-----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, UzSD/Jn/nJQbRBTZXMtJKkxUIkIj0vSHnTWS6hDjZUj3lqAzTuNhXqO9/Kre1DX4 NTB9etkKcrZVZ0t4Fug2yA== 0000891618-99-003695.txt : 19990813 0000891618-99-003695.hdr.sgml : 19990813 ACCESSION NUMBER: 0000891618-99-003695 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 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: CA FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25699 FILM NUMBER: 99685212 BUSINESS ADDRESS: STREET 1: 390 POTRERO AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087749060 10-Q 1 FORM 10-Q FOR PERIOD ENDING JUNE 30, 1999 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 June 30, 1999. 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)
390 Potrero Avenue, Sunnyvale, CA 94086 (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 July 31, 1999 there were 22,147,841 shares of common stock, par value $0.001 per share, outstanding. This Report on Form 10-Q includes 19 pages with the Index to Exhibits located on page 20. 2 PLX TECHNOLOGY, INC. INDEX TO REPORT ON FORM 10-Q FOR QUARTER ENDED JUNE 30, 1999
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): Condensed Consolidated Balance Sheets at June 30, 1999 and December 31, 1998................................................ 3 Condensed Consolidated Statements of Income for the three and six months ended June 30, 1999 and 1998..................... 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998............................. 5 Notes to Condensed Consolidated Financial Statements.............. 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................8-18 Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 18 PART II. OTHER INFORMATION Item 2. Changes in Securities............................................. 19 Item 4. Submission of Matters to a Vote of Security Holders............... 19 Item 6. Exhibits and Reports on Form 8-K.................................. 20 Signature .................................................................. 21
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PLX TECHNOLOGY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
June 30, December 31, 1999 1998(1) -------- -------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 37,669 $ 5,638 Accounts receivable, net 3,932 2,073 Inventories 1,522 1,344 Deferred tax assets 735 735 Other current assets 209 332 -------- -------- Total current assets 44,067 10,122 Property and equipment, net 1,568 1,515 Deposits and licenses 172 129 ======== ======== Total assets $ 45,807 $ 11,766 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,766 $ 1,601 Accrued compensation and benefits 875 724 Accrued commissions 152 100 Deferred revenues 783 592 Other accrued expenses 703 547 Income tax payable -- 442 -------- -------- Total current liabilities 4,279 4,006 STOCKHOLDERS' EQUITY: Redeemable convertible preferred stock, par value -- 5 Common stock, par value 22 5 Additional paid in capital 36,642 5,616 Deferred compensation (237) (283) Notes receivable for employee stock purchases (146) (163) Retained earnings 5,247 2,580 -------- -------- Total stockholders' equity 41,528 7,760 -------- -------- Total liabilities and stockholders' equity $ 45,807 $ 11,766 ======== ========
- ---------- (1) The balance sheet at December 31, 1998 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 INCOME (Unaudited) (in thousands, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1999 1998 1999 1998 ------- ------- ------- ------- Net revenues $ 9,413 $ 5,626 $18,321 $11,039 Cost of revenues 3,222 2,108 6,474 4,116 ------- ------- ------- ------- Gross margin 6,191 3,518 11,847 6,923 Operating expenses: Research and development 1,780 1,600 3,512 3,398 Selling, general and administrative 2,397 1,568 4,688 3,016 ------- ------- ------- ------- Total operating expenses 4,177 3,168 8,200 6,414 ------- ------- ------- ------- Income from operations 2,014 350 3,647 509 Interest income and other, net 419 14 462 28 ------- ------- ------- ------- Income before income taxes 2,433 364 4,109 537 Provision for income taxes 851 73 1,442 108 ------- ------- ------- ------- Net income $ 1,582 $ 291 $ 2,667 $ 429 ======= ======= ======= ======= Basic net income per share $ 0.08 $ 0.08 $ 0.14 $ 0.12 ======= ======= ======= ======= Shares used to compute basic share amounts 20,558 3,508 18,400 3,474 ======= ======= ======= ======= Diluted net income per share $ 0.07 $ 0.02 $ 0.13 $ 0.02 ======= ======= ======= ======= Shares used to compute diluted per share amounts 22,814 18,420 20,697 18,420 ======= ======= ======= =======
