<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 May 1999
(containing quarterly information for the quarter ended March 31, 1999)
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
------------ ------------
<PAGE>
GALILEO TECHNOLOGY LTD.
FORM 6-K
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations
Three months ended March 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Exhibits - Exhibit Index
Signatures
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GALILEO TECHNOLOGY LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars, in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------------------------
(Unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 37,086 $45,607
Short-term investments 53,352 40,838
Accounts receivable, net 5,697 5,207
Inventories 2,634 2,851
Prepaid expenses and other assets 1,870 1,745
------------------------------------
Total current assets 100,639 96,248
Other assets 1,886 1,857
Property and equipment, net 4,974 4,816
------------------------------------
Total assets $107,499 $102,921
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,776 $ 4,826
Accrued and other liabilities 5,151 6,078
Deferred income 898 771
Short-term debt and current maturities of 92 128
long-term debt
------------------------------------
Total current liabilities 10,917 11,803
Accrued severance pay 287 283
Long-term debt - 6
Other liabilities 1,049 1,030
Commitments
Shareholders' equity:
Ordinary Shares 70,425 70,148
Treasury Shares at cost (1,012) (1,451)
Deferred compensation (814) (941)
Accumulated other comprehensive income 151 155
Retained earnings 26,496 21,888
------------------------------------
Total shareholders' equity 95,246 89,799
------------------------------------
Total liabilities and shareholders' equity $107,499 $102,921
====================================
</TABLE>
See accompanying notes.
(1) The balance sheet at December 31, 1998 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.
2
<PAGE>
GALILEO TECHNOLOGY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars, in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
March 31, March 31,
1999 1998
------------------------------------
<S> <C> <C>
Net sales $15,152 $15,139
Cost of sales 5,447 5,603
------------------------------------
Gross profit 9,705 9,536
Operating expenses:
Research and development 3,285 2,627
Selling, marketing and administrative 2,411 2,475
------------------------------------
Total operating expenses 5,696 5,102
------------------------------------
Operating income 4,009 4,434
Other income, net 1,216 1,027
------------------------------------
Income before provision for income taxes 5,225 5,461
Provision for income taxes 260 220
------------------------------------
Net income $ 4,965 $ 5,241
====================================
Earnings per share:
Basic $ 0.24 $ 0.26
====================================
Diluted $ 0.23 $ 0.25
====================================
Shares used in computing earnings per share:
Basic 20,347 20,307
====================================
Diluted 22,043 21,264
====================================
</TABLE>
See accompanying notes.
3
<PAGE>
GALILEO TECHNOLOGY LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(U.S. dollars, in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 31, March 31,
1999 1998
---------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,965 $ 5,241
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and other 568 342
Amortization of deferred compensation 127 154
Deferred income taxes - 235
Changes in operating assets and liabilities:
Accounts receivable (490) (667)
Inventories 217 (234)
Prepaid expenses and other assets (125) 364
Accounts payable (50) 1,360
Accrued and other liabilities (927) (102)
Deferred income 127 424
Accrued severance pay and other liabilities 23 6
---------------------------------
Net cash provided by operating activities 4,435 7,123
Cash flows from investing activities
Purchases of short-term investments (19,179) (15,537)
Proceeds from short-term investments 6,661 9,006
Purchases of property and equipment (726) (801)
Other assets (29) -
---------------------------------
Net cash used in investing activities (13,273) (7,332)
Cash flows from financing activities
Proceeds from issuance of Ordinary Shares 359 1,576
Repayment of short-term loans (36) (51)
Repayment of long-term debt (6) (49)
---------------------------------
Net cash provided by financing activities 317 1,476
Net increase (decrease) in cash and cash equivalents (8,521) 1,267
Cash and cash equivalents at beginning of period 45,607 43,887
---------------------------------
Cash and cash equivalents at end of period $ 37,086 $ 45,154
=================================
</TABLE>
See accompanying notes.
