<PAGE>
FORM 6-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13A-16 OF 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of August 1998
Galileo Technology Ltd.
----------------------------------------------------
(Translation of registrant's name into English)
Moshav Manof, D.N. Misgav 20184, Israel
----------------------------------------------------
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
--------- ---------
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
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GALILEO TECHNOLOGY LTD.
FORM 6-K
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Exhibits - Exhibit Index
Signatures
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GALILEO TECHNOLOGY LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars, in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-----------------------------
<S> <C> <C> <C>
(Unaudited) (1)
ASSETS
Current assets:
Cash and cash equivalents $41,514 $43,887
Short-term investments 38,721 27,349
Accounts receivable, net 5,672 4,566
Inventories 3,469 2,387
Prepaid expenses and other assets 1,297 1,336
----------------------------
Total current assets 90,673 79,525
Property and equipment, net 3,750 2,967
----------------------------
Total assets $94,423 $82,492
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,003 $ 2,932
Accrued and other liabilities 4,483 4,979
Deferred income 1,249 1,014
Short-term debt and current maturities of long-term debt 158 228
----------------------------
Total current liabilities 10,893 9,153
Accrued severance pay 244 210
Long-term debt 60 131
Commitments
Shareholders' equity:
Ordinary Shares 69,114 67,480
Deferred compensation and other (1,298) (1,542)
Retained earnings 15,410 7,060
----------------------------
Total shareholders' equity 83,226 72,998
----------------------------
Total liabilities and shareholders' equity $94,423 $82,492
============================
</TABLE>
See accompanying notes.
(1) The balance sheet at December 31, 1997 has been derived from audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
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GALILEO TECHNOLOGY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS, IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
--------------------- --------------------
<S> <C> <C> <C> <C> <C>
Net sales $11,359 $ 8,423 $26,498 $12,824
Cost of sales 4,355 3,227 9,958 4,976
--------------------- ------------------
Gross profit 7,004 5,196 16,540 7,848
Operating expenses:
Research and development 2,577 1,331 5,204 2,499
Selling, marketing and administrative 2,248 1,620 4,723 2,662
--------------------- ------------------
Total operating expenses 4,825 2,951 9,927 5,161
--------------------- ------------------
Operating income 2,179 2,245 6,613 2,687
Other income, net 1,095 18 2,122 63
--------------------- ------------------
Income before provision for income taxes 3,274 2,263 8,735 2,750
Provision for income taxes 165 2 385 4
--------------------- ------------------
Net income $ 3,109 $ 2,261 $ 8,350 $ 2,746
===================== ==================
Earnings per share:
Basic $ 0.15 $ 0.18 $ 0.41 $ 0.22
===================== ==================
Diluted $ 0.15 $ 0.13 $ 0.39 $ 0.16
===================== ==================
Shares used in computing earnings per share:
Basic 20,406 12,266 20,357 12,263
===================== ==================
Diluted 21,226 17,482 21,245 17,485
===================== ==================
</TABLE>
See accompanying notes.
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GALILEO TECHNOLOGY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(U.S. DOLLARS, IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JUNE 30, JUNE 30,
1998 1997
-------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,350 $ 2,746
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and other 732 368
Amortization of deferred compensation 308 320
Deferred income taxes 90 -
Changes in operating assets and liabilities:
Accounts receivable (1,106) (2,445)
Inventories (1,082) (834)
Prepaid expenses and other assets 669 (266)
Accounts payable 2,071 1,031
Accrued and other liabilities (496) 358
Deferred income 235 390
Accrued severance pay 34 (10)
-------------------------------
Net cash provided by operating activities 9,805 1,658
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (22,649) (3,000)
Proceeds from short-term investments 11,213 2,304
Purchases of property and equipment (1,515) (594)
-------------------------------
Net cash used in investing activities (12,951) (1,290)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Preferred Shares - 1,450
Proceeds from issuance of Ordinary Shares 1,669 102
Repurchase of Ordinary Shares (755) -
Proceeds from short-term loans - 2,184
Proceeds from long-term debt - 80
Repayment of short-term loans (70) (1,998)
Repayment of long-term debt (71) (87)
-------------------------------
Net cash provided by financing activities 773 1,731
Net increase (decrease) in cash and cash equivalents (2,373) 2,099
Cash and cash equivalents at beginning of period 43,887 5,332
-------------------------------
Cash and cash equivalents at end of period $ 41,514 $ 7,431
===============================
</TABLE>
See accompanying notes.
4
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GALILEO TECHNOLOGY LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
The condensed consolidated financial statements have been prepared by Galileo
Technology Ltd., without audit, and include the accounts of Galileo Technology
Ltd. and its wholly-owned subsidiaries ("Galileo" or collectively the
"Company"). Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position at June 30, 1998 and December 31,
1997, and the operating results and cash flows for the reported periods. These
financial statements and notes should be read in conjunction with the Company's
audited financial statements and notes thereto for the year ended December 31,
1997, which were filed with the Securities and Exchange Commission on Form 20-F.
The results of operations for the three and six months ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the future
quarters or the year ending December 31, 1998.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------
1998 1997 1998 1997
---------------------- --------------------
<S><C> <C> <C> <C> <C> <C>
Numerator used for both basic and diluted
earnings per share net income $ 3,109 $ 2,261 $ 8,350 $ 2,746
======================= ====================
Denominator for basic earnings per share:
Weighted average shares 20,406 12,266 20,357 12,263
======================= ====================
Denominator for diluted earnings per share:
Denominator for basic earnings per share 20,406 12,266 20,357 12,263
Effect of dilutive securities:
Employee share options 820 822 888 828
Warrants - 12 - 12
Convertible Preferred Share - 4,382 - 4,382
---------------------- --------------------
21,226 17,482 21,245 17,485
======================= ====================
Earnings per share:
Basic $ 0.15 $ 0.18 $ 0.41 $ 0.22
======================= ====================
Diluted $ 0.15 $ 0.13 $ 0.39 $ 0.16
======================= ====================
Potentially dilutive securities excluded from
computations as the effect would be
antidilutive 426 - 222 -
======================= ====================
</TABLE>
5
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3. Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined by the first-in, first-out (FIFO) method. Substantially all of the
inventories are finished goods.
4. Ordinary Share Purchase Program
In June 1998, the Board of Directors of the Company's wholly owned subsidiary,
Galileo Technology Inc. ("GTI"), approved a stock purchase program to buy an
aggregate of up to five percent of the Ordinary Shares of the Company from time
to time at prevailing market prices. The shares may be used for issuance upon
exercise of employee stock options under existing or new stock option plans of
GTI and for other corporate purposes. As of June 30, 1998, GTI acquired 70,000
shares for an aggregate purchase price of $755,000.
5. New Accounting Standards
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net income or
shareholders' equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity to be included in other comprehensive income.
For the three months ended June 30, 1998 and 1997, total comprehensive income
was $3,056,000 and $2,261,000, respectively. For the six months ended June 30,
1998 and 1997, total comprehensive income was $8,286,000 and $2,746,000,
respectively.
As of January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued in 1999. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS 131 has no impact on the Company's consolidated
results of operations, financial position or cash flows.
6
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" contained herein and in the
Company's other filings with the Securities and Exchange Commission.
