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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 2000
(containing quarterly information for the quarter ended June 30, 2000)
Galileo Technology Ltd.
--------------------------------------------------------------------------------
(Translation of registrant's name into English)
Moshav Manof, D.N. Misgav 20184, Israel
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(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
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Pages
<S> <C> <C> <C>
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 2
Condensed Consolidated Statements of Operations Three months
and six months ended June 30, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows Six months
ended June 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
Item 1. Exhibits - Exhibit Index 16
Signatures
</TABLE>
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,
2000 1999
------------------------------
(Unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 57,070 $ 42,648
Short-term investments 50,396 63,005
Accounts receivable, net 10,584 12,523
Inventories 11,545 8,094
Prepaid expenses and other assets 2,287 3,049
------------------------------
Total current assets 131,882 129,319
Other assets 8,091 2,031
Property and equipment, net 12,462 9,388
------------------------------
Total assets $ 152,435 $ 140,738
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,134 $ 6,495
Accrued and other liabilities 8,023 8,969
Deferred income 2,394 1,817
------------------------------
Total current liabilities 18,551 17,281
Accrued severance pay 731 500
Other liabilities 1,675 1,652
Commitments
Shareholders' equity:
Ordinary shares 76,133 74,440
Deferred compensation (186) (432)
Accumulated other comprehensive income (loss) 388 (124)
Retained earnings 55,143 47,421
------------------------------
Total shareholders' equity 131,478 121,305
------------------------------
Total liabilities and shareholders' equity $ 152,435 $ 140,738
==============================
</TABLE>
See accompanying notes.
/(1)/ The balance sheet at December 31, 1999 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
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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,
2000 1999 2000 1999
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net sales $ 24,318 $ 18,271 $ 44,470 $ 33,423
Cost of sales 9,573 6,247 18,819 11,694
--------------------------- ----------------------------
Gross profit 14,745 12,024 25,651 21,729
Operating expenses:
Research and development 5,977 3,679 11,979 6,964
Selling, marketing and administrative 4,180 2,971 7,948 5,382
--------------------------- ----------------------------
Total operating expenses 10,157 6,650 19,927 12,346
--------------------------- ----------------------------
Operating income 4,588 5,374 5,724 9,383
Other income (expense), net 1,372 1,076 2,406 2,292
--------------------------- ----------------------------
Income before provision for income taxes 5,960 6,450 8,130 11,675
Provision for income taxes 300 320 408 580
--------------------------- ----------------------------
Net income $ 5,660 $ 6,130 $ 7,722 $ 11,095
=========================== ============================
Earnings per share:
Basic $ 0.13 $ 0.15 $ 0.18 $ 0.27
=========================== ============================
Diluted $ 0.13 $ 0.14 $ 0.17 $ 0.25
=========================== ============================
Shares used in computing earnings per share:
Basic 42,579 41,010 42,406 40,852
=========================== ============================
Diluted 45,059 44,544 45,148 44,316
=========================== ============================
</TABLE>
See accompanying notes.
3
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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,
2000 1999
--------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 7,722 $ 11,095
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and other 2,302 1,163
Amortization of deferred compensation 246 256
Changes in operating assets and liabilities:
Accounts receivable 1,939 (3,091)
Inventories (3,451) (581)
Prepaid expenses and other assets 785 (744)
Accounts payable 1,639 (107)
Accrued and other liabilities (946) 1,098
Deferred income 577 (74)
Accrued severance pay and other liabilities 231 85
--------------------------------
Net cash provided by operating activities 11,044 9,100
Cash flows from investing activities
Purchases of short-term investments (1,730) (26,382)
Maturities of short-term investments 14,851 9,485
Purchases of property and equipment (5,376) (1,910)
Other assets (6,060) (51)
--------------------------------
Net cash provided by (used in) investing activities 1,685 (18,858)
Cash flows from financing activities
Proceeds from issuance of ordinary shares 1,827 2,080
Repurchase of treasury shares (134) (77)
Repayment of long-term debt -- (6)
--------------------------------
Net cash provided by financing activities 1,693 1,997
Net increase (decrease) in cash and cash equivalents 14,422 (7,761)
Cash and cash equivalents at beginning of period 42,648 45,607
--------------------------------
Cash and cash equivalents at end of period $ 57,070 $ 37,846
================================
</TABLE>
See accompanying notes.
4
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
The condensed consolidated financial statements have been prepared by
Galileo Technology Ltd., 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, 2000 and December 31, 1999, 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, 1999, 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, 2000
are not necessarily indicative of the results that may be expected for the
future quarters or the year ending December 31, 2000.
