-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BxQeVeCgF1r8LCsXe6WZcIsGmL/9Io7Jf18TCDm++oJwiq3OddP+vev88OvkZ9Hg hltdq4USohtAbEfDwuvczg== 0000891618-01-500578.txt : 20010510 0000891618-01-500578.hdr.sgml : 20010510 ACCESSION NUMBER: 0000891618-01-500578 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLX TECHNOLOGY INC CENTRAL INDEX KEY: 0000850579 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 943008334 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25699 FILM NUMBER: 1626026 BUSINESS ADDRESS: STREET 1: 390 POTRERO AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087749060 10-Q 1 f72140e10-q.txt 10-Q 1 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 March 31, 2001. or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . ------------------- ------------------- Commission File Number 0-25699 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 April 27, 2001, there were 23,424,922 shares of common stock, par value $0.001 per share, outstanding. This Report on Form 10-Q includes 23 pages with the Index to Exhibits located on page 22 2 PLX TECHNOLOGY, INC. INDEX TO REPORT ON FORM 10-Q FOR QUARTER ENDED MARCH 31, 2001
Page ---- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (Unaudited): Condensed Consolidated Balance Sheets at March 31, 2001 and December 31, 2000.............................................. 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000..................... 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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......... 21 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K................................... 22
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PLX TECHNOLOGY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
MARCH 31, DECEMBER 31, 2001 2000(1) --------- ------------ (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents $ 8,015 $ 16,621 Short-term investments 3,339 3,340 Accounts receivable, net 4,964 4,772 Inventories 7,939 4,521 Deferred tax assets 4,099 4,099 Other current assets 1,414 1,290 --------- --------- Total current assets 29,770 34,643 Goodwill 10,480 11,308 Other intangible assets 2,747 2,964 Property and equipment, net 34,119 31,277 Restricted cash and investments 33,234 33,146 Other assets 209 141 --------- --------- Total assets $ 110,559 $ 113,479 --------- --------- LIABILITIES Current liabilities: Accounts payable $ 4,064 $ 5,064 Accrued compensation and benefits 1,038 1,491 Accrued commissions 245 345 Deferred revenues 760 1,430 Income tax payable 684 833 Deferred tax liability 1,100 1,100 Other accrued expenses 1,118 1,518 --------- --------- Total current liabilities 9,009 11,781 Long-term notes payable 28,500 28,500 STOCKHOLDERS' EQUITY Common stock, par value 23 23 Additional paid in capital 78,536 79,715 Deferred compensation (6,913) (9,312) Notes receivable for employee stock purchases (50) (50) Accumulated other comprehensive income 153 54 Retained earnings 1,301 2,768 --------- --------- Total stockholders' equity 73,050 73,198 --------- --------- Total liabilities and stockholders' equity $ 110,559 $ 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 4 PLX TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share amounts)
THREE MONTHS ENDED MARCH 31, ----------------------- 2001 2000 -------- -------- Net revenues $ 12,429 $ 14,542 Cost of revenues 4,064 4,420 -------- -------- Gross Margin 8,365 10,122 Operating expenses: Research and development 5,265 2,020 Selling, general and administrative 3,824 3,400 Amortization of goodwill and purchased intangible assets 1,044 -- -------- -------- Total operating expenses 10,133 5,420 -------- -------- Income (loss) from operations (1,768) 4,702 Interest income and other, net 231 489 -------- -------- Income (loss) before provision (benefit) for income taxes (1,537) 5,191 Provision (benefit) for income taxes (70) 1,816 -------- -------- Net income (loss) $ (1,467) $ 3,375 ======== ======== Basic net income (loss) per share $ (0.06) $ 0.16 ======== ======== Shares used to compute basic per share amounts 23,151 21,696 ======== ======== Diluted net income (loss) per share $ (0.06) $ 0.15 ======== ======== Shares used to compute diluted per share amounts 23,151 22,981 ======== ========
See notes to condensed consolidated financial statements. 4 5 PLX TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
THREE MONTHS ENDED MARCH 31, ----------------------- 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (1,467) $ 3,375 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 617 244 Compensation related to stock options issued to non-employees 17 -- Amortization of deferred compensation 818 22 Amortization of goodwill and other purchased intangible assets 1,044 -- Changes in operating assets and liabilities: Accounts receivable (192) (1,177) Inventories (3,418) 241 Other current assets (124) (423) Other assets (68) (152) Accounts payable (1,000) 1,003 Accrued compensation and benefits (453) 475 Accrued commissions (100) 237 Income tax payable (149) 1,277 Deferred revenues (670) 432 Other accrued expenses (400) 251 -------- -------- Net cash provided by (used in) operating activities (5,545) 5,805 -------- -------- INVESTING ACTIVITIES Purchases of short term investments (1,939) (10,922) Sales of short term investments -- 3,250 Maturities of short term investments 3,193 13,500 Purchases of long term investments (2,123) (1,260) Sales of long term investments -- 1,005 Purchases of property and equipment (3,459) (137) -------- -------- Net cash provided by (used in) investing activities (4,328) 5,436 FINANCING ACTIVITIES Proceeds from sale of common stock 385 735 Decrease in restricted cash and investments 882 -- -------- -------- Net cash provided by financing activities 1,267 735 -------- -------- Increase (decrease) in cash and cash equivalents (8,606) 11,976 Cash and cash equivalents at beginning of year 16,621 8,636 -------- -------- Cash and cash equivalents at end of period $ 8,015 $ 20,612 ======== ========