OVERVIEW
Galileo was incorporated in November 1992 and commenced operations on March 1,
1993 to define, develop and market advanced digital semiconductor devices that
perform critical functions for network systems. Time-to-market pressures,
bandwidth constraints and the need for improved network management capabilities
have forced network system vendors increasingly to transition from internally-
developed solutions to third-party semiconductor devices that are highly-
integrated, scalable, programmable and flexible and meet the demands of more
technologically sophisticated networks. The Company's "datacom systems on
silicon" are designed to simplify design efforts, reduce development risks and
costs, and substantially improve time-to-market for OEMs in the data
communications equipment market. The Company's existing products -- system
controllers, switched Ethernet LAN controllers and remote access WAN controllers
- -- provide three of the key functionalities of data communications systems.
Galileo Technology Ltd., founded in Karmiel, Israel, began operations in early
1993, and opened its U.S. business operations, Galileo Technology, Inc. ("GTI"),
in San Jose, California, in early 1994.
The Company's limited operating history makes the prediction of future
operating results difficult or impossible. The Company believes that period-to-
period comparisons of its financial results are not necessarily meaningful and
should not be relied upon as an indication of future performance. See "Risk
Factors--Risks Relating to the Company--Potential Fluctuations in Operating
Results." For the six months ended June 30, 1998, five customers accounted for
approximately 59% of the Company's net sales. The Company expects that it will
continue to depend on a limited number of customers to generate a significant
percentage of its net sales for the foreseeable future. See "Risk Factors--Risks
Relating to the Company--Customer Concentration" and "--Dependence on OEMs."
7
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RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, statement of
operations data for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of sales 38.3 38.3 37.6 38.8
----------------------------------------------------------
Gross profit 61.7 61.7 62.4 61.2
Operating expenses:
Research and development 22.7 15.8 19.6 19.5
Selling, marketing and administrative 19.8 19.2 17.8 20.7
----------------------------------------------------------
Total operating expenses 42.5 35.0 37.4 40.2
Operating income 19.2 26.7 25.0 21.0
Other income, net 9.6 0.2 8.0 0.4
----------------------------------------------------------
Income before provision for income taxes 28.8 26.9 33.0 21.4
Provision for income taxes 1.4 0.0 1.5 0.0
----------------------------------------------------------
Net income 27.4% 26.9% 31.5% 21.4%
----------------------------------------------------------
</TABLE>
Net Sales. Net sales to date have been derived primarily from the sale of
system controllers and switched Ethernet LAN controllers. Net sales increased to
$11.4 million for the three months ended June 30, 1998 from $8.4 million in the
three months ended June 30, 1997. Net sales increased to $26.5 million for the
six months ended June 30, 1998 from $12.8 million for the six months ended June
30, 1997. The key factor contributing to the growth of the Company's net sales
in the three and six months ended June 30, 1998 from the three and six months
ended June 30, 1997 was the increased demand for the Company's products, leading
to volume shipments of the Company's system controllers and switched Ethernet
LAN controllers. The Company does not expect that the growth rate in net sales
experienced in the three and six months ended June 30, 1998 as compared to the
three and six months ended June 30, 1997 will continue in the future due to the
maturity of the Company's existing products and the timing of the market
acceptance of its new products. See "Risk Factors--Risks Relating to the
Company--Potential Fluctuations in Operating Results."
Net sales, other than sales to distributors, are recorded when products are
shipped. The Company accrues estimated sales returns for sales made to
customers, other than distributors, and accrues estimated warranty costs. The
Company has not experienced significant warranty claims to date.
One customer accounted for approximately 34% of the Company's net sales for
the three months ended June 30, 1998. Two customers accounted for approximately
24% and 10%, respectively, of the Company's net sales for the six months ended
June 30, 1998. The Company expects a significant portion of its future net sales
to remain concentrated within a limited number of strategic customers. There can
be no
8
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assurance that the Company will be able to retain its strategic customers, that
such customers will not cancel or reschedule orders or that, in the event they
cancel orders, such orders will be replaced by other sales. The occurrence of
any such events or the loss of a strategic customer would have a material
adverse effect on the Company's operating results. See "Risk Factors--Risks
Relating to the Company--Customer Concentration" and "--Dependence on OEMs."
Cost of Sales/Gross Profit. Cost of sales consists principally of the cost of
purchased packaged semiconductor products from the Company's foundries. Cost of
sales increased to $4.4 million for the three months ended June 30, 1998 from
$3.2 million for the three months ended June 30, 1997. Cost of sales increased
to $10.0 million for the six months ended June 30, 1998 from $5.0 million for
the six months ended June 30, 1997. The increase in cost of sales for the three
and six months ended June 30, 1998 as compared to the three and six months ended
June 30, 1997 was due to increased sales of system controllers and switched
Ethernet LAN controllers.
The gross margin on net sales for the three months ended June 30, 1998 and
1997 was 61.7%. The gross margin on net sales for the six months ended June 30,
1998 increased to 62.4% from 61.2% for the six months ended June 30, 1997. The
Company has experienced an overall decline in both its product's average selling
prices (ASP's) and its product's overall manufacturing costs in both the three
and six months ended June 30, 1998 as compared to the three and six months ended
June 30, 1997. These two factors offset each other in the three months ended
June 30, 1998 as compared to the three months ended June 30, 1997 resulting in a
stable gross margin. The impact of the overall lower product manufacturing costs
more than offset the decline in the product's ASP's in the six months ended June
30, 1998 as compared to the six months ended June 30, 1997, resulting in an
increase in gross margin to 62.4% in the six months ended June 30, 1998 from
61.2% in the six months ended June 30, 1997.
Research and Development Expenses. Research and development expenses primarily
consist of salaries and related costs of employees engaged in ongoing research,
design and development activities, and of subcontracting costs. Research and
development expenses for the three months ended June 30, 1998 increased to $2.6
million from $1.3 million for the three months ended June 30, 1997. Research and
development expenses for the six months ended June 30, 1998 increased to $5.2
million from $2.5 million for the six months ended June 30, 1997. As a
percentage of net sales, research and development expenses were 22.7% and 15.8%
for the three months ended June 30, 1998 and 1997, respectively. Research and
development expenses were 19.6% and 19.5% of net sales for the six months ended
June 30, 1998. The increase in research and development expenses in absolute
dollars reflects the addition of personnel and increase in nonrecurring
engineering and product verification expenses. The Company anticipates that
research and development expenses will increase in absolute dollars.
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses are mainly comprised of commissions to sales
representatives, employee-related expenses, advertising, trade exhibition
expenses and professional fees. Selling, marketing and administrative expenses
increased to $2.2 million for the three months ended June 30, 1998 from $1.6
million for the three months ended June 30, 1997. Selling, marketing and
administrative expenses increased to $4.7 from $2.7 million for the six months
ended June 30, 1998. The increase was primarily due to increased sales
commissions on higher sales and personnel additions. Selling, marketing and
administrative expenses as a percentage of total net sales were 19.8% and 19.2%
for the three months ended June 30, 1998 and 1997, respectively. Selling,
marketing and administrative expenses as a percentage of total net sales were
17.8% and 20.7% for the six months ended June 30, 1998 and 1997, respectively.
The Company anticipates that sales, marketing and administrative expenses will
increase in absolute dollars.
Other Income, Net. Other income, net increased to $1.1 million for the three
months ended June 30, 1998 from $18,000 for the three months ended June 30,
1997. Other income, net increased to $2.1 million from $63,000 for the six
months ended June 30, 1998 from the six months ended June 30, 1997. The increase
was due to increased interest income from higher average cash and short-term
investment balances as a result of the Company's initial public offering
completed in July 1997.
