expenses are incurred. As a result, our
profitability from quarter to quarter and from year to year may be adversely
affected by the number and timing of our new product launches in any period and
the level of acceptance gained by these products.
OUR INDEPENDENT MANUFACTURERS MAY NOT BE ABLE TO MEET OUR MANUFACTURING
REQUIREMENTS
We do not manufacture any of our semiconductor devices. Therefore, we are
referred to in the semiconductor industry as a "fabless" producer of
semiconductors. Consequently, we depend upon third party manufacturers to
produce semiconductors that meet our specifications. We currently have third
party manufacturers that can produce semiconductors which meet our needs.
However, as the semiconductor industry continues to progress to smaller
manufacturing and design geometries, the complexities of producing
semiconductors will increase. Decreasing geometries may introduce new problems
and delays that may affect product development and deliveries. Due to the nature
of the semiconductor industry and our status as a "fabless" semiconductor
company, we could encounter fabrication related problems that may affect the
availability of our semiconductor devices, may delay our shipments or may
increase our costs.
OUR RELIANCE ON SINGLE SOURCE MANUFACTURERS OF OUR SEMICONDUCTOR DEVICES COULD
DELAY SHIPMENTS AND INCREASE OUR COSTS
None of our semiconductor devices is currently manufactured by more than one
supplier. We place our orders on a purchase order basis and do not have a long
term purchase agreement with any of our existing suppliers. In the event that
the supplier of a semiconductor device was unable or unwilling to continue to
manufacture this product in the required volume, we would have to identify and
qualify a substitute supplier. Introducing new products or transferring existing
products to a new third party manufacturer or process may result in unforeseen
device specification and operating problems. These problems may affect product
shipments and may be costly to correct. Silicon fabrication capacity may also
change, or the costs per silicon wafer may increase. Manufacturing-related
problems may have a material adverse effect on our business.
INTENSE COMPETITION IN THE MARKETS IN WHICH WE OPERATE MAY REDUCE THE DEMAND FOR
OR PRICES OF OUR PRODUCTS
Competition in the semiconductor industry is intense. If our main target market,
the embedded systems market, continues to grow, the number of competitors may
increase significantly. In addition, new semiconductor technology may lead to
new products that can perform similar functions as our products. Some of our
competitors and other semiconductor companies may develop and introduce products
that integrate into a single semiconductor device the functions performed by our
semiconductor devices. This would eliminate the need for our products in some
applications.
In addition, competition in our markets comes from companies of various sizes,
many of which are significantly larger and have greater financial and other
resources than we do and thus can better withstand adverse economic or market
conditions. Also, with our processor products, we compete with established
embedded microprocessor companies and others. Many of these indirect competitors
and microprocessor companies have significantly greater financial, technical,
marketing and other resources than we. Therefore, we cannot assure you that we
will be able to compete successfully in the future against existing or new
competitors, and increased competition may adversely affect our business.
17
FAILURE TO HAVE OUR PRODUCTS DESIGNED INTO THE PRODUCTS OF ELECTRONIC EQUIPMENT
MANUFACTURERS WILL RESULT IN REDUCED SALES
Our future success depends on electronic equipment manufacturers that design our
semiconductor devices into their systems. We must anticipate market trends and
the price, performance and functionality requirements of current and potential
future electronic equipment manufacturers and must successfully develop and
manufacture products that meet these requirements. In addition, we must meet the
timing requirements of these electronic equipment manufacturers and must make
products available to them in sufficient quantities. These electronic equipment
manufacturers could develop products that provide the same or similar
functionality as one or more of our products and render these products obsolete
in their applications.
We do not have purchase agreements with our customers that contain minimum
purchase requirements. Instead, electronic equipment manufacturers purchase our
products pursuant to short-term purchase orders that may be canceled without
charge. We believe that in order to obtain broad penetration in the markets for
our products, we must maintain and cultivate relationships, directly or through
our distributors, with electronic equipment manufacturers that are leaders in
the embedded systems markets. Accordingly, we will often incur significant
expenditures in order to build relationships with electronic equipment
manufacturers prior to volume sales of new products. If we fail to develop
relationships with additional electronic equipment manufacturers, to have our
products designed into new embedded systems or to develop sufficient new
products to replace products that have become obsolete, our business would be
materially adversely affected.
LOWER DEMAND FOR OUR CUSTOMERS' PRODUCTS WILL RESULT IN LOWER DEMAND FOR OUR
PRODUCTS
Demand for our products depends in large part on the development and expansion
of the high-performance embedded systems markets including networking and
telecommunications, enterprise storage, imaging and industrial applications. The
size and rate of growth of these embedded systems markets may in the future
fluctuate significantly based on numerous factors. These factors include the
adoption of alternative technologies, capital spending levels and general
economic conditions. Demand for products that incorporate high-performance
embedded systems may not grow.