See notes to condensed consolidated financial statements. 5 6 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 March 31, 2001 and for the three-month periods ended March 31, 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 months ended March 31, 2001 and March 31, 2000 was as follows:
THREE MONTHS ENDED MARCH 31, ---------------------- 2001 2000 -------- ------- (IN THOUSANDS) Net income (loss) $ (1,467) $ 3,375 Unrealized gains on investments 99 3 -------- ------- Comprehensive income (loss) $ (1,368) $ 3,378 ======== =======
Accumulated other comprehensive income on the accompanying Consolidated Balance Sheets is comprised entirely of unrealized gains on investments. 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, has been adopted by the Company effective January 1, 2001, and did not 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. 6 7 On February 14, 2001, the Financial Accounting Standards Board issued a limited revision of its September 7, 1999 exposure Draft, "Business Combinations and Intangible Assets", that proposes to significantly change the accounting for goodwill acquired in a purchase business combination. Under the revised proposal, goodwill would not be amortized but would be reviewed for impairment, using a complex methodology different from the original proposal, when an event occurs indicating the potential for impairment. Goodwill impairment charges would be presented as a separate line item within the operating section of the income statement. The nonamortization approach would apply to previously recorded goodwill as well as goodwill arising from acquisitions completed after the application of the new standard. Amortization of the remaining book value of goodwill would cease and the new impairment-only approach would apply. The FASB expects to release the final statement in June 2001. The provisions of the proposed statement are to be applied at the beginning of the first fiscal quarter following its issuance for all entities. 2. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method) or market (net realizable value). Inventories were as follows:
MARCH 31, DECEMBER 31, --------------------------- 2001 2000 ------ ------ (IN THOUSANDS) Work in Process ................ $ 641 $ 646 Finished goods ................. 7,298 3,875 ------ ------ Total ...................... $7,939 $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 MARCH 31, --------------------------- 2001 2000 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income (loss) ............................... $ (1,467) $ 3,375 -------- -------- Weighted average shares of common stock outstanding ................................. 23,215 21,986 Less weighted average shares of common stock subject to repurchase ................. (64) (290) -------- -------- Shares used in computing basic net income per share ................................... 23,151 21,696 -------- -------- Net income (loss) per share -- Basic ............ $ (0.06) $ 0.16 -------- -------- Shares used in computing basic net income (loss) per share ............................ 23,151 21,696 Effect of dilutive securities: Stock options ............................... -- 995 Unvested restricted stock ................... -- 290 -------- -------- Shares used in computing diluted net income (loss) per share ..................... 23,151 22,981 -------- -------- Net income (loss) per share -- diluted .......... $ (0.06) $ 0.15 -------- --------
7 8 As the Company incurred a loss for the three month period ended March 31, 2001, the effect of dilutive securities, totaling 2.0 million equivalent shares, 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 MARCH 31, ---------------------------- 2001 2000 ---------- ---------- (IN THOUSANDS) Revenues: United States $ 7,295 $ 9,318 France 1,664 1,239 Europe -- excluding France 1,733 1,912 Asia 1,737 2,073 ------- ------- Total $12,429 $14,542 ======= =======
For the three months ended March 31, 2001, Unique Technologies, the Company's U.S. distributor, and A2M, a European distributor accounted for 23% and 13% of net revenues, respectively. In March 2001, the Company decided to terminate its relationship with Unique Technologies and service all of its U.S. customers directly or through manufacturers' representatives. For the three months ended March 31, 2001, sales to IBM accounted for 14% of net revenues and sales to Cisco Systems accounted for 11% of net revenues, in each case taking into account sales through the Company's distributors as well as direct sales. No other individual customer represented greater than 10% of net revenues. 5. DEBT 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 is collaterized by cash, short-term and long-term investments of approximately $33.2 million, which are classified as restricted cash. The loan agreement includes covenants regarding profitability and bears interest at the LIBOR rate plus 0.45% (7.14% at March 31, 2001). The loan requires monthly interest payments with the outstanding principal balance due and payable on November 6, 2005. At March 31, 2001, the Company was in compliance with all covenants. 6. BUSINESS COMBINATION On May 19, 2000, the Company purchased Sebring Systems Inc., a development stage company, that was developing the 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 9
(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 =======
The acquired in-process technology was written-off in the second quarter of fiscal 2000. The estimated weighted average useful life of the intangible assets for patents, tradenames, and the residual goodwill, created as a result of the acquisition of Sebring Systems is approximately four years. Additionally, PLX recorded $12.3 million in deferred compensation on options granted to employees below fair market value related to the acquisition of Sebring. Deferred compensation is being amortized over the vesting period of three years. The $14.3 million allocation of the purchase price to the acquired in-process technology 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 March 31, 2001, the Company estimates that the project was approximately 95% complete. 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 three months ended March 31, 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.
THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 ---- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenues $ 14,542 Net loss $ 404 Net loss per share -- basic and diluted $ (0.02) Number of shares used in per share calculations -- basic and diluted 22,657
9 10 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 March 31, 2001, no shares had been repurchased. 8. INCOME TAXES Income tax benefit for the three months ended March 31, 2001 was $70,000 on a pretax loss of $1,537,000, compared to income tax expense of $1,816,000 on pretax income of $5,191,000 for the three months ended March 31, 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. 10 11 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, our anticipated expense levels for research and development, selling, general and administrative operations, and deferred compensation 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 revenue 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 12 Our long-term success will depend on our ability to introduce new products. Although 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 MARCH 31, -------------------- 2001 2000 ----- ----- Net revenues 100.0% 100.0% Cost of revenues 32.7 30.4 ----- ----- Gross margin 67.3 69.6 Operating expenses: Research and development 42.3 13.9 Selling, general and administrative 30.8 23.4 Amortization of goodwill and purchased intangible assets 8.4 -- ----- ----- Total operating expenses 81.5 37.3 ----- ----- Income (loss) from operations (14.2) 32.3 Interest income and other, net 1.8 3.4 ----- ----- Income (loss) before provision (benefit) for (12.4) 35.7 income taxes Provision (benefit) for income taxes (0.6) 12.5 ----- ----- Net income (loss) (11.8)% 23.2%
NET REVENUES Net revenues for the three months ended March 31, 2001 were $12.4 million, a decrease of 15% from $14.5 million for the three months ended March 31, 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 March 31, 2001, Unique Technologies, our U.S. distributor, and A2M, a European distributor accounted for 23% and 13% of net revenues, respectively. In March 2001, we decided to terminate our relationship with Unique Technologies and service all of our U.S. customers directly or through manufacturers' representatives. For the three months ended March 31, 2001, sales to IBM accounted for 14% of net revenues and sales to Cisco Systems accounted for 11% of net revenues, in each case taking into account sales through our distributors as well as direct sales. No other individual customer represented greater than 10% 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, as well as royalty expenses paid on some of our products. Gross profit for the three months ended March 31, 2001 was $8.4 million, a decrease of 17% from $10.1 million for the three months ended March 31, 2000. Gross profit as a percentage of net revenues was 67.3% for the three months ended March 31, 2001, as compared to 69.6% for the three months ended March 31, 2000. The slight decline in our gross profit was primarily due to a shift in our product mix. 12 13 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 March 31, 2001 were $5.3 million, an increase of 161% from $2.0 million for the three months ended March 31, 2000. The increase in absolute dollars was primarily due to amortization of deferred compensation associated with the May 2000 acquisition of Sebring Systems, 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 42.3% for the three months ended March 31, 2001, as compared to 13.9% for the three months ended March 31, 2000. This percentage increase was primarily due to lower net revenues coupled with amortization of deferred compensation associated with the acquisition of Sebring Systems, increased headcount and higher costs to support our continuing efforts to develop new products. We expect that research and development expenses in absolute dollars will continue to increase in future periods. 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 March 31, 2001 were $3.8 million, an increase of 12% from $3.4 million for the three months ended March 31, 2000. Selling, general and administrative expenses as a percentage of net revenues were 30.8% for the three months ended March 31, 2001, as compared to 23.4% for the three months ended March 31, 2000. The percentage increase was primarily due to a decline in revenues. AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLE ASSETS Amortization of goodwill and purchased intangible assets increased by $1.0 million for the three months ended March 31, 2001. 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. 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 $818,000 and $22,000 for each of the three months ended March 31, 2001 and 2000, respectively, and has substantially all been included in research and development expenses in our results of operations. The amount of deferred compensation is amortized ratably over the vesting period of the applicable stock grants. We expect to record compensation expenses related to deferred compensation of approximately $800,000 per quarter through September 30, 2003. INTEREST INCOME AND OTHER, NET Interest income and other income, net reflects interest earned on average cash, cash equivalents, short-term and long-term investment balances. Interest income and other, net decreased to $231,000 for the three months ended March 31, 2001 from $489,000 for the three months ended March 31, 2000. This decrease was primarily due to interest expense related to the 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 Income tax benefit for the three months ended March 31, 2001 was $70,000 on a pretax loss of $1,537,000, compared to an income tax expense of $1,816,000 on a pretax income of $5,191,000 for the three months ended March 31, 2000. Our 2001 income tax benefit differs from the expected benefit derived by applying the applicable 13 14 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. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, we had $20.8 million in working capital and $8.0 million in cash and cash equivalents. Our operating activities used cash of $5.5 million for the three months ended March 31, 2001, and generated cash of $5.8 million for the three months ended March 31, 2000. The $5.5 million in cash used by operations was primarily attributable to a net loss of $1.5 million, an increase in inventories of $3.4 million and a decrease in accounts payable of $1.0 million. Our investing activities used cash of $4.3 million for the three months ended March 31, 2001 and provided cash of $5.4 million for the three months ended March 31, 2000. The $4.3 million in cash used by investing activities was primarily attributable to purchases of property and equipment of $3.5 million. Cash provided by financing activities was $1.3 million and $0.7 million for the three months ended March 31, 2001 and 2000, respectively. Cash provided by financing activities for the three months ended March 31, 2001 is related to exercise of employee stock options and a decrease of restricted cash and investments. 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 March 31, 2001, no shares had been repurchased. We believe that our existing resources, together with cash 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: - - 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. 14 15 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. 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 the 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. Although, historically, we have had adequate funds from operations to devote to research and development, there can be no assurance that such funds will be available in the future or, if available, that they will be adequate. 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 revenue 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. 15 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. Prospective 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, as we start to sell our processor products, we will 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. 16 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. 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. 17 18 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 three months ended March 31, 2001 and 2000, net revenues through distributors accounted for approximately 64% and 61%, 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. For example, in March 2001, we decided to terminate our relationship with Unique Technologies, our U.S. distributor that accounted for 23% of our first quarter revenues, and service all of our U.S. customers directly or through manufacturers' representatives. The loss of one or more of our major distributors could have a material adverse effect on our business as we may not be successful in servicing our customers directly or through manufacturers' representatives. 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 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 generally 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 18 19 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, 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 41% of our revenues for the three months ended March 31, 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, - - 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 19 20 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. Since we have had limited experience with acquisitions in the past, we are not certain that we will 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. 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. Consistent with Delaware law, our Board of Directors may adopt additional anti-takeover measures in the future. 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. 20 21 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 $43.8 million at March 31, 2001. These securities are subject to interest rate fluctuations and will decrease in market value if interest rates increase. The primary objective of the Company's investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. The Company invests 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 $0.5 million decrease (less than 2%) in the fair value of the Company's available-for-sale securities. 21 22 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. 10.1(1) Form of Indemnification Agreement between PLX and each of its Officers and Directors. 10.2(1)(4) 1998 Stock Incentive Plan. 10.3(1)(4) 1999 Stock Incentive Plan. 10.4(1) Lease Agreement dated December 20, 1995 by and between Aetna Life Insurance Company as Landlord and PLX as Tenant. 10.5(1) Lease Agreement dated October 17, 1997 between The Arrillaga Foundation and The Perry Foundation as Landlords and PLX as Tenant, as amended. 10.6(1)(4) Form of Restricted Stock Purchase Agreement used in connection with the 1986 Restricted Stock Purchase Program. 10.7(1)(4) Form of Pledge Agreement used in connection with the 1986 Restricted Stock Purchase Program. 10.8(1)(4) Form of Promissory Note used in connection with the 1986 Restricted Stock Purchase Program. 10.9 (1) PLX Technology, Inc. Stock Restriction, Information Rights and Registration Rights Agreement dated April 19, 1989. 10.10(1) PLX Technology, Inc. Stock Restriction, Information Rights and Registration Rights Agreement dated July 3, 1991. 10.11(3) Loan Agreement dated October 25, 2000 between Wells Capital Management and PLX.
--------------------------------- (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. (3) Incorporated by reference to Exhibit 10.11 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2000. (4) Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended March 31, 2001. 22 23 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: May 8, 2001 By /s/ Rafael Torres ------------------------------------- Rafael Torres Vice President, Finance and Chief Financial Officer (Authorized Officer and Principal Financial Officer) 23 -----END PRIVACY-ENHANCED MESSAGE-----