4
<PAGE>
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 March 31, 1999 and December 31,
1998, 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,
1998, which were filed with the Securities and Exchange Commission on Form 20-F.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the future
quarters or the year ending December 31, 1999.
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
-----------------------------
March 31,
1999 1998
-----------------------------
<S> <C> <C>
Numerator used for both basic and diluted
earnings per share net income $ 4,965 $ 5,241
=============================
Denominator for basic earnings per share:
Weighted average shares 20,347 20,307
=============================
Denominator for diluted earnings per share:
Denominator for basic earnings per share 20,347 20,307
Effect of dilutive securities -
Employee share options 1,696 957
-----------------------------
22,043 21,264
=============================
Earnings per share:
Basic $ 0.24 $ 0.26
=============================
Diluted $ 0.23 $ 0.25
=============================
Potentially dilutive securities excluded from
computations as the effect would be
antidilutive 12 25
=============================
</TABLE>
5
<PAGE>
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. Comprehensive Income
Total comprehensive income for the three months ended March 31, 1999 and
1998 was $4,961,000 and $5,230,000, respectively. Other comprehensive income
represents net unrealized gain (loss) on available-for-sale investments.
5. Segment Information
The Company and its subsidiaries operate in one segment, principally the
definition, development and marketing of semiconductor devices for the data
communication market. Operations in Israel include research and development and
production contracting. Operations in the U.S. include marketing and sales.
6. New Accounting Standards
Effective January 1, 1999, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed for or Obtained for
Internal Use" (the "SOP"). The SOP requires the capitalization of certain costs
incurred in connection with developing or obtaining software for internal use.
The Company previously expensed such costs as incurred. The adoption of the new
SOP does not have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is required to be
adopted in years beginning after June 15, 1999. Because of the Company's minimal
use of derivatives, the Company does not anticipate that the adoption of SFAS
133 will have a significant effect on the Company's consolidated results of
operations or financial position.
6
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information should be read in conjunction with the condensed
consolidated interim financial statements and the notes thereto in Part I, Item
1 of this quarterly report and with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Annual
Report on Form 20-F for the year ended December 31, 998.
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 defines, develops and markets advanced digital semiconductor devices
that perform critical functions for network systems, including LANs, WANs, and
the Internet. 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.
Galileo's highly integrated "datacom systems on silicon" simplify the designs,
reduce development risks and costs, and substantially improve time-to-market for
manufacturers of data communications equipment. The Company's product lines --
system controllers, switched Ethernet controllers, and communications
controllers -- provide three of the key technologies needed in communications
systems. Galileo Technology Ltd. is an international company with its
headquarters in Moshav Manof, Israel and its business headquarters, Galileo
Technology, Inc. ("GTI"), in San Jose, California.
7
<PAGE>
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
March 31,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Net sales 100% 100%
Cost of sales 35.9 37.0
-----------------------------
Gross profit 64.1 63.0
Operating expenses:
Research and development 21.7 17.4
Selling, marketing and administrative 15.9 16.3
-----------------------------
Total operating expenses 37.6 33.7
Operating income 26.5 29.3
Other income, net 8.0 6.8
-----------------------------
Income before provision for income taxes 34.5 36.1
Provision for income taxes 1.7 1.5
-----------------------------
Net income 32.8% 34.6%
=============================
</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 $15.2 million for the three months ended March 31, 1999 from $15.1 million
for the three months ended March 31, 1998. The Company experienced unit sales
growth for both its system controllers and switched Ethernet LAN controllers for
the three months ended March 31, 1999 as compared to the three months ended
March 31, 1998. However, the increase in unit shipments was mostly offset by a
decrease in the Company's average selling price ("ASP") per unit.
One customer accounted for approximately 25% of the Company's net sales for
the three months ended March 31, 1999. 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 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 decreased to $5.4 million for the three months ended March 31, 1999
from $5.6 million for the three months ended March 31, 1998.