9
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Provision for Income Taxes. The provision for income taxes for the three and
six months ended June 30, 1998 primarily consisted of the Company's United
States income tax expense. The provision for income taxes for the three and six
months ended June 30, 1997 consisted of accrued U.S. withholding taxes.
The Company receives certain tax benefits through operating in Israel, as a
result of the "Approved Enterprise" status of most of the Company's existing
facilities. The Company's first investment plan was granted "Approved
Enterprise" status on October 10, 1993 under the Israeli Law for the
Encouragement of Capital Investments, 1959 (the "Investment Law"). The Approved
Enterprise status will allow a full tax exemption on the undistributed income
derived from the Company's investment in its Israeli facilities. The benefits of
the investment plans are expected to expire in 2006. Entitlement to the benefits
is conditional upon the Company fulfilling the conditions stipulated by the
Investment Law, regulations published thereunder and the instruments of approval
for the specific investments in Approved Enterprises. In the event that these
conditions are violated, in whole or in part, the Company would be required to
refund the amount of tax benefits, with the addition of the Israeli CPI linkage
adjustment and interest. The Company believes its Approved Enterprise operates
in substantial compliance with all such conditions and criteria. As of June 30,
1998, the Company was in the process of completing its third investment plan.
Under the third investment plan, the Company agreed to invest approximately
$4,600,000, of which $1,160,000 was invested as of June 30, 1998.
If the Company decides to distribute a cash dividend out of income that has
been exempted from tax, the income out of which the dividend is distributed will
be subject to the 25% Israeli corporate tax rate. The Company currently has no
plans to distribute dividends and intends to retain future earnings to finance
the development of its business.
The Company's pre-tax income from its U.S. operations is subject to U.S.
taxation at U.S. statutory tax rates. However, the Company anticipates that most
of its income will be generated from its Israeli operations and therefore its
overall effective tax rate will be significantly lower than the U.S. statutory
income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $80.2 million at June
30, 1998. The Company generated net cash from operations of $9.8 million for the
six months ended June 30, 1998. Net cash from operations for the six months
ended June 30, 1998 consisted primarily of net income plus increases in accounts
payable offset by increases in accounts receivable and inventories. Investing
activities for the six months ended June 30, 1998, other than purchases and
proceeds from short-term investments, reflected purchases of property and
equipment of $1.5 million. Continued expansion of the Company's business may
require higher levels of capital equipment purchases. Financing activities
provided cash of $0.8 million. In June 1998, the Company's wholly owned
subsidiary, GTI, commenced a program to buy an aggregate of up to five percent
of the Ordinary Shares of the Company. As of June 30, 1998, GTI acquired 70,000
shares for an aggregate purchase price of $755,000. Such repurchased Ordinary
Shares are accounted as treasury shares in the Company's Consolidated Financial
Statements.
FOREIGN CURRENCY TRANSACTIONS
Substantially all of the Company's sales and a substantial portion of its
costs are denominated in United States dollars. Since the dollar is the primary
currency in the economic environment in which the Company operates, the dollar
is its functional currency, and, accordingly, monetary accounts maintained in
currencies other than the dollar (principally cash and liabilities) are
remeasured using the foreign exchange rate at the balance sheet date.
Operational accounts and nonmonetary balance sheet accounts are remeasured and
recorded at the rate in effect at the date of the transaction. The effects of
foreign currency remeasurement are reported in current operations, and have been
immaterial to date.
10
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IMPACT OF INFLATION, DEVALUATION AND FLUCTUATION OF CURRENCIES ON RESULTS OF
OPERATIONS AND FINANCIAL POSITION
For many years prior to 1986, the Israeli economy was characterized by high
rates of inflation and devaluation of the Israeli currency against the U.S.
dollar and other currencies. However, since the institution of the Israeli
Economic Program in 1985, inflation, while continuing, has been reduced
significantly and the rate of devaluation has diminished substantially.
A devaluation of the New Israeli Shekel ("NIS") in relation to the U.S. dollar
would have the effect of decreasing the dollar value of assets (mostly current
assets) of the Company, to the extent the underlying value is NIS-based. Such a
devaluation would also have the effect of reducing the U.S. dollar amount of any
liabilities of the Company, which are payable in NIS (unless such payables are
linked to the U.S. dollar).
Most of the Company's sales and production costs are denominated in U.S.
dollars. The Company's expenses that are denominated in NIS are principally
payroll. Its expenses in NIS exceed its net sales received in NIS. The results
of operations of the Company are adversely affected by increases in the rate of
inflation in Israel when such increases are not offset by a corresponding
devaluation of the NIS against the U.S. dollar. In most recent years, the rate
of inflation in Israel exceeded the rate of devaluation of the U.S. dollar
against the NIS. As a result, the Company experienced increases in the cost of
its operations in dollar terms, relating primarily to the cost of salaries in
Israel that are paid in NIS partially linked to the CPI in Israel. These
increases did not materially adversely affect the Company's results of
operations in such periods, although there can be no assurance that there will
not be a material adverse effect on the Company's business, operating results
and financial condition in the future should this pattern recur. See "Risk
Factors--Risks Relating to Operations in Israel--Inflation and Currency
Fluctuations" and "Conditions in Israel--Economic Conditions."
RISK FACTORS
RISKS RELATING TO THE COMPANY
Limited Operating History; Uncertain Future Profitability. Galileo was
incorporated in November 1992 and commenced operations in March 1993. From 1994
to the third quarter of 1995, the Company derived net sales solely from a
technology development contract, sales of a line of semiconductor devices that
are no longer being sold by the Company and sales of evaluation boards. The
Company introduced its first system controller in the third quarter of 1994, its
first switched Ethernet LAN controller in the first quarter of 1996 and its
first remote access WAN controller in the second quarter of 1997. Accordingly,
the Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company did not generate any net
sales until the fourth quarter of 1993, and did not generate income in any
quarter until the fourth quarter of 1996. Therefore, there can be no assurance
that the Company can sustain profitability on a quarterly or annual basis in the
future. Moreover, the Company does not expect to sustain its rate of sequential
quarterly growth in net sales. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Potential Fluctuations in Operating Results. The Company's operating results
are subject to quarterly and other fluctuations due to a variety of factors,
including the gain or loss of significant customers, increased pricing
pressures, the timing of new product and feature announcements and introductions
by the Company, its competitors or its customers and market acceptance of
existing, new or enhanced versions of the Company's and its competitors' and
customers' products. Other factors include the availability of foundry capacity,
the availability of products as a result of fluctuations in manufacturing yields
and the availability and cost of raw materials to its main supplier, TSMC in
Taiwan, the availability of advanced packaging capacity, changes in the mix of
products sold, the cyclical nature of both the data communications market and
the semiconductor industry, the timing of significant orders, order
cancellations and reschedulings, significant increases in expenses associated
with expansion of operations and changes in
11
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pricing policies of the Company, its competitors or TSMC, including decreases in
unit average selling prices ("ASPs") of the Company's products. Historically,
unit ASPs in the semiconductor industry have decreased over the life of
individual products. In the past, the Company has experienced decreases in unit
ASPs on each of its products. The Company believes that many of its current and
potential customers are volume purchasers, and will require volume discounts,
and that per unit ASPs of individual products will continue to decline in the
future due to these increased volume shipments and other pricing pressures. Such
declines in unit ASPs will lead to declines in the gross margins for these
products, absent offsetting cost reductions or high margins on new product
introductions. Furthermore, as the Company enters new markets, there can be no
assurance that gross margins will be consistent with historical levels. These
factors are difficult to forecast, and these or other factors could materially
affect the Company's quarterly or annual operating results. Therefore, there can
be no assurance as to the level of net sales or net income, if any, that may be
attained by the Company in any given period in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Intense Competition. The data communications market into which the Company
sells its products is intensely competitive and is subject to frequent product
introductions with improved price/performance characteristics, rapid
technological change, unit ASP erosion and continued emergence of new industry
standards. The semiconductor industry is also intensely competitive and is
characterized by rapid technological change, product obsolescence and unit ASP
erosion. The Company expects competition to increase in the future from existing
competitors and from companies that may enter the Company's existing or future
markets, including certain current customers, with similar or substitute
solutions that may be less costly or provide better performance or features than
the Company's products. To be successful in the future, the Company must
continue to respond promptly and effectively to changing customer performance,
feature and pricing requirements, technological change and competitors'
innovations. The Company is contractually prohibited from marketing certain of
the features of its switched Ethernet LAN controllers designed for one of its
significant customers to other potential customers. This restriction could place
the Company at a significant competitive disadvantage if such features were to
be offered by its competitors before the Company completes development of its
next generation switched Ethernet LAN controllers incorporating such features.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors or that competitive pressures faced by
the Company will not have a material adverse effect on the Company's business,
financial condition and results of operations.