See notes to condensed consolidated financial statements. 4 5 PLX TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Six Months Ended June 30, ----------------------- 1999 1998 -------- -------- Cash flows from operating activities Net income $ 2,667 $ 429 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 450 336 Compensation expense recognized 144 -- Amortization of unearned compensation 46 32 Changes in operating assets and liabilities: Accounts receivable (1,859) 15 Inventories (178) (416) Other current assets 123 (84) Deposits and licenses (43) (39) Accounts payable 165 (591) Accrued compensation and benefits 151 146 Accrued commissions 52 (45) Deferred revenues 191 194 Other accrued expenses 156 179 Income tax payable (442) (111) -------- -------- Net cash provided by operating activities 1,623 45 -------- -------- Investing activities Purchase of property and equipment (503) (530) -------- -------- Net cash used in investing activities (503) (530) Financing activities Proceeds from sale of common stock 30,894 -- Repayment of stockholder notes receivable 17 27 -------- -------- Net cash provided by financing activities 30,911 27 -------- -------- Increase (decrease) in cash and cash equivalents 32,031 (458) Cash and cash equivalents at beginning of year 5,638 2,701 -------- -------- Cash and cash equivalents at June 30 $ 37,669 $ 2,243 ======== ========
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 ("PLX" or the "Company") as of June 30, 1999 and for the three-month and six-month periods ended June 30, 1999 and 1998 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 Registration Statement on Form S-1, as amended, filed with the Securities and Exchange Commission, SEC File No. 333-71795. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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. Recent Accounting Pronouncements The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 requires that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company's comprehensive net income was the same as its net income for the six months ended June 30, 1998 and 1999. In June 1998, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. FAS 133 is effective for fiscal years beginning after June 15, 2000 and the Company believes that the adoption of FAS 133 will not have a significant impact on the Company's operating results or cash flows. 2. Inventories Inventories consisted solely of finished goods as of June 30, 1999 and December 31, 1998. 6 7 3. Net Income Per Share The following table sets forth the computation of basic and diluted net income per share:
Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------ 1999 1998 1999 1998 ------- ------- ------- ------- (in thousands) (in thousands) Net income (numerator) $ 1,582 $ 291 $ 2,667 $ 429 Shares used in computing basic net income per share - Weighted average number of common shares 20,558 3,509 18,400 3,474 ======= ======= ======= ======= Basic net income per share $ 0.08 $ 0.08 $ 0.14 $ 0.12 ======= ======= ======= ======= Outstanding weighted average number of common shares 21,313 3,509 19,156 3,474 Effect of dilutive securities: Employee stock options 876 9 876 9 Unvested restricted stock 625 1,163 665 1,198 Redeemable convertible preferred stock 13,739 13,739 ------- ------- ------- ------- Dilutive potential common shares 1,501 14,911 1,541 14,946 ------- ------- ------- ------- Denominator for diluted net income per share - adjusted Weighted-average shares and assumed conversions 22,814 18,420 20,697 18,420 ======= ======= ======= ======= Diluted net income per share $ 0.07 $ 0.02 $ 0.13 $ 0.02 ======= ======= ======= =======
4. Reincorporation in Delaware On March 22, 1999, the Company reincorporated in the State of Delaware. The par value of the preferred and common stock is $0.001 per share. The Company's Certificate of Incorporation has been amended to authorize 5,000,000 shares of preferred stock. The Board of Directors has the authority to fix or alter the designations, powers, preferences and rights of the shares of each such series. The Company's reincorporation has been reflected in the condensed consolidated financial statements for all periods presented. 5. Initial Public Offering In April 1999, the Company made an initial public offering of its common stock. At that time, all issued and outstanding shares of the Company's preferred stock were automatically converted into 13,738,908 shares of common stock. The Company generated approximately $31 million from the initial public offering. 7 8 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; the amount of and specific uses of anticipated capital expenditures; expectations regarding inventory balances, liquidity, adequacy of cash resources; and adequacy of current facilities under the sub-headings "Results of Operations" and "Liquidity and Capital Resources." 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 the Company's Registration Statement on Form S-1, as amended, filed with the Securities and Exchange Commission, SEC File No. 333-71795. 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 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. 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. 8 9 RESULTS OF OPERATIONS The following table summarizes historical results of operations as a percentage of net revenues for the periods shown.
Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------ 1999 1998 1999 1998 ------- ------- ------- ------- (in thousands) (in thousands) Net revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 34.2 37.5 35.3 37.3 ----- ----- ----- ----- Gross margin 65.8 62.5 64.7 62.7 Operating expenses: Research and development 18.9 28.4 19.2 30.8 Selling, general and administrative 25.5 27.9 25.6 27.3 ----- ----- ----- ----- Total operating expenses 44.4 56.3 44.8 58.1 ----- ----- ----- ----- Income from operations 21.4 6.2 19.9 4.6 Interest income and other, net 4.4 0.3 2.5 0.3 ----- ----- ----- ----- Income before income taxes 25.8 6.5 22.4 4.9 Provision for income taxes 9.0 1.3 7.8 1.0 ----- ----- ----- ----- Net income 16.8% 5.2% 14.6% 3.9%
Net Revenues Net revenues for the three months ended June 30, 1999 were $9.4 million, an increase of 67% from $5.6 million for the three months ended June 30, 1998. For the six months ended June 30, 1999, net revenues were $18.3 million, a 66% increase over the $11.0 million recorded in the six months ended June 30, 1998. The increase was primarily due to higher unit shipments resulting from increased market acceptance of our products. For the six months ended June 30, 1999, net revenues derived from customers in the United States were 69%, with 26% of net revenues from sales to Unique Technologies, our U.S. distributor. For the six months ended June 30, 1999, one customer, an electronic equipment manufacturer, accounted for 11% of net revenues. 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 June 30, 1999 was $6.2 million, an increase of 76% from $3.5 million for the three months ended June 30, 1998. For the six months ended June 30, 1999, gross profit was $11.8 million, an increase of 71% from $6.9 million for the six months ended June 30, 1998. The improvement in the Company's gross profit is primarily due to lower product costs. 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 June 30, 1999 were $1.8 million, an increase of 11% from $1.6 million for the three months ended June 30, 1998. For the six months ended June 30, 1999, research and development expenses were $3.5 million compared to $3.4 million in the six months ended June 30, 1998. The increases were primarily due to increased headcount and higher costs to support the Company's continuing efforts to develop new products. Research and development expenses as a percentage of net revenues were 18.9% for the three months ended June 30, 1999, as compared to 28.4% for the three months ended June 30, 1998. For the six months ended June 30, 1999, research and development expenses were 19.2% as a percentage of net revenues compared to 30.8% for the six months ended June 30, 1998. This percentage decrease was primarily due to higher net revenues as well as lower 9 10 expenses for outside engineering consultants and non-recurring engineering at our independent foundries. 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 June 30, 1999 were $2.4 million, an increase of 53% from $1.6 million for the three months ended June 30, 1998. For the six months ended June 30, 1999, selling, general and administrative expenses were $4.7 million compared to $3.0 million for the same period in 1998. Selling, general and administrative expenses as a percentage of net revenues were 25.5% for the three months ended June 30, 1999, as compared to 27.9% for the three months ended June 30, 1998. For the six months ended June 30, 1999, selling, general and administrative expenses as a percentage of net revenues decreased to 25.6% compared to 27.3% in the comparable period a year ago. This percentage decrease was primarily due to higher net revenues. The first quarter 1999 amounts include approximately $144,000 for compensation expense recognized related to stock options granted to non-employees. We expect that selling, general and administrative expenses in absolute dollars will continue to increase in future periods. Deferred Compensation We recorded deferred compensation in connection with the grant of stock options and restricted stock to our employees during 1997 and 1998. Amortization of deferred compensation was recognized amounting to approximately $23,000 for the three months ended June 30, 1999 and $15,000 for the three months ended June 30, 1998. For the six months ended June 30, 1999 and 1998, we recorded amortization of deferred compensation of $45,000 and $33,000, respectively. The amount of deferred compensation is amortized ratably over the vesting period of the applicable stock grants. We expect the deferred compensation amortization to continue at approximately $20,000 per quarter through December 31, 2001. Interest Income and Other, Net Interest income and other income, net reflects interest earned on average cash, cash equivalents and short-term investment balances. Interest income and other, net increased to $419,000 for the three months ended June 30, 1999 from $14,000 for the three months ended June 30, 1998. For the six months ended June 30, 1999, interest income increased to $462,000 from $28,000 in the six months ended June 30, 1998. The increase was primarily due to interest earned on higher levels of short-term investments and cash balances generated by the initial public offering in April 1999. Provision for Income Taxes Income tax expenses as a percentage of pretax income were 35% and 20% for the six month periods ended June 30, 1999 and 1998, respectively. Our effective tax rate in 1999 differs from the applicable statutory rate