The gross margin on net sales for the three months ended March 31, 1999
increased to 64.1% from 63.0% for the three months ended March 31, 1998. The
Company has experienced an overall decline in both its product's ASPs and its
product's overall manufacturing costs in the three months ended March 31, 1999
as compared to the three months ended March 31, 1998. The impact of the lower
manufacturing costs
8
<PAGE>
of the Company's products more than offset the lower ASPs resulting in an
increase in the gross margin for the three months ended March 31, 1999 as
compared to the three months ended March 31, 1998.
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 subcontracting costs. Research
and development expenses for the three months ended March 31, 1999 increased to
$3.3 million from $2.6 million for the three months ended March 31, 1998. As a
percentage of net sales, research and development expenses were 21.7% and 17.4%
for the three months ended March 31, 1999 and 1998, respectively. The increase
in research and development expenses in absolute dollars and as a percentage of
net sales reflects the addition of personnel and an 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
were $2.4 million for the three months ended March 31, 1999 and $2.5 million for
the three months ended March 31, 1998. As a percentage of net sales, selling,
marketing and administrative expenses were 15.9% and 16.3% for the three months
ended March 31, 1999 and 1998, respectively. The decrease in expense for the
three months ended March 31, 1999 as compared to the three months ended March
31, 1998 was primarily due to a decrease in marketing costs and sales
commissions partially offset by an increase in personnel. The Company
anticipates that sales, marketing and administrative expenses will increase in
absolute dollars.
Other Income, Net. Other income, net increased to $1.2 million for the three
months ended March 31, 1999 from $1.0 million for the three months ended March
31, 1998. The increase was primarily due to increased interest income from
higher average cash and short-term investment balances as a result of cash
generated from operations.
Provision for Income Taxes. The provision for income taxes for the three
months ended March 31, 1999 and 1998 primarily consisted of the Company's United
States income tax expense.
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 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.
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 $90.4 million at
March 31, 1999. The Company generated net cash from operations of $4.4 million
for the three months ended March 31, 1999.
9
<PAGE>
Net cash from operations for the three months ended March 31, 1999 consisted
primarily of net income plus depreciation offset by an increase in accounts
receivable and a decrease in accrued and other liabilities. Investing activities
for the three months ended March 31, 1999, other than purchases and proceeds
from short-term investments and other assets, reflected purchases of property
and equipment of $0.7 million. Continued expansion of the Company's business may
require higher levels of capital equipment purchases. Financing activities
provided cash of $0.3 million primarily from the issuance of Ordinary Shares
pursuant to option exercises.
At March 31, 1999, the Company had $89.7 million in working capital. The
Company's principal sources of liquidity at March 31, 1999 consisted of
approximately $90.4 million in cash, cash equivalents and short-term
investments. The Company believes that its existing cash, cash equivalents and
short-term investments, together with any cash flow generated from its
operations, will be sufficient to satisfy its working capital and capital
expenditure requirements for at least the next 12 months.
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.
Impact of Year 2000
The "Year 2000" issue results from the use in computer hardware and software
of two digits rather than four digits to define the applicable year. When
computer systems must process dates both before and after January 1, 2000, two-
digit year "fields" may create processing ambiguities that can cause errors and
system failures. The results of these errors may range from minor undetected
errors to complete shutdown of an affected system. These errors or failures may
have limited effects, or the effects may be widespread, depending on the
computer chip, system or software, and its location and function. The effects of
the Year 2000 problem are exacerbated because of the interdependence of computer
and telecommunications systems in the United States and throughout the world.
Because of this interdependence, the failure of one system may lead to the
failure of many other systems even though the other systems are themselves "Year
2000 compliant."
The Company relies heavily on information technology ("IT") systems and
other systems and facilities such as telephones, building access control systems
and heating and ventilation equipment ("non-IT) systems. If the Company's or
significant third parties' IT and/or non-IT systems do not adequately or
accurately process or manage day or date information beyond the year 1999, there
could be a material adverse impact on the Company's operations. To address the
issue, the Company has assembled a Year 2000 cross-functional project team. The
Year 2000 project team has developed a phased approach to identifying and
remediating Year 2000 issues, with many of these phases overlapping with one
another or conducted simultaneously. The Company is also working with its
significant third party suppliers of products and systems to assure that the
products and systems supplied to the Company, and the products the Company
supplies to its customers, are Year 2000 compliant.