Third-party merchant competitors vary in the scope of the products and
services they offer. Many large companies develop and market network components.
In the market for system controllers, the Company's competitors include NEC
Corp. and NKK Corporation with respect to the MIPs microprocessor and several
small companies with respect to the i960 microprocessor from Intel. The
Company's switched Ethernet LAN controllers compete with products from companies
such as Texas Instruments Incorporated, MMC Networks, I-Cube, Inc. and PMC-
Sierra Inc. The Company anticipates that its remote access WAN controller will
compete directly with well-established products from Motorola, Inc. and more
recent products from Siemens A.G. and Temic Semiconductors. In addition, the
Company expects increased competition in the future from other emerging and
established companies.
Many of the Company's current and potential competitors have longer operating
histories, greater name recognition, access to larger customer bases and
significantly greater financial, technical, marketing and other resources than
the Company. As a result, they may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the promotion and sale of their products than the Company. In
addition, current and potential competitors may determine, for strategic
reasons, to consolidate, to lower the price of their products substantially or
to bundle their products with other products. Current and potential competitors
have established or may establish financial or strategic relationships among
themselves or with existing or potential customers, resellers or other third
parties. Accordingly, it is possible that new competitors or alliances among
competitors could emerge and rapidly acquire significant market share. There can
be no assurance that the Company will be able to compete successfully against
current and future competitors. Increased competition may result in price
reductions, reduced gross margins and loss of market share, any of which would
have a
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material adverse effect on the Company's business, financial condition and
results of operations. See "--Dependence on Growth of Outsourcing".
Dependence on Growth of Outsourcing. Traditionally, the Company's customers
have internally developed the key ASIC components for their network systems or
utilized programmable logic, such as field programmable gate arrays ("FPGAs"),
for system and network controllers. Recently, they have begun to outsource these
semiconductor devices as a result of intense time-to-market pressures, the
increasing technological complexity of network systems and development costs.
The Company's success depends in large part on increased acceptance of
outsourcing as an alternative to in-house development by these companies. Many
of the Company's current and potential customers have substantial technological
capabilities and financial resources. These customers may currently be
developing, or may in the future determine to develop or acquire, components or
technologies that are similar to or may be substituted for the Company's
products and, therefore, may discontinue purchases of the Company's products. If
such customers develop or acquire the technology to develop their own components
rather than purchase the Company's products, the Company's business, financial
condition and results of operations would be materially adversely affected.
Customer Concentration. To date, a small number of customers has accounted for
a majority of the Company's net sales. The Company expects that net sales to a
limited number of customers will continue to account for a significant
percentage of its net sales for the foreseeable future. In addition, a limited
number of large OEMs account for a majority of purchasers in the data
communications market, and the Company's success will be dependent upon its
ability to establish and maintain relationships with these customers. The
Company currently has purchase agreements with a few of its larger customers.
None of the Company's customer purchase agreements contains minimum purchase
requirements. Customers purchase the Company's products pursuant to short-term
purchase orders that may be canceled without charge if notice is given within an
agreed-upon period. The Company entered into agreements with certain of its
early, large customers with respect to specific products that granted such
customers preferential terms on which they may purchase such products. Certain
of these agreements include limited manufacturing and direct purchase rights
that allow the customers, under certain circumstances, to purchase the Company's
products directly from the Company's foundries or to manufacture (or have
manufactured) such products for their own use. Depending upon the customer,
certain agreements also include certain cancellation privileges, pricing
commitments, and agreements regarding product upgrades and enhancements and the
Company's inventory maintenance requirements. Currently, the Company is not
offering such preferential terms to those customers with respect to any other
products or to other customers with respect to any products, but these
agreements still apply to a significant percentage of the Company's net sales.
The loss of any one of the Company's major customers would have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's future success depends in significant part upon the
decision of the Company's current and prospective customers to continue to
purchase products from the Company. There is increasing consolidation within the
Company's customer base. Accordingly, there can be no assurance that the
Company's current customers will continue to place orders with the Company or
that the Company will be able to obtain orders from new customers. If orders by
current customers are canceled, decreased or delayed or the Company fails to
obtain significant orders from new customers, the Company's business, financial
condition and results of operations would be materially adversely affected.
Product Concentration; Broad Market Acceptance of Products. The Company
currently derives substantially all of its net sales from its system controllers
and switched Ethernet LAN controllers, and the Company expects that net sales
from these products will continue to account for a substantial portion of the
Company's net sales for the foreseeable future. The Company's future performance
will also depend in part on its ability to successfully develop, introduce and
market new and enhanced products at competitive prices, including the Company's
remote access WAN controllers. Broad market acceptance of these products is,
therefore, critical to the Company's future success. Factors that may affect the
market acceptance of the Company's products include the market acceptance of
network switching products, the price, functionality and availability of
competing products and technologies, and the success of the sales efforts of the
Company and its customers. There can be no assurance that the Company will be
able to develop products that will attain broad market acceptance. Failure of
the Company's products to achieve
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broad market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Dependence on TSMC; Manufacturing Risks. Substantially all of the Company's
semiconductor devices are manufactured, assembled and tested by TSMC and its
subcontractors. The Company intends to continue to rely on TSMC and its
subcontractors for substantially all of its manufacturing, assembly and testing
requirements for the foreseeable future. TSMC also manufactures products for
other companies. The Company does not have a long-term manufacturing agreement
with TSMC. Therefore, TSMC is not obligated to supply products to the Company
for any specific period, in any specific quantity or at any specific price,
except as may be provided in a particular purchase order that has been accepted
by TSMC. The Company's reliance on TSMC for the manufacture, assembly and
testing of its products involves a number of risks, including the possible
absence of adequate capacity as the Company expands, the unavailability of, or
interruption in access to, certain process technologies and reduced control over
delivery schedules, quality assurance, manufacturing yields and costs. The
Company has experienced delays and may in the future experience delays in
receiving semiconductor devices from TSMC, and there can be no assurance that
the Company will be able to obtain semiconductor devices within the time frames
and in the volumes required by the Company at an affordable cost or at all.