BECAUSE A SUBSTANTIAL PORTION OF OUR NET SALES IS GENERATED BY A SMALL NUMBER OF
LARGE CUSTOMERS, IF ANY OF THESE CUSTOMERS DELAYS OR REDUCES ITS ORDERS, OUR NET
SALES AND EARNINGS WILL BE HARMED
Historically, a relatively small number of customers have accounted for a
significant portion of our net sales in any particular period. We have no
long-term volume purchase commitments from any of our significant customers. We
cannot be certain that our current customers will continue to place orders with
us, that orders by existing customers will continue at the levels of previous
periods or that we will be able to obtain orders from new customers. In
addition, some of our customers supply products to end-market purchasers and any
of these end-market purchasers could choose to reduce or eliminate orders for
our customers' products. This would in turn lower our customers' orders for our
products.
We anticipate that sales of our products to a relatively small number of
customers will continue to account for a significant portion of our net sales.
Due to these factors, the following have in the past and may in the future
reduce our net sales or earnings:
- the reduction, delay or cancellation of orders from one or more of our
significant customers;
- the selection of competing products or in-house design by one or more of
our current customers;
- the loss of one or more of our current customers; or
- a failure of one or more of our current customers to pay our invoices.
18
DEFECTS IN OUR PRODUCTS COULD INCREASE OUR COSTS AND DELAY OUR PRODUCT SHIPMENTS
Our products are complex. While we test our products, these products may still
have errors, defects or bugs that we find only after commercial production has
begun. We have experienced errors, defects and bugs in the past in connection
with new products.
Our customers may not purchase our products if the products have reliability,
quality or compatibility problems. This delay in acceptance could make it more
difficult to retain our existing customers and to attract new customers.
Moreover, product errors, defects or bugs could result in additional development
costs, diversion of technical and other resources from our other development
efforts, claims by our customers or others against us, or the loss of
credibility with our current and prospective customers. In the past, the
additional time required to correct defects has caused delays in product
shipments and resulted in lower revenues. We may have to spend significant
amounts of capital and resources to address and fix problems in new products.
We must continuously develop our products using new process technology with
smaller geometries to remain competitive on a cost and performance basis.
Migrating to new technologies is a challenging task requiring new design skills,
methods and tools and is difficult to achieve.
FAILURE TO HIRE ADDITIONAL PERSONNEL AND TO IMPROVE OUR OPERATIONS WILL LIMIT
OUR GROWTH
We have experienced rapid growth which places a significant strain on our
limited personnel and other resources. To manage our expanded operations
effectively, we will need to further improve our operational, financial and
management systems. We will also need to successfully hire, train, motivate and
manage our employees. We may not be able to manage our growth effectively, which
could have a material adverse effect on our business. Also, we are seeking to
hire additional skilled development engineers, who are currently in short
supply. Our business could be adversely affected if we encounter delays in
hiring additional engineers.
WE COULD LOSE KEY PERSONNEL DUE TO COMPETITIVE MARKET CONDITIONS AND ATTRITION
Our success depends to a significant extent upon our senior management and key
technical and sales personnel. The loss of one or more of these employees could
have a material adverse effect on our business. We do not have employment
contracts with any of our executive officers.
Our success also depends on our ability to attract and retain qualified
technical, sales and marketing, customer support, financial and accounting, and
managerial personnel. Competition for such personnel in the semiconductor
industry is intense, and we may not be able to retain our key personnel or to
attract, assimilate or retain other highly qualified personnel in the future. In
addition, we may lose key personnel due to attrition, including health, family
and other reasons. We have experienced, and may continue to experience,
difficulty in hiring and retaining candidates with appropriate qualifications.
If we do not succeed in hiring and retaining candidates with appropriate
qualifications, our business could be materially adversely affected.
A LARGE PORTION OF OUR REVENUES IS DERIVED FROM SALES TO THIRD-PARTY
DISTRIBUTORS WHO MAY TERMINATE THEIR RELATIONSHIPS WITH US AT ANY TIME
We depend on distributors to sell a significant portion of our products. In the
nine months ended September 30, 2001 and 2000, net revenues through distributors
accounted for approximately 59% and 65%, respectively, of our net revenues. Some
of our distributors also market and sell competing products.
Distributors may terminate their relationships with us at any time. Our future
performance will depend in part on our ability to attract additional
distributors that will be able to market and support our products effectively,
especially in markets in which we have not previously distributed our products.