The Year 2000 project consists of four main phases. The first phase involves
an internal assessment of the Company's IT and non-IT systems to identify any
potentially non-compliant Year 2000 systems. Additionally, the Company is
conducting inquiries of its significant third party vendors to assess their Year
2000 readiness. The Company has substantially completed its internal assessment
of its IT and non-IT systems. The Company believes it will fully complete its
internal assessment phase by June 1999. The Company has inquired of
substantially all of its significant third party vendors in regards to their
Year 2000 readiness. The Company is still in the process of receiving responses
from its third party vendors and
10
<PAGE>
assessing such responses. The Company also expects to fully complete the
assessment of its significant third party vendors by June 1999.
The second phase of the Year 2000 project is to remediate any of the
Company's IT and/or non-IT systems that are determined not to be Year 2000
compliant. The Company has successfully upgraded all identified non-compliant
systems to date. Based on the internal assessment phase completed to date the
Company does not expect any significant remediation of its internal IT and non-
IT systems. To the extent the Company further identifies any non-compliant
systems while performing its remaining assessment phase the Company intends on
either replacing or upgrading such systems.
The third phase of the Year 2000 project is to test all assessed internal IT
and non-IT systems. Such testing will include present and forward date testing
which will simulate dates in the Year 2000. The Company is in the early stage of
this phase and believes it will complete this phase by September 1999.
The fourth phase is to develop contingency/recovery plans aimed at ensuring
the continuity of critical business functions before and after December 31,
1999. As part of that process, the Company has begun to develop reasonably
likely failure scenarios for its critical IT and non-IT systems and external
relationships. Once these scenarios are identified, the Company will develop
plans that are designed to reduce the impact on the Company, and provide methods
of returning to normal operations, if one or more of those scenarios occur. The
Company expects its contingency/recovery planning to be substantially completed
by September 1999. There can be no assurance that any such plans will fully
mitigate any such failures or problems or mitigate such failures or problems at
all.
The Impact of Year 2000 issues on the Company will depend not only on the
review and corrective actions that the Company takes, but also on the way in
which Year 2000 issues are addressed by governmental agencies, business and
other third parties, including the Company's significant vendors and customers,
that provide services or data to, or receive services, data or product from, the
Company, or whose financial condition or operational capability is important to
the Company. As discussed above, to reduce this exposure, the Company is
engaging in an ongoing process of identifying and contacting mission-critical
third party vendors to determine their Year 2000 plans and target dates to
ensure Year 2000 compliance. Notwithstanding the Company's efforts, there can be
no assurance that the Company, mission-critical third party vendors or other
significant third parties will adequately address their Year 2000 issues.
The extent and magnitude of the Year 2000 problem as it will affect the
Company, both before and for some period after January 1, 2000, are difficult to
predict or quantify for a number of reasons. Among the most important are lack
of control over systems that are used by third parties who are critical to the
Company's operation, including the Company's significant customers and vendors,
dependence on third party software vendors to deliver Year 2000 upgrades in a
timely manner, and the uncertainty surrounding how others will deal with
liability issues raised by Year 2000 related failures. Therefore it is very
difficult for the Company to assess the most reasonably likely worst case
scenario in the event that any Year 2000 problems arise.
The Company believes that its Year 2000 compliance project will be completed
on a timely basis, and in advance of the Year 2000 date transition and will not
have a material adverse effect on the Company's financial condition. To date the
Company's costs related to its Year 2000 compliance project have amounted to
approximately $2,000, and based on the results of its assessment phase completed
to date the Company does not expect the aggregate amount spent on this project
to exceed $25,000. However, there can be no assurance that unexpected delays or
problems, including the failure to ensure Year 2000 compliance by systems or
products supplied to the Company by a third party, will not have an adverse
effect on the Company, its financial performance, or the competitiveness or
customer acceptance of its products. Further, the Company's current
understanding of expected costs is subject to change as the project progresses
and does not include potential costs related to actual customer claims.