In the event that TSMC is unable or unwilling to continue to manufacture the
Company's key products in required volumes, the Company would be required to
qualify acceptable alternative foundries and such foundries would need time to
prepare for volume production. It could take six months or longer for another
foundry to commence volume production, and no assurance can be given that any
additional foundry would become available to the Company or that any additional
foundry would be able to provide products on a turnkey basis or would be in a
position to satisfy the Company's production requirements on a timely basis and
at acceptable price levels. The loss of TSMC as a supplier, the inability of the
Company in a period of increased demand for its products to obtain additional
foundry capacity from TSMC or other manufacturers, the inability of TSMC or
other manufacturers to maintain acceptable manufacturing yields, or any other
circumstances that would limit the Company's ability to obtain adequate supplies
of manufactured products, would delay shipments of the Company's products
significantly. A delay in shipments could cause cancellation of orders, damage
relationships with current and prospective customers or result in the loss of
customers. Any such event would have a material adverse effect on the Company's
business, financial condition and results of operations.
Increases in semiconductor demand may limit available foundry capacity
worldwide. The Company does not currently have a long-term manufacturing
agreement with TSMC and may not be able to obtain such an agreement on terms
favorable to the Company in the future. In the event increased worldwide
semiconductor demand limits available foundry capacity, the Company may not be
able to obtain sufficient allocation of manufacturing capacity to meet its
manufacturing needs. Allocation of a foundry's manufacturing capacity may be
influenced by a customer's size or the existence of a long-term agreement with
the foundry. To address foundry capacity constraints, other semiconductor
suppliers that rely on third-party foundries have utilized various arrangements,
including equity investments in or loans to independent component manufacturers,
in exchange for guaranteed production capacity, joint ventures to own and
operate foundries, or "take or pay" contracts that commit a company to purchase
specified quantities of components over extended periods. While the Company is
not currently a party to any such arrangements, it may determine to enter into
such arrangements in the future. There can be no assurance, however, that such
arrangements will be available to the Company on acceptable terms or at all. Any
such arrangements could require the Company to commit substantial capital. The
need to commit substantial capital could require the Company to obtain
additional debt or equity financing, which could result in dilution to the
Company's shareholders. There can be no assurance that such additional
financing, if required, would be available when needed or, if available, could
be obtained on terms acceptable to the Company.
The manufacture of the Company's products is a highly complex and precise
process, requiring production in a highly controlled environment. Changes in
TSMC's manufacturing processes or the inadvertent use of defective or
contaminated materials by TSMC could adversely affect TSMC's ability to
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achieve acceptable manufacturing yields and product reliability. To the extent
that TSMC does not achieve such yields or product reliability, the Company's
customer relationships, business, financial condition and results of operations
could be adversely affected.
The Company's products are assembled and tested by third-party subcontractors.
Such assembly and testing is conducted on a purchase order basis rather than
under a long-term agreement. As a result of its reliance on third-party
subcontractors to assemble and test its products, the Company cannot directly
control product delivery schedules, which could lead to product shortages or
quality assurance problems that could increase the costs of manufacturing or
assembly of the Company's products. Qualification of assembly and test
subcontractors normally requires a significant investment of time. If TSMC is
unable to provide the Company with its products on a turnkey basis or the
Company is otherwise required to find alternative subcontractors, product
shipments could be delayed significantly. Any problems associated with the
delivery, quality or cost of the assembly and testing of the Company's products
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "--Intense Competition."
Rapid Technological Change; Necessity to Develop and Introduce New Products.
The markets for the Company's products are characterized by rapidly changing
technologies, evolving and competing industry standards, changes in customer
needs, emerging competition, new product introductions and rapid product
obsolescence. The Company's future success will depend, in part, on its ability
to use leading technologies effectively, to continue to develop its technical
expertise, to maintain close working relationships with its key customers in
order to develop new products that meet changing customer needs, to advertise
and market its products and to influence and respond to changing industry
standards and other technological changes on a timely and cost-effective basis.
There can be no assurance that the Company will be successful in effectively
developing or using new technologies, developing new products or enhancing its
existing products on a timely basis, or that such new technologies or
enhancements will achieve market acceptance. The Company's pursuit of necessary
technological advances may require substantial time and expense, and there can
be no assurance that the Company will succeed in adapting its products or
business to alternate technologies. Failure of the Company, for technological or
other reasons, to develop and introduce new or enhanced products that are
compatible with industry standards and that satisfy customer price and
performance requirements would have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the Company's competitors may offer enhancements to existing
products, or offer new products based on new technologies, industry standards or
customer requirements, that have the potential to replace or provide lower cost
alternatives to the Company's products. The introduction of such enhancements or
new products by the Company's competitors could render the Company's existing
and future products obsolete, unmarketable or inoperable. There can be no
assurance that the Company will be able to develop new products to compete with
new technologies on a timely basis or in a cost-effective manner.
Transition to New Manufacturing Process Technologies. The Company's future
success depends upon its ability to develop products that utilize new
manufacturing process technologies. Manufacturing process technologies are
subject to rapid change, requiring large expenditures for research and
development. The Company continuously evaluates the benefits, on a product-by-
product basis, of migrating to smaller geometry process technologies in order to
reduce costs and has commenced migration of certain products to smaller geometry
processes. The Company believes that the transitioning of its products to
increasingly smaller geometries will be important for the Company to remain
competitive. Other companies in the industry have experienced difficulty in
migrating to new manufacturing processes and, consequently, have suffered
reduced yields, delays in product deliveries and increased expense levels.
Moreover, the Company is dependent on its relationship with TSMC to migrate to
smaller geometry processes successfully. No assurance can be given that the
Company's future process migrations will be achieved without similar
difficulties. The Company's business, financial condition and results of
operations could be materially adversely affected if any such transition is
substantially delayed or inefficiently implemented. See "--
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Dependence on TSMC; Manufacturing Risks" and "--Rapid Technological Change;
Necessity to Develop and Introduce New Products."
Product Complexity. Products as complex as those offered by the Company
frequently contain errors, defects and bugs when first introduced or as new
versions are released. The Company has experienced such errors, defects and bugs
in the past in connection with new products. Introductions by the Company of new
or enhanced products with reliability, quality or compatibility problems could
significantly delay or hinder market acceptance of such products, which could
adversely affect the Company's ability to retain its existing customers and to
attract new customers. Moreover, such errors, defects or bugs could cause
problems, interruptions, delays or cessation of service to the Company's
customers. Alleviating such problems could require significant expenditures of
capital and resources by the Company. There can be no assurance that, despite
testing by TSMC and its subcontractors, the Company or its customers, errors,
defects or bugs will not be found in new products after commencement of
commercial production, resulting in additional development costs, loss of, or
delays in, market acceptance, diversion of technical and other resources from
the Company's other development efforts, claims by the Company's customers or
others against the Company, or the loss of credibility with the Company's
current and prospective customers. Any such event would have a material adverse
effect on the Company's business, financial condition and results of operations.
Evolving Market for Data Communications Products and Network Switches. Demand
for the Company's products depends in large part on the development and
expansion of the data communications and networking markets and, in particular,
the overall demand for network switching products. These markets have in the
past and may in the future fluctuate significantly based on numerous factors,
including the lack of an industry connectivity standard, adoption of alternative
technologies, capital spending levels and general economic conditions. There can
be no assurance with respect to the rate or extent to which the data
communications and networking markets or the market for network switching
products will grow. There also can be no assurance that the Company will not
experience a decline in demand for its products, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Intense Competition" and "--Rapid Technological Change;
Necessity to Develop and Introduce New Products."