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,
--------------------------------- ------------------------------
2000 1999 2000 1999
--------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Numerator used for both basic and diluted
earnings per share - net income $ 5,660 $ 6,130 $ 7,722 $ 11,095
================================= ==============================
Denominator for basic earnings per share-
Weighted average shares 42,579 41,010 42,406 40,852
================================= ==============================
Denominator for diluted earnings per share:
Denominator for basic earnings per share 42,579 41,010 42,406 40,852
Effect of dilutive securities-
Employee share options 2,480 3,534 2,742 3,464
--------------------------------- ------------------------------
45,059 44,544 45,148 44,316
--------------------------------- ------------------------------
Earnings per share:
Basic $ 0.13 $ 0.15 $ 0.18 $ 0.27
================================== ===============================
Diluted $ 0.13 $ 0.14 $ 0.17 $ 0.25
================================== ===============================
Potentially dilutive securities excluded from
computations as the effect would be
antidilutive 2,390 13 2,603 15
================================== ===============================
</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. Comprehensive Income
Total comprehensive income for the three months ended June 30, 2000 and
1999 was $5,897,000 and $5,976,000, respectively. For the six months ended June
30, 2000 and 1999, total comprehensive income was $8,234,000 and $10,937,000,
respectively. Other comprehensive income represents the net change in 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
communication market. Operations in Israel include research and development and
production contracting. Operations in the U.S. include marketing and sales.
6. Stock Split
On September 17, 1999, the Company effected a two-for-one stock split in
the form of a stock dividend. Accordingly, all references to share and per-share
data for all periods presented have been adjusted to reflect this event.
6. New Accounting Standards
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133." This Statement defers for one
year the effective date of Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). The rule will now apply for
fiscal years beginning after June 15, 2000. 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain areas of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company believes that its current revenue recognition policies
comply with SAB 101.
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 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, 1999.
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 New World converged-network systems,
in which voice, video, and data are handled seamlessly using Internet Protocol
techniques. Galileo's core competencies utilized in making converged networks a
reality include various LAN technologies, WAN technologies, and high performance
CPU subsystem technologies. 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 "communications systems on
silicon" simplify the designs, reduce development risks and costs, and
substantially improve time-to-market for manufacturers of data communications
equipment.
Galileo is organized around two principal product groups: Internetworking
Products, which consists of system controllers and WAN communications
controllers, and Switching Products, which consists of switched Ethernet
controllers, switched Ethernet processors, and switched POS/ATM processors.
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
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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,
2000 1999 2000 1999
---------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of sales 39.4 34.2 42.3 35.0
---------------------------------------------------
Gross profit 60.6 65.8 57.7 65.0
Operating expenses:
Research and development 24.5 20.1 26.9 20.8
Selling, marketing and administrative 17.2 16.3 17.9 16.1
---------------------------------------------------
Total operating expenses 41.7 36.4 44.8 36.9
Operating income 18.9 29.4 12.9 28.1
Other income (expense), net 5.6 5.9 5.4 6.8
---------------------------------------------------
Income before provision for income taxes 24.5 35.3 18.3 34.9
Provision for income taxes 1.2 1.8 0.9 1.7
---------------------------------------------------
Net income 23.3% 33.5% 17.4% 33.2%
===================================================
</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
$24.3 million for the three months ended June 30, 2000 from $18.3 million for
the three months ended June 30, 1999. Net sales increased to $44.5 million for
the six months ended June 30, 2000 from $33.4 million for the six months ended
June 30, 1999. For the three and six months ended June 30, 2000, the Company
experienced increased unit sales growth for its system controllers and GalNet-II
family of switched Ethernet LAN controllers due to increased demand for these
products as compared to the three and six months ended June 30, 1999. Sales for
the Company's older generation of switched Ethernet LAN controllers, namely the
GalNet-I and Galaxy families, for the three and six months ended June 30, 2000,
declined as these products reached the end of their product life cycles.
Three customers accounted for approximately 37%, 17% and 14%, respectively,
of the Company's net sales for the three months ended June 30, 2000. 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."
8
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Cost of Sales/Gross Profit. Cost of sales consists principally of the cost
of purchased packaged semiconductor products from third party foundries,
principally Taiwan Semiconductor Manufacturing Company. Cost of sales increased
to $9.6 million for the three months ended June 30, 2000 from $6.2 million for
the three months ended June 30, 1999. Cost of sales increased to $18.8 million
for the six months ended June 30, 2000 from $11.7 million for the six months
ended June 30, 1999. The increase in cost of sales for the three and six months
ended June 30, 2000 as compared to the three and six months ended June 30, 1999
was due to increased net sales of the Company's products.