11
<PAGE>
RISK FACTORS
Risks Relating to the Company
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. Additionally, even if existing, new or enhanced versions of
the Company's products are accepted by the Company's customers, the Company
could experience fluctuations in its operating results as a result of any delays
or slowdown in the customers production ramp. 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
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. 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. with respect to the MIPS microprocessor, several small companies with
respect to the Intel i960 microprocessor, and Motorola and IBM with respect to
the Power PC microprocessor. The Company's switched Ethernet LAN controllers
compete with products from companies such as Texas Instruments Incorporated, MMC
Networks, Allayer Technologies Corporation, I-Cube, Inc., PMC-Sierra Inc, and
Broadcom Corporation. The Company's remote access WAN controller competes
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.
12
<PAGE>
Customer Concentration. To date, a small number of customers has accounted
for a majority of the Company's net sales. The Company expects that revenues
from the sale of its products 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 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
WAN communication 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 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".
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
13
<PAGE>
able to develop new products to compete with new technologies on a timely basis
or in a cost-effective manner.
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."
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. 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. 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. 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
14
<PAGE>
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."
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, the financial position of the Company is
routinely subjected to a variety of risks, including market risk associated with
interest rate movements and currency rate movements on non-U.S. dollar
denominated assets and liabilities, as well as collectibility of accounts
receivable. The Company regularly assesses these risks and has established
policies and business practices to protect against the adverse effects of these
and other potential exposures. As a result, the Company does not anticipate
material losses in these areas.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Exhibits
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------- -----------------------
1 April 19, 1999 Press Release: "Galileo Technology Ltd. Reports First
Quarter 1999 Results"
27.1 Financial Data Schedule (Three months ended March 31, 1999)
27.2 Financial Data Schedule (Three months ended March 31, 1998)
16
<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.
May 18, 1999 By: George A. Hervey
--------------------
George A. Hervey,
Sr. Vice President of Finance
and Chief Financial Officer
17
<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
FIRST QUARTER 1999 RESULTS
San Jose, CA -- April 19, 1999 -- Galileo Technology Ltd. (Nasdaq: GALT)
today reported net sales for the first quarter of 1999 increased to a record
$15.2 million, compared to $15.1 million for the first quarter of 1998. Net
income for the quarter decreased to $5.0 million, or $0.23 per share, compared
to net income of $5.2 million, or $0.25 per share, for the corresponding quarter
last year. All per share amounts are diluted earnings per share. Diluted shares
used in computing earnings per share for the first quarter of 1999 were 22.0
million, compared to 21.3 million shares for the first quarter of 1998.
Net sales for the first quarter 1999 increased 11% from the fourth quarter
1998 net sales of $13.7 million. First quarter 1999 net income increased 17%
compared to the fourth quarter 1998 net income of $4.2 million. First quarter
ordinary and equivalent shares outstanding increased to 22.0 million, compared
to 21.7 million in the fourth quarter, with earnings per share increasing
sequentially 15%.
"We are pleased with the sequential Q1 growth in both revenue and profits,"
stated Avigdor Willenz, Galileo's Chairman and CEO. "Q1 was the second
consecutive quarter of sequential increase in both revenue and profits and was
driven by increasing contribution from our new GalNet-II family of devices and
the continuing strength of our new system controller products. As we enter Q2
1999, we are encouraged by the level of design activity in Q1 and are focused in
working with our customers to bring their products to market."
<PAGE>
About Galileo Technology Ltd.
Galileo Technology Ltd., a market leader in complex data communications
systems on silicon, is one of the semiconductor industry's fastest growing
suppliers of complex, high performance, integrated circuit devices. Galileo's
products include single-chip Ethernet switches, high-performance system
controllers for RISC processors and WAN coprocessors.