Dependence on OEMs. The Company's future success depends on OEMs' designing
the Company's products into their network systems. The Company must anticipate
market trends and the price, performance and functionality requirements of such
network system vendors and must successfully develop and manufacture products
that meet these requirements. In addition, the Company must meet the timing
requirements of such OEMs and must make products available to them in sufficient
quantities. The Company works closely with its customers to determine customers'
future product needs and receives a rolling forecast from customers for
products. The Company has incurred and expects to continue to incur expenses
based upon these sales forecasts. The Company's customer purchase agreements
contain no minimum purchase requirements. Customers purchase the Company's
products pursuant to short-term purchase orders that may be canceled without
charge if notice is given within an agreed-upon period. Therefore, there can be
no assurance that the actual net sales which the Company will receive will be
commensurate with the level of expenses that the Company will incur based on
forecasts it receives from its customers in any future period. The Company
believes that its success in broadly penetrating markets for its products also
depends on its ability to maintain and cultivate relationships with OEMs that
are leaders in the data communications and networking markets. Accordingly, in
selling to OEMs, the Company can often incur significant expenditures prior to
volume sales of new products. The inability of the Company to develop
relationships with additional OEMs and have its products designed into new
network systems developed by existing and potential OEM customers would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Ability to Manage Growth and Expansion. The Company has recently experienced
significant growth. The management of any future growth will require continued
expansion and refinement of the Company's management, administration and control
systems as well as a significant increase in the Company's
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development, testing, quality control, marketing, logistics and service
capabilities, any of which could place a significant strain on the Company's
resources, particularly in light of the fact that the Company has operations in
both California and Israel. Avigdor Willenz, the Company's founder and Chief
Executive Officer, and Manuel Alba, the President of GTI, have had no prior
experience managing a large or public company and have only limited experience
managing a rapidly growing business organization. In addition, other members of
the Company's senior management have only recently joined the Company. If the
Company's management is unable to manage growth effectively, maintain the
quality and marketability of the Company's products and retain key personnel,
the Company's business, financial condition and results of operations could be
materially adversely affected. Failure to integrate new personnel on a timely
basis could have an adverse effect on the Company. Furthermore, expenses
associated with expanding the Company's management team, implementing additional
administrative and financial controls, and hiring new employees may be incurred
independently of the generation of any associated sales.
Dependence on Third-Party Distribution. The Company sells its products to
customers primarily through distributors and manufacturers' representatives. The
Company's relationships with many of its distributors and manufacturers'
representatives have been established within the last year, and the Company is
unable to predict the extent to which some of these distributors and
manufacturers' representatives will be successful in marketing and selling the
Company's products. Moreover, many of its distributors also market and sell
competing products. Manufacturers' representatives and distributors may
terminate their relationships with the Company at any time. The Company's future
performance will also depend, in part, on its ability to attract additional
distributors or manufacturers' representatives that will be able to market and
support the Company's products effectively, especially in markets in which the
Company has not previously distributed its products. There can be no assurance
that the Company will retain its current distributors or manufacturers'
representatives or that it will be able to recruit additional or replacement
distributors or manufacturers' representatives. The loss of one or more of the
Company's distributors or manufacturers' representatives could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company generally realizes a higher gross margin on direct sales
and from sales through manufacturers' representatives than on sales through
distributors. Accordingly, if the Company's distributors were to account for an
increased portion of the Company's net sales, its gross margin would decline.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Backlog; Cancelable Customer Orders. The Company's backlog is subject to
fluctuations and is not necessarily indicative of future sales. Customers
purchase the Company's products pursuant to short-term purchase orders that may
be canceled without charge if notice is given within an agreed-upon period.
Cancellations of or reductions in pending purchase orders could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's design wins are solely an expression of interest by
potential customers in purchasing the Company's products and are not supported
by binding commitments of any nature. Therefore, there can be no assurance that
any design win will result in purchase orders for the Company's products.
Reasons that a design win may not result in a purchase order may include product
development delays, pricing issues, availability of competing products,
inability to deliver products in volume, technological obsolescence, changes in
market needs or preferences, changing standards and changes in customer product
lines. The inability of the Company to convert design wins into purchase orders
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Dependence on Key Personnel. The Company's future performance depends, in
significant part, upon the continued service of Avigdor Willenz, the Company's
founder and Chief Executive Officer, and Manuel Alba, President of GTI, as well
as other key technical, sales and management personnel. Several members of the
Company's senior management have only recently joined the Company. The Company
does not have employment agreements with or any life insurance on any of these
individuals. The loss of the services of one or more of the Company's key
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company's
future success depends on its continuing ability to attract and retain highly
qualified technical, sales and management personnel.
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Competition for such personnel in both the United States and Israel is intense,
and there can be no assurance that the Company will be able to attract and
retain key technical, sales and management personnel in the future. If the
Company cannot retain or is unable to hire such key personnel, the Company's
business, financial condition and results of operations could be materially
adversely affected.
Limited Protection of Intellectual Property and Proprietary Rights. The
Company's future success and ability to compete are dependent, in part, upon its
proprietary technology. The Company relies in part on patent, trade secret,
trademark and copyright law to protect its intellectual property. The Company
has approximately 10 patent applications pending in the United States and
approximately 10 patent applications pending in Israel relating to certain
aspects of its technologies. There can be no assurance that any patents will
issue pursuant to the Company's current or future patent applications or that
patents issued pursuant to such applications will not be invalidated,
circumvented, challenged or licensed to others. In addition, there can be no
assurance that the rights granted under any such patents will provide
competitive advantages to the Company. There can be no assurance that any
patents issued to the Company will be adequate to safeguard and maintain the
Company's proprietary rights, to deter misappropriation or to prevent an
unauthorized third party from copying the Company's technology, designing around
the patents owned by the Company or otherwise obtaining and using the Company's
products, designs or other information. In addition, there can be no assurance
that others will not develop technologies that are similar or superior to the
Company's technology.
The Company also relies on confidentiality agreements to protect its
proprietary rights. It is the Company's policy to require employees and
consultants and, when possible, suppliers to execute confidentiality agreements
upon the commencement of their relationships with the Company. There can be no
assurance that the Company's efforts to protect its proprietary rights will be
adequate. Litigation may be necessary to enforce the Company's intellectual
property rights and to protect the Company's trade secrets, and there can be no
assurance that such efforts will be successful. The Company's inability to
protect its proprietary rights effectively would have a material adverse effect
on the Company's business, financial condition and results of operations.
Many participants in the semiconductor and data communications industries have
a significant number of patents and have frequently demonstrated a readiness to
commence litigation based on allegations of patent and other intellectual
property infringement. Although the Company is not aware of any claim of
infringement or misappropriation against the Company, there can be no assurance
that third parties will not assert such claims in the future with respect to the
Company's current or future products. The Company expects that companies will
increasingly be subject to infringement claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Responding to such claims,
regardless of merit, could cause product shipment delays or require the Company
to enter into royalty or licensing arrangements. Any such claims could also lead
to time-consuming, protracted and costly litigation that would require
significant expenditures of time, capital and other resources by the Company and
its management. Moreover, no assurance can be given that any necessary royalty
or licensing agreement will be available or that, if available, such agreement
could be obtained on commercially reasonable terms.