We may lose one or more of our current distributors or may not be able to
recruit additional or replacement distributors. The loss of one or more of our
major distributors could have a material adverse effect on our business.
THE DEMAND FOR OUR PRODUCTS DEPENDS UPON OUR ABILITY TO SUPPORT EVOLVING
INDUSTRY STANDARDS
Substantially all of our revenues are derived from sales of products which rely
on the PCI standard. If the embedded systems markets move away from this
standard and begin using new standards, we may not be able to successfully
design and manufacture new products that use these new standards. There is also
the risk that new products we develop in response to new standards may not be
accepted in the market. In addition, the PCI standard is
19
continuously evolving, and we may not be able to modify our products to address
new PCI specifications. Any of these events would have a material adverse effect
on our business.
THE SUCCESSFUL MARKETING AND SALES OF OUR PRODUCTS DEPEND UPON OUR THIRD PARTY
RELATIONSHIPS, WHICH ARE NOT SUPPORTED BY WRITTEN AGREEMENTS
When marketing and selling our semiconductor devices, we believe we enjoy a
competitive advantage based on the availability of development tools offered by
third parties. These development tools are used principally for the design of
other parts of the embedded system but also work with our products. We will lose
this advantage if these third party tool vendors cease to provide these tools
for existing products or do not offer them for our future products. This event
could have a material adverse effect on our business. We have no written
agreements with these third parties, and these parties could choose to stop
providing these tools at any time.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
COULD ADVERSELY AFFECT OUR COMPETITIVE POSITION
Our future success and competitive position depend upon our ability to obtain
and maintain proprietary technology used in our principal products. Currently,
we have limited protection of our intellectual property in the form of patents
and rely instead on trade secret protection. Our existing or future patents may
be invalidated, circumvented, challenged or licensed to others. The rights
granted thereunder may not provide competitive advantages to us. In addition,
our future patent applications may not be issued with the scope of the claims
sought by us, if at all. Furthermore, others may develop technologies that are
similar or superior to our technology, duplicate our technology or design around
the patents owned or licensed by us. In addition, effective patent, trademark,
copyright and trade secret protection may be unavailable or limited in foreign
countries where we may need protection. We cannot be sure that steps taken by us
to protect our technology will prevent misappropriation of the technology.
We may from time to time receive notifications of claims that we may be
infringing patents or other intellectual property rights owned by third parties.
While there is currently no intellectual property litigation pending against us,
litigation could result in significant expenses to us and adversely affect sales
of the challenged product or technology. This litigation could also divert the
efforts of our technical and management personnel, whether or not the litigation
is determined in our favor. In addition, we may not be able to develop or
acquire non-infringing technology or procure licenses to the infringing
technology under reasonable terms. This could require expenditures by us of
substantial time and other resources. Any of these developments would have a
material adverse effect on our business.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY MAY LEAD TO SIGNIFICANT
VARIANCES IN THE DEMAND FOR OUR PRODUCTS
In the last year, the semiconductor industry has been characterized by
significant downturns and wide fluctuations in supply and demand. Also, during
this time, the industry has experienced significant fluctuations in anticipation
of changes in general economic conditions, including economic conditions in
Asia. This cyclicality has led to significant variances in product demand and
production capacity. It has also accelerated erosion of average selling prices
per unit. We may experience periodic fluctuations in our future financial
results because of industry-wide conditions.
BECAUSE WE SELL OUR PRODUCTS TO CUSTOMERS OUTSIDE OF NORTH AMERICA AND BECAUSE
OUR PRODUCTS ARE INCORPORATED WITH PRODUCTS OF OTHERS THAT ARE SOLD OUTSIDE OF
NORTH AMERICA WE FACE FOREIGN BUSINESS, POLITICAL AND ECONOMIC RISKS
Sales outside of North America accounted for 44% of our revenues for the nine
months ended September 30, 2001. In 2000, 1999 and 1998 sales outside of North
America accounted for 39%, 35% and 34% of our revenues, respectively. We
anticipate that these sales may increase in future periods and may account for
an increasing portion of our revenues. In addition, equipment manufacturers who
incorporate our products into their products sell their products outside of
North America, thereby exposing us indirectly to foreign risks. Further, most of
our semiconductor products are manufactured outside of North America.
Accordingly, we are subject to international risks, including:
- difficulties in managing distributors,
20
- difficulties in staffing and managing foreign subsidiary and branch
operations,
- political and economic instability,
- foreign currency exchange fluctuations,
- difficulties in accounts receivable collections,
- potentially adverse tax consequences,
- timing and availability of export licenses,
- changes in regulatory requirements, tariffs and other barriers,
- difficulties in obtaining governmental approvals for telecommunications
and other products, and
- the burden of complying with complex foreign laws and treaties.