Galileo's products form the heart of many advanced data communications
systems built by leading OEMs, such as Cisco Systems, Hewlett Packard, Nortel
Networks, D-Link, Nbase Communications and Intel.
Galileo employs more than 200 people worldwide with business headquarters
in San Jose, California and R&D headquarters in Manof, Israel.
###
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.
<PAGE>
GALILEO TECHNOLOGY LTD
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars, in thousands, except per share data )
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
------------------- --------------------
<S> <C> <C>
Net sales $15,152 $15,139
Cost of sales 5,447 5,603
------------------- --------------------
Gross profit 9,705 2,652
Operating expenses:
Research and development 3,285 2,627
Selling, marketing and administrative 2,411 2,475
------------------- --------------------
Total operating expenses 5,696 5,102
------------------- --------------------
Operating income 4,009 4,434
Other income, net 1,216 1,027
------------------- --------------------
Income before provision for income taxes 5,225 5,461
Provision for income taxes 260 220
------------------- --------------------
Net income $ 4,965 $ 5,241
=================== ====================
Earnings per share:
Basic $0.25 $0.26
=================== ====================
Diluted $0.24 $0.25
=================== ====================
Shares used in computing earnings per share:
Basic 20,347 20,307
=================== ====================
Diluted 22,043 21,264
=================== ====================
</TABLE>
<PAGE>
GALILEO TECHNOLOGY LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars, in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1999 1998
-------------------- --------------------
ASSETS
Current assets:
Cash, cash equivalents and short-term investments $ 90,438 $ 86,445
Accounts receivable 5,697 5,207
Inventories 2,634 2,851
Prepaid expenses and other 1,870 1,745
-------------------- --------------------
Total current assets 100,639 96,248
Other assets 1,886 1,857
Property and equipment, net 4,974 4,816
-------------------- --------------------
Total $107,499 $102,921
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,776 $ 4,826
Accrued and other liabilities 5,151 6,078
Deferred income 898 771
Current maturities of long-term debt 92 128
-------------------- --------------------
Total current liabilities 10,917 11,803
Accrued severance pay 287 283
Long-term debt - 6
Other liabilities 1,049 1,030
Total shareholders' equity 95,246 89,799
-------------------- --------------------
Total $107,499 $102,921
==================== ====================
</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 THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 37,086
<SECURITIES> 53,352
<RECEIVABLES> 5,679
<ALLOWANCES> 193
<INVENTORY> 2,634
<CURRENT-ASSETS> 100,639
<PP&E> 8,550
<DEPRECIATION> 3,576
<TOTAL-ASSETS> 107,499
<CURRENT-LIABILITIES> 10,917
<BONDS> 0
0
0
<COMMON> 69,413
<OTHER-SE> (663)
<TOTAL-LIABILITY-AND-EQUITY> 95,246
<SALES> 15,152
<TOTAL-REVENUES> 15,152
<CGS> 5,447
<TOTAL-COSTS> 5,447
<OTHER-EXPENSES> 3,285
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 5,225
<INCOME-TAX> 260
<INCOME-CONTINUING> 4,965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,965
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.23
</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 THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 45,154
<SECURITIES> 33,869
<RECEIVABLES> 5,233
<ALLOWANCES> 226
<INVENTORY> 2,621
<CURRENT-ASSETS> 88,265
<PP&E> 5,139
<DEPRECIATION> 1,713
<TOTAL-ASSETS> 91,691
<CURRENT-LIABILITIES> 10,772
<BONDS> 94
0
0
<COMMON> 69,707
<OTHER-SE> (1,399)
<TOTAL-LIABILITY-AND-EQUITY> 80,609
<SALES> 15,139
<TOTAL-REVENUES> 15,139
<CGS> 5,603
<TOTAL-COSTS> 5,603
<OTHER-EXPENSES> 2,627
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> 5,461
<INCOME-TAX> 220
<INCOME-CONTINUING> 5,241
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,241
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
</TABLE>