Cyclicality of Semiconductor Industry. The semiconductor industry has
historically been characterized by wide fluctuations in product manufacturing,
assembly and testing, supply and demand. From time to time, the industry has
also experienced significant downturns, often in connection with, or in
anticipation of, declines in general economic conditions. These downturns have
been characterized by diminished product demand, production overcapacity and
accelerated erosion of unit ASPs. Industry-wide fluctuations in the future could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Impact of the Year 2000. Some of the Company's older computer programs were
written using two digits rather than four to define the applicable year. As a
result, those computer programs have time-sensitive software that recognize a
date using "00" as the year 1900 rather than the year 2000. This could cause a
system failure or miscalculations causing disruptions of operations, including,
among other things, a
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temporary inability to process transactions or engage in normal business
activities. The Company has determined that it has no exposure to contingencies
related to the Year 2000 issue for the products it has sold. In 1998, the
Company initiated a project to modify or replace portions of its systems so that
its computer system will function properly with respect to dates in the year
2000 and thereafter. The Company expects this project to be substantially
complete in 1999 and does not expect to incur material costs on this project. In
addition, the Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company may be vulnerable to those third parties' failure to remediate their own
Year 2000 issues. Despite these efforts, there can be no assurance that the
Company will not encounter unforeseen problems in its own computer systems, or
that the systems of other companies on which the Company's operations rely will
be upgraded or replaced in a timely manner. Such unforeseen problems in the
Company's systems, or failures to address this issue by other companies could
have an adverse effect on the Company's operations.
RISKS RELATING TO OPERATIONS IN ISRAEL
Operations in Israel. The Company is incorporated under the laws of, and its
principal offices are located in, the State of Israel. Further, a significant
portion of its sales is derived from sales to customers in Israel. Thus, the
Company is directly influenced by the political, economic and military
conditions affecting Israel. Accordingly, any major hostilities involving
Israel, the interruption or curtailment of trade between Israel and its present
trading partners or a significant downturn in the economic or financial
condition of Israel could have a material adverse effect on the Company's
business, financial condition and results of operations. Despite some progress
toward peace between Israel and its Arab neighbors, there remain a number of
countries that restrict business with Israel or Israeli companies. There can be
no assurance that restrictive laws or policies toward Israel or Israeli
businesses will not have an adverse effect on the expansion of the Company's
business.
Inflation and Currency Fluctuations. Because most of the Company's net sales
are generated in U.S. dollars, and a substantial portion of the Company's
operating expenses are incurred in NIS, the Company is exposed to risk to the
extent that the rate of inflation in Israel exceeds the rate of devaluation of
the NIS in relation to the U.S. dollar or the timing of such devaluation lags
behind inflation in Israel. In recent years, the rate of inflation in Israel
exceeded the rate of devaluation of the U.S. dollar against the NIS. As a
result, the Company experienced increases in the cost of its operations in
dollar terms, relating primarily to the cost of salaries in Israel that are paid
in NIS partially linked to the consumer price index ("CPI") in Israel. Likewise,
the Company's operations could be adversely affected if it is unable to guard
against currency fluctuations in the future. In the future, the Company may
enter into currency hedging transactions to decrease the risk of financial
exposure from fluctuations in the exchange rate of the dollar against the NIS;
however, no assurance can be given that such measures will adequately protect
the Company from material adverse effects due to the impact of inflation in
Israel. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Dependence on Tax Benefits. The Company receives certain tax benefits through
operating in Israel, particularly as a result of the "Approved Enterprise"
status of most of the Company's existing facilities. To be eligible for these
tax benefits, the Company must continue to meet certain conditions, including
making certain specified investments in fixed assets in Israel. The Company
believes that it is in compliance with all applicable conditions. If the Company
fails to meet such conditions in the future, the tax benefits could be canceled
and the Company would be required to refund the tax benefits already received
with the addition of the Israeli CPI linkage adjustment and interest. There can
be no assurance that these tax benefits will be continued in the future at their
current levels or at any level. Israeli authorities have indicated that the
government may reduce or eliminate these benefits in the future. The termination
or reduction of certain tax benefits would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
may, from time to time, submit requests for expansion of its Approved Enterprise
programs or for new programs. No assurance can be given that any such requests
will be approved. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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Difficulty of Effecting Service of Process and Enforcement of Judgments on
Directors, Officers and Experts in Israel. The Company is incorporated under the
laws of the State of Israel, and certain of its officers and directors and
certain experts named herein reside outside of the United States. Service of
process upon individuals or firms that are not resident in the United States may
be difficult to obtain within the United States. Furthermore, since
substantially all of the Company's and such persons' assets are outside the
United States, any judgment obtained in the United States against the Company or
such persons may not be collectible within the United States.
The Company has been informed by its legal counsel in Israel, Primes, Shiloh,
Givon & Co., that there is doubt as to the enforceability of civil liabilities
under the Securities Act of 1933, as amended (the "Securities Act"), or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), in original
actions instituted in Israel. However, subject to certain time limitations, an
Israeli court may declare a foreign civil judgment enforceable if it finds that
(i) the judgment was rendered by a court which was, according to the laws of the
state of the court, competent to render the judgment, (ii) the judgment is no
longer appealable, (iii) the obligation imposed by the judgment is enforceable
according to the rules relating to the enforceability of judgments in Israel and
the substance of the judgment is not contrary to public policy and (iv) the
judgment is executory in the state in which it was given. A foreign judgment
will not be declared enforceable if it was given in a state whose laws do not
provide for the enforcement of judgments of Israeli courts (subject to
exceptional cases) or if its enforcement is likely to prejudice the sovereignty
or security of the State of Israel. An Israeli court also will not declare a
foreign judgment enforceable if it is proved to the Israeli court that (i) the
judgment was obtained by fraud, (ii) there was no due process, as resolved by
the Israeli court at its discretion, (iii) the judgment was rendered by a court
not competent to render it according to the laws of private international law in
Israel, (iv) the judgment is at variance with another judgment that was given in
the same matter between the same parties and that is still valid or (v) at the
time the action was brought in the foreign court, a suit in the same matter and
between the same parties was pending before a court or tribunal in Israel.
A specific permit from the Controller of Foreign Currency of the Bank of
Israel is required before transferring out of Israel the proceeds of a foreign
judgment enforced in Israel. The usual practice in an action to recover an
amount in foreign currency is for the Israeli court to award a judgment for the
equivalent in Israeli currency at the rate of exchange on the date thereof.
Under existing law, a foreign judgment payable in foreign currency may be paid
in Israeli currency at the rate of exchange on the date of payment, but the
judgment debtor may also make payment in foreign currency if the Israeli
exchange control regulations then in effect permit such foreign currency
payment. Pending collection, the amount of the judgment of an Israeli court
stated in Israeli currency will ordinarily be linked to the Israeli CPI.
Judgment creditors must bear the risk that they will be unable to convert their
award into foreign currency that can be transferred out of Israel. All judgment
creditors must bear the risk of unfavorable exchange rates.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. EXHIBITS
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------- -----------------------
1 July 23, 1998 Press Release: "Galileo Technology Ltd. Reports Second
Quarter 1998 Results."
27.1 Financial Data Schedule (Six months ended June 30, 1998)
27.2 Financial Data Schedule (Six months ended June 30, 1997)
21
<PAGE>
SIGNATURES
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.