primarily due to state income taxes offset by the benefit of the research and development tax credit. Our effective tax rate in 1998 differed from the applicable statutory rate primarily due to the benefit of research and development tax credits and the realization of deferred tax assets. Liquidity and Capital Resources At June 30, 1999, we had $39.8 million in working capital and $37.7 million in cash and cash equivalents. Our operating activities generated cash of $1.6 million for the six months ended June 30, 1999, and provided cash of $45,000 for the six months ended June 30, 1998. The $1.6 million change in cash provided by operations was primarily attributable to net income of $2.7 million partially offset by an increase of $1.9 million in accounts receivable due to higher net revenues. The increases in accounts receivable and net income were due to higher product shipments during the six months ended June 30, 1999 as compared to the six months ended June 30, 1998. Our investing activities used cash of $503,000 and $530,000 for the six months ended June 30, 1999 and the six months ended June 30, 1998, respectively. These investing activities were for the purchase of capital equipment. Cash provided by financing activities was $30.9 million and $27,000 for the six months ended June 30, 1999 and the six months ended June 30, 1998, respectively. Cash provided by financing activities for the six months ended June 30,1999 is primarily related to the Company's initial public offering which generated approximately $31 million in net proceeds from the sale of common stock in April 1999. 10 11 On April 9, 1999 we completed our initial public offering of common stock which generated approximately $31 million in net proceeds. We intend to use the net proceeds primarily for general corporate purposes, including working capital. Pending use of the net proceeds for such purposes, we intend to invest the funds in interest-bearing, investment-grade securities. We believe that the proceeds from the public offering together with the cash generated from our operations will be sufficient to meet our capital requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including the inventory levels we maintain, the level of investment we make in new technologies and improvements to existing technologies and the levels of monthly expenses required to launch new products. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS This quarterly report on Form 10-Q contains forward-looking statements which involve risks and uncertainties. This Company's 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 in 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: o our ability to develop, introduce and market new products and technologies on a timely basis, o the timing of significant orders, order cancellations and reschedulings, o changes in our pricing policies or those of our competitors or suppliers, including decreases in unit average selling prices of our products, o introduction of products and technologies by our competitors, o shifts in our product mix toward lower margin products, o the availability of production capacity at the fabrication facilities that manufacture our products, o purchasing patterns related to the Year 2000, and o 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. 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 11 12 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 The semiconductor industry is characterized by rapidly changing technology and industry standards, along with frequent new product introductions. Consequently, our future success depends on our ability to identify trends in our target markets and to offer new semiconductor devices, as well as other products and services, that address the changing needs of our target customers. 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. 12 13 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. 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 can make it more difficult to retain our existing customers and to attract new customers. Moreover, product errors, defects or bugs can 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 13 14 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 six months ended June 30, 1999 and in fiscal 1998, net revenues through distributors accounted for approximately 56% and 49%, 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 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 14 15 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 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 other 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 two years, 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 31% of our revenues for the six months ended June 30, 1999. In 1998, 1997, and 1996 sales outside of North America accounted for 34%, 22%, and 21% 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: o difficulties in managing distributors, o difficulties in staffing and managing foreign subsidiary and branch operations, o political and economic instability, o foreign currency exchange fluctuations, o difficulties in accounts receivable collections, 15 16 o potentially adverse tax consequences, o timing and availability of export licenses, o changes in regulatory requirements, tariffs and other barriers, o difficulties in obtaining governmental approvals for telecommunications and other products, and o the burden of complying with complex foreign laws and treaties. Although approximately 10% of our revenues were attributable to sales in Asia during 1998 and the first six months of 1999, the recent Asian economic instability could adversely affect our business, particularly to the extent that this instability impacts the sales of products manufactured by our customers. 