Because sales of our products have been denominated to date exclusively in
United States dollars, increases in the value of the United States dollar will
increase the price of our products so that they become relatively more expensive
to customers in the local currency of a particular country, which could lead to
a reduction in sales and profitability in that country.
OUR POTENTIAL FUTURE ACQUISITIONS MAY NOT BE SUCCESSFUL BECAUSE OF OUR LIMITED
EXPERIENCE WITH ACQUISITIONS IN THE PAST
There have been a significant number of mergers and acquisitions in the
semiconductor industry in the past. As part of our business strategy, we expect
to review acquisition prospects that would complement our existing product
offerings, improve market coverage or enhance our technological capabilities. In
May 2000, we acquired Sebring Systems. We have no current agreements or
negotiations underway with respect to any acquisitions, and we may not be able
to locate suitable acquisition opportunities. Future acquisitions could result
in any or all of the following:
- potentially dilutive issuances of equity securities,
- large one-time write-offs,
- the incurrence of debt and contingent liabilities or amortization
expenses related to goodwill and other intangible assets,
- difficulties in the assimilation of operations, personnel,
technologies, products and the information systems of the acquired
companies,
- diversion of management's attention from other business concerns,
- risks of entering geographic and business markets in which we have
no or limited prior experience, and
- potential loss of key employees of acquired organizations.
We have had limited experience with acquisitions in the past and may not be able
to successfully integrate any businesses, products, technologies or personnel
that may be acquired in the future. Our failure to do so could have a material
adverse effect on our business.
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OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS
THAT MAY NOT BE IN THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS
Our executive officers, directors and other principal stockholders, in the
aggregate, beneficially own a substantial amount of our outstanding common
stock. Although these stockholders do not have majority control, they currently
have, and likely will continue to have, significant influence with respect to
the election of our directors and approval or disapproval of our significant
corporate actions. This influence over our affairs might be adverse to the
interests of other stockholders. In addition, the voting power of these
stockholders could have the effect of delaying or preventing a change in control
of PLX.
THE ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION COULD ADVERSELY
AFFECT THE RIGHTS OF THE HOLDERS OF OUR COMMON STOCK
Anti-takeover provisions of Delaware law and our Certificate of Incorporation
may make a change in control of PLX more difficult, even if a change in control
would be beneficial to the stockholders. These provisions may allow the Board of
Directors to prevent changes in the management and control of PLX.
As part of our anti-takeover devices, our Board of Directors has the ability to
determine the terms of preferred stock and issue preferred stock without the
approval of the holders of the common stock. Our Certificate of Incorporation
allows the issuance of up to 5,000,000 shares of preferred stock. There are no
shares of preferred stock outstanding. However, because the rights and
preferences of any series of preferred stock may be set by the Board of
Directors in its sole discretion without approval of the holders of the common
stock, the rights and preferences of this preferred stock may be superior to
those of the common stock. Accordingly, the rights of the holders of common
stock may be adversely affected. Consistent with Delaware law, our Board of
Directors may adopt additional anti-takeover measures in the future.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have an investment portfolio of fixed income securities, including those
classified as cash equivalents and restricted cash of approximately $9.9 million
at September 30, 2001. These securities are subject to interest rate
fluctuations and will decrease in market value if interest rates increase.
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
We invest primarily in high quality, short-term and long-term debt instruments.
A hypothetical 100 basis point increase in interest rates would result in less
than $0.1 million decrease (less than 1%) in the fair value of our
available-for-sale securities.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1(2) Agreement and Plan of Merger dated April 19, 2000
by and among PLX Technology, Inc., OKW Technology
Acquisition Corporation and Sebring Systems, Inc.
3.1(1) Amended and Restated Certificate of Incorporation
of the Registrant.
3.2(1) Registrant's Amended and Restated Bylaws.
4.1 Reference is made to Exhibit 3.1.
----------
(1) Incorporated by reference to the same numbered exhibit
previously filed with the Company's Registration Statement on
Form S-1 (Registration No. 333-71795).
(2) Incorporated by reference to Exhibit 2.1 to Form 8-K as filed
on June 2, 2000.
(b) Reports on Form 8-K. The Company did not file any reports on Form
8-K during the quarter ended September 30, 2001.
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SIGNATURE
Pursuant to the requirements 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.
PLX TECHNOLOGY, INC.
----------------------------------
(Registrant)
Date: October 30, 2001 By /s/ Rafael Torres
----------------------------------
Rafael Torres
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
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