GALILEO TECHNOLOGY LTD.
August 18, 1998 By: George A. Hervey
----------------
George A. Hervey, Sr. Vice President of Finance
and Chief Financial Officer
22
<PAGE>
EXHIBIT 1
FOR MORE INFORMATION CONTACT
George A. Hervey
Sr. VP Finance & CFO
(408) 367-1400 x228
Galileo Website Location: http://www.galileot.com
FOR IMMEDIATE RELEASE
- ---------------------
GALILEO TECHNOLOGY LTD. REPORTS
SECOND QUARTER 1998 RESULTS
San Jose, CA -- July 23, 1998 -- Galileo Technology Ltd. (Nasdaq: GALTF)
today reported net sales for the second quarter of 1998 increased 35% to $11.4
million, compared to $8.4 million for the second quarter of 1997. Net income for
the quarter increased to $3.1 million, or $0.15 per share, an increase of 38%,
compared to net income of $2.3 million, or $0.13 per share, for the
corresponding quarter last year. All per share amounts are diluted earnings per
share.
Net sales for the first six months of 1998 were $26.5 million, as compared
to $12.8 million for the first six months of 1997. Net income for the first six
months of 1998 was $8.4 million or $0.39 per share, as compared to net income of
$2.7 million or $0.16 per share, for the first six months of 1997. Diluted
shares used in computing earnings per share for the first three and six months
of 1998 were 21.2 million, compared to 17.5 million shares for the first three
and six months of 1997.
"Q2 was a difficult quarter for Galileo Technology, as we dealt with the
declining demand in the 10Mbps Ethernet market and began transitioning customers
to our new products," stated Avigdor Willenz, Galileo's Chairman and CEO. "While
our revenue decline in Q2 is disappointing, we were successful in achieving the
revised revenue target that we indicated in our June 5, 1998 press release.
Entering Q3 we are faced with many of the same challenges we encountered in Q2
and therefore anticipate another quarter of transition. Our recently introduced
GalNet-II(TM) architecture and the initial products in that family have been
very well received by our customers. These products will begin shipping in late
Q3 and contributing to our revenue growth in Q4 1998."
Manuel Alba, President of Galileo stated, "Our new GalNet-II(TM) Family of
devices provide solutions for nearly all classes of Ethernet switching products.
Customer response has been positive with a significant number of design wins for
these new products."
1
<PAGE>
ABOUT GALILEO TECHNOLOGY LTD.
Galileo Technology Ltd., defines, develops and markets advanced digital
semiconductor devices that perform critical functions for network systems.
Galileo's Datacom Systems on Silicon(TM) are designed to simplify design
efforts, reduce development risks and costs, and substantially improve time-to-
market for OEM's in the data communications equipment market. The company's
product lines - system controllers, switched Ethernet LAN controllers and remote
access WAN controllers - provide three of the key functionalities of data
communications systems. Galileo Technology Ltd., founded in Karmiel, Israel,
began operations in early 1993, and opened its business operations, Galileo
Technology, Inc., in San Jose, California, in early 1994. Galileo employs more
than 120 employees worldwide.
###
Any forward-looking statements contained in this document reflect
management's current intentions and expectations. Actual future results could
vary materially depending on certain risks and uncertainties, including
dependence on new product development, customer acceptance and competition and
other risk factors listed in the company's most recent report on form 20-F on
file with the SEC.
2
<PAGE>
GALILEO TECHNOLOGY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------------------- ------------------
<S> <C> <C> <C> <C> <C>
Net sales $11,359 $ 8,423 $26,498 $12,824
Cost of sales 4,355 3,227 9,958 4,976
--------------------- -----------------
Gross profit 7,004 5,196 16,540 7,848
Operating expenses:
Research and development 2,577 1,331 5,204 2,499
Selling, marketing and administrative 2,248 1,620 4,723 2,662
--------------------- -----------------
Total operating expenses 4,825 2,951 9,927 5,161
--------------------- -----------------
Operating income 2,179 2,245 6,613 2,687
Other income, net 1,095 18 2,122 63
--------------------- -----------------
Income before provision for income taxes 3,274 2,263 8,735 2,750
Provision for income taxes 165 2 385 4
--------------------- -----------------
Net income $ 3,109 $ 2,261 $ 8,350 $ 2,746
--------------------- -----------------
Earnings per share:
Basic $ 0.15 $ 0.18 $ 0.41 $ 0.22
--------------------- -----------------
Diluted $ 0.15 $ 0.13 $ 0.39 $ 0.16
--------------------- -----------------
Shares used in computing earnings per share:
Basic 20,406 12,266 20,357 12,263
--------------------- -----------------
Diluted 21,226 17,482 21,245 17,485
--------------------- -----------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
GALILEO TECHNOLOGY LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars, in thousands)
JUNE 30, DECEMBER 31,
1998 1997
-------------------- -------------------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and short-term investments $80,235 $71,236
Accounts receivable 5,672 4,566
Inventories 3,469 2,387
Prepaid expenses and other 1,297 1,336
------- -------
Total current assets 90,673 79,525
Property and equipment, net 3,750 2,967
------- -------
Total $94,423 $82,492
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,003 $ 2,932
Accrued and other liabilities 4,483 4,979
Deferred income 1,249 1,014
Current maturities of long-term debt 158 228
------- -------
Total current liabilities 10,893 9,153
Accrued severance pay 244 210
Long-term debt 60 131
Total shareholders' equity 83,226 72,998
------- -------
Total $94,423 $82,492
======= =======
</TABLE>
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 6-K OF GALILEO TECHNOLOGY
LTD. FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 41,514
<SECURITIES> 38,721
<RECEIVABLES> 5,898
<ALLOWANCES> 226
<INVENTORY> 3,469
<CURRENT-ASSETS> 90,673
<PP&E> 5,854
<DEPRECIATION> 2,104
<TOTAL-ASSETS> 94,423
<CURRENT-LIABILITIES> 10,893
<BONDS> 60
0
0
<COMMON> 69,114
<OTHER-SE> (1,298)
<TOTAL-LIABILITY-AND-EQUITY> 94,423
<SALES> 26,498
<TOTAL-REVENUES> 26,498
<CGS> 9,958
<TOTAL-COSTS> 9,958
<OTHER-EXPENSES> 5,204
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 110
<INCOME-PRETAX> 8,735
<INCOME-TAX> 385
<INCOME-CONTINUING> 8,350
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,350
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.39
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 6-K OF GALILEO TECHNOLOGY
LTD. FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,431
<SECURITIES> 3,000
<RECEIVABLES> 4,345
<ALLOWANCES> 77
<INVENTORY> 1,984
<CURRENT-ASSETS> 17,469
<PP&E> 2,652
<DEPRECIATION> 843
<TOTAL-ASSETS> 19,278
<CURRENT-LIABILITIES> 6,979
<BONDS> 215
0
9,173
<COMMON> 5,165
<OTHER-SE> (2,354)
<TOTAL-LIABILITY-AND-EQUITY> 19,278
<SALES> 12,824
<TOTAL-REVENUES> 12,824
<CGS> 4,976
<TOTAL-COSTS> 4,976
<OTHER-EXPENSES> 2,499
<LOSS-PROVISION> 59
<INTEREST-EXPENSE> 100
<INCOME-PRETAX> 2,750
<INCOME-TAX> 4
<INCOME-CONTINUING> 2,746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,746
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.16
</TABLE>