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, leading to a reduction in sales and profitability in that country. We Could Experience Disruptions From Important Suppliers And Customers Because They Are Not Year 2000 Compliant We are highly dependent on our computer software programs and operating systems in operating our business. We also depend on proper functioning of computer systems of third parties, such as suppliers and customers. Any computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 instead of the year 2000. We have completed audits of our internal systems, including our accounting, sales and technical support automation system, and obtained assurances from our major suppliers and customers that they have done the same. However, we do not have the resources to verify these assurances. Thus, there is a risk that some of our customers' and suppliers' systems will not function adequately. If they do not, the result could be a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Our Potential Future Acquisitions May Not Be Successful Because We Have Not Made 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. 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 the following: o potentially dilutive issuances of equity securities, o large one-time write-offs, o the incurrence of debt and contingent liabilities or amortization expenses related to goodwill and other intangible assets, o difficulties in the assimilation of operations, personnel, technologies, products and the information systems of the acquired companies, o diversion of management's attention from other business concerns, and o 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. 16 17 Since we have not made any 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 approximately 45% 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. Commencing at the first annual meeting of stockholders following the annual meeting of stockholders when we shall have had at least 800 stockholders, our stockholders will not be entitled to cumulate their votes in the election of directors, and the holders of a majority of the common stock present at a meeting of stockholders will be able to elect all of our directors. 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. Under Delaware law, our Board of Directors may adopt additional anti-takeover measures in the future. One anti-takeover provision that we have is the ability of our Board of Directors 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. READINESS DISCLOSURE FOR YEAR 2000 We utilize a number of computer software programs and operating systems across our entire organization, including applications used in financial business systems and various administrative functions. To the extent that our software applications contain source code that is unable to appropriately interpret the upcoming Year 2000 and beyond, some level of modification or replacement of such applications will be necessary. We believe that our internal Year 2000 issues are limited to information technology, or IT, systems such as software programs and computer operating systems, and we are working closely with the suppliers of such systems to ensure that all systems are Year 2000 compliant. Employing a team made up of internal personnel, we have completed our identification of IT systems that are not yet Year 2000 compliant and have commenced modification or replacement of non-compliant systems as necessary. We have also completed our assessment of the Year 2000 compliance issues presented by our semiconductor hardware and software products. We anticipate that modification or replacement and testing of these systems will be completed by September 30, 1999. We believe that none of our hardware or software products has Year 2000 issues that require product modification or replacement. We are highly dependent on a few semiconductor foundry companies to produce the majority of our products. To the extent that Year 2000 issues effect these suppliers' ability to deliver product, we must review the suppliers' plans for Year 2000 compliance and satisfy ourselves that they have made the necessary modifications to or replacements of their affected systems. We have requested these plans and will evaluate them as they are received. We anticipate that this evaluation will be completed by September 30, 1999. We will rely primarily on the suppliers' commitments to accomplish this task but have no contractual commitment from the suppliers regarding Year 2000 issues. Given the information known at this time about our non-compliant systems, coupled with ongoing, normal course-of-business efforts to upgrade or replace critical systems, as necessary, we do not expect Year 2000 compliance costs to have any material adverse impact on our business. We estimate that total costs for the Year 2000 compliance 17 18 assessment and remediation will not exceed $100,000. The costs of this assessment and remediation will be paid out of general and administrative expenses. In light of our assessment and remediation efforts to date, and the planned, normal course-of-business upgrades, we believe that any residual Year 2000 risk is limited to non-critical business applications and support hardware. No assurance can