The gross profit on net sales for the three months ended June 30, 2000
decreased to 60.6% from 65.8% for the three months ended June 30, 1999. The
gross profit on net sales for the six months ended June 30, 2000 decreased to
57.7% from 65.0% for the six months ended June 30, 1999. The decrease in the
gross profit percentage for the three months ended June 30, 2000 was primarily
due to an overall decline in the average selling price of the Company's products
that was not offset by a decline in product manufacturing costs. The decrease in
the Company's gross profit percentage for the six months ended June 30, 2000 was
primarily due to $1.5 million of expense related to an increase in the Company's
inventory reserve along with an overall decline in the average selling price of
the Company's products that was not offset by a decline in product manufacturing
costs.
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 June 30, 2000 increased to
$6.0 million from $3.7 million for the three months ended June 30, 1999.
Research and development expenses for the six months ended June 30, 2000
increased to $12.0 million from $7.0 million for the six months ended June 30,
1999. The increase in research and development expenses for the three months and
six months ended June 30, 2000 from the three months and six months ended June
30, 1999 was primarily due to the addition of personnel, an increase in
nonrecurring engineering and product verification expenses and higher
depreciation expense. Additionally, the Company incurred a charge of $0.7
million to write off intellectual property related to a development program that
was discontinued in the three months ended March 31, 2000. The Company
anticipates that research and development expense will continue to 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 $4.2 million for the three months ended June 30, 2000 and $3.0 million for
the three months ended June 30, 1999. Selling, marketing and administrative
expenses increased to $7.9 million for the six months ended June 30, 2000 from
$5.4 million for the six months ended June 30, 1999. The increase in selling,
marketing and administrative expenses in both 2000 periods was primarily due to
increased sales commissions on higher sales and personnel additions. The Company
anticipates that sales, marketing and administrative expenses will continue to
increase in absolute dollars.
Other Income (Expense), Net. Other income (expense), net was $1.4 million
for the three months ended June 30, 2000 and $1.1 million for the three months
ended June 30, 1999. Other income (expense), net increased to $2.4 million for
the six months ended June 30, 2000 from $2.3 million for the six months ended
June 30, 1999. The increase in other income in both 2000 periods, was primarily
due to an increase in interest income on 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
and six months ended June 30, 2000 and 1999 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
9
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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.
In the event of distribution of cash dividends from income which is tax
exempt due to the above, the Company would have to pay tax at the rate of 20% on
an amount equal to the amount distributed. The Company currently has no plans to
distribute dividends and intends to retain future earnings to finance the
development of its business. The tax exempt income attributable to the Approved
Enterprise can be distributed to shareholders without subjecting the Company to
taxes only upon the complete liquidation of the Company. All of the Company's
retained earnings are attributable to the Company's "approved enterprises" and
are not available for distribution without the payment of tax.
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 $107.5 million at
June 30, 2000. The Company generated net cash from operations of $11.0 million
for the six months ended June 30, 2000. Net cash from operations for the six
months ended June 30, 2000 consisted primarily of net income plus depreciation,
an increase in accounts payable, and a decrease in accounts receivable which
were partially offset by an increase in inventories. Investing activities for
the six months ended June 30, 2000, other than purchases and maturities of
short-term investments and other assets, reflected purchases of property and
equipment of $5.4 million. Continued expansion of the Company's business may
require higher levels of capital equipment purchases. Financing activities
provided cash of $1.7 million primarily from the issuance of ordinary shares
pursuant to option exercises.
At June 30, 2000, the Company had $113.3 million in working capital. The
Company believes that its existing cash, cash equivalents and short-term
investments, together with any cash flows 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.
10
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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."
Dependence on Taiwan Semiconductor Manufacturing Company ("TSMC").
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
11
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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 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.
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.
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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 1960 microprocessor, and Motorola and IBM with respect to
the Power PC microprocessor. Galileo's switched Ethernet LAN controllers compete
with products from companies such as Broadcom Corporation, MMC Networks, and
Allayer Technologies Corporation. The Company's WAN communications controllers
compete directly with products from companies such as Motorola, Inc., Siemens
A.G., and PMC-Sierra Inc. In addition, the Company expects increased competition
in the future from other emerging and established companies
Customer Concentration. To date, a small number of customers have 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
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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.
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.
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
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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 Israel 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 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.
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PART II. OTHER INFORMATION
Item 1. Exhibits
EXHIBIT INDEX
Exhibit
Number Description of Document
------ -----------------------
27.1 Financial Data Schedule (Six months ended June 30, 2000)
99.1 July 18, 2000 Press Release: "Galileo Technology Ltd. Reports
Second Quarter 2000 Results."
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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.
September 6, 2000 By: /s/ Michael T. Tate
------------------------------------------
Michael T. Tate, Vice President of Finance
and Chief Financial Officer
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