be given, however, that all of our systems will be Year 2000 compliant or that compliance will not have a material adverse effect on our business. We also do not have any assurance that the manufacturers who supply semiconductors for us will be Year 2000 compliant with their internal systems; a reduction in the supply of product from these suppliers could have a material adverse effect on our business. We believe that, if our suppliers are not Year 2000 compliant, the reasonably likely worst case would be that we would be unable to receive products from them on a timely basis which would disrupt our shipments to customers and could materially adversely affect our business. In addition, if our IT systems are not Year 2000 compliant, we may be unable to process customer orders, which could also lead to shipment delays. We plan to develop a contingency plan for all operations to address the most reasonably likely worst case scenarios regarding Year 2000 compliance. We expect the contingency plan to be completed by September 30, 1999. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our principal financial market risk relates to the interest rates associated with our available-for-sale securities. At June 30, 1999, our market risk related to these investment was immaterial and all these investments had original maturities not exceeding 90 days. 18 19 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES. Upon the closing of our initial public offering in April 1999, all outstanding shares of PLX's Preferred Stock were automatically converted into 13,738,908 shares of Common Stock. Following such closing, PLX filed an Amended and Restated Certificate of Incorporation with the Delaware Secretary of State which eliminated the previously authorized Preferred Stock, authorized 5,000,000 shares of undesignated Preferred Stock and increased the authorized Common Stock to 30,000,000 shares. 19 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit Number Description - ------- --------------------------------------------------------------------------- 3.1* Amended and Restated Certificate of Incorporation of the Registrant. 3.2* Registrant's Amended and Restated Bylaws. 4.1 Reference is made to Exhibit 3.1. 10.1* Form of Indemnification Agreement between PLX and each of its Officers and Directors. 10.2* 1998 Stock Incentive Plan. 10.3* 1999 Stock Incentive Plan. 10.4* Lease Agreement dated December 20, 1995 by and between Aetna Life Insurance Company as Landlord and PLX as Tenant. 10.5* Lease Agreement dated October 17, 1997 between The Arrillaga Foundation and The Perry Foundation as Landlords and PLX as Tenant, as amended. 10.6* Form of Restricted Stock Purchase Agreement used in connection with the 1986 Restricted Stock Purchase Program. 10.7* Form of Pledge Agreement used in connection with the 1986 Restricted Stock Purchase Program. 10.8* Form of Promissory Note used in connection with the 1986 Restricted Stock Purchase Program. 10.9* PLX Technology, Inc. Stock Restriction, Information Rights and Registration Rights Agreement dated April 19, 1989. 10.10* PLX Technology, Inc. Stock Restriction, Information Rights and Registration Rights Agreement dated July 3, 1991. 27.1 Financial Data Schedule.
- -------------- * Incorporated by reference to the same numbered exhibit previously filed with the Company's Registration Statement on Form S-1 (Registration No. 333-71795). (b) Reports on Form 8-K. The Company did not file any Reports on Form 8-K during the quarter ended June 30, 1999. 20 21 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: August 11, 1999 By /s/ Scott M. Gibson ------------------------------- Scott M. Gibson Vice President, Finance and Chief Financial Officer (Authorized Officer and Principal Financial Officer) 21 22 INDEX TO EXHIBITS
Exhibit Number Description - ------- --------------------------------------------------------------------------- 3.1* Amended and Restated Certificate of Incorporation of the Registrant. 3.2* Registrant's Amended and Restated Bylaws. 4.1 Reference is made to Exhibit 3.1. 10.1* Form of Indemnification Agreement between PLX and each of its Officers and Directors. 10.2* 1998 Stock Incentive Plan. 10.3* 1999 Stock Incentive Plan. 10.4* Lease Agreement dated December 20, 1995 by and between Aetna Life Insurance Company as Landlord and PLX as Tenant. 10.5* Lease Agreement dated October 17, 1997 between The Arrillaga Foundation and The Perry Foundation as Landlords and PLX as Tenant, as amended. 10.6* Form of Restricted Stock Purchase Agreement used in connection with the 1986 Restricted Stock Purchase Program. 10.7* Form of Pledge Agreement used in connection with the 1986 Restricted Stock Purchase Program. 10.8* Form of Promissory Note used in connection with the 1986 Restricted Stock Purchase Program. 10.9* PLX Technology, Inc. Stock Restriction, Information Rights and Registration Rights Agreement dated April 19, 1989. 10.10* PLX Technology, Inc. Stock Restriction, Information Rights and Registration Rights Agreement dated July 3, 1991. 27.1 Financial Data Schedule.
- -------------- * Incorporated by reference to the same numbered exhibit previously filed with the Company's Registration Statement on Form S-1 (Registration No. 333-71795). EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 37,669 0 4,124 (192) 1,522 44,067 3,540 (1,972) 45,807 4,279 0 0 0 22 41,506 45,807 18,321 18,321 6,474 6,474 8,200 0 0 4,109 1,442 2,667 0 0 0 2,667 0.14 0.13
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