<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 1999
REGISTRATION NO. 333-71795
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PLX TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3674 94-3008334
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
390 POTRERO AVENUE
SUNNYVALE, CA 94086
(408) 774-9060
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SCOTT M. GIBSON
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
PLX TECHNOLOGY, INC.
390 POTRERO AVENUE
SUNNYVALE, CA 94086
(408) 774-9060
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
WILLIAM D. SHERMAN, ESQ. JEFFREY D. SAPER, ESQ.
STEPHEN J. SCHRADER, ESQ. J. ROBERT SUFFOLETTA, ESQ.
HEIKE E. FISCHER, ESQ. WILSON SONSINI GOODRICH & ROSATI
MORRISON & FOERSTER LLP PROFESSIONAL CORPORATION
755 PAGE MILL ROAD 650 PAGE MILL ROAD
PALO ALTO, CA 94304 PALO ALTO, CA 94304
(650) 813-5600 (650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON THE DATE THAT THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 30, 1999
PROSPECTUS
3,300,000 SHARES
LOGO
COMMON STOCK
------------------------
This is PLX Technology, Inc.'s initial public offering of common stock.
We expect the public offering price to be between $8.00 and $9.00 per
share. Currently, no public market exists for the shares. After pricing of the
offering, we expect that the common stock will trade on the Nasdaq National
Market under the symbol "PLXT."
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price................................... $ $
Underwriting Discount................................... $ $
Proceeds, before expenses, to PLX....................... $ $
</TABLE>
The underwriters may also purchase up to an additional 495,000 shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
WIT CAPITAL CORPORATION
------------------------
The date of this prospectus is , 1999.
<PAGE> 3
PLX I/O Silicon and Software Solutions
PLX Technology delivers advanced semiconductor and software solutions that
accelerate data flow in equipment used to build the Internet and worldwide
communications infrastructure. More than 500 customers use PLX products
including 3Com, Cisco Systems, Compaq Computer, Hewlett-Packard, IBM, Lucent
Technologies, Nortel Networks, Siemens and Tektronix.
[Graphic of computer chips, books, CD-ROMs and computer circuitry with printed
computer code.]
GATE-FOLD PAGE ONE
Leaders in networking, telecommunications, imaging, enterprise storage and
industrial automation rely on PLX silicon and software solutions to help them
deliver high performance equipment to market quickly. Demand for these systems
is growing dramatically due to the rapid expansion of the Internet, high speed
networking and multimedia.
Networking & Telecommunications
[vertical text] Industrial
Imaging
[Graphic PLX Technology computer chip and representation of computer network
equipment with the following captions:
- Cellular Base Station
- Digital Telephony
- Cable Modem Router
- Ethernet Switch
- Remote Access Concentrator
- Process Control
- Enterprise Router
- Storage
- Printer]
GATE-FOLD PAGE TWO
[vertical text] Storage
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Forward-Looking Statements.................................. 14
Trademarks.................................................. 14
Information in Prospectus................................... 14
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Dilution.................................................... 17
Selected Consolidated Financial Data........................ 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 27
Management.................................................. 42
Transactions Between PLX and its Officers, Directors or
Significant Stockholders.................................. 50
Principal Stockholders...................................... 52
Description of Capital Stock................................ 54
Shares Eligible for Future Sale............................. 57
Underwriting................................................ 59
Legal Matters............................................... 62
Experts..................................................... 62
Where You Can Find More Information......................... 62
Glossary.................................................... 64
Index to Consolidated Financial Statements.................. F-1
</TABLE>
<PAGE> 5
[INTENTIONALLY LEFT BLANK]
<PAGE> 6
PROSPECTUS SUMMARY
This summary is not complete and does not contain all of the information
that may be important to you. You should read the entire prospectus carefully,
including the financial data and related notes, before making an investment
decision.
PLX TECHNOLOGY
PLX develops and supplies semiconductor devices and software that
accelerate and manage the transfer of data in networking and telecommunications,
enterprise storage, imaging and industrial equipment. This equipment is
typically controlled by internal computers, commonly referred to as embedded
systems. PLX offers a complete solution consisting of three related types of
products: semiconductor devices, software development kits and hardware design
kits. Our semiconductor devices simplify the development of data transfer
circuits in high-performance embedded systems and are compatible with
microprocessors such as IBM's PowerPC, Motorola's PowerPC, Intel's i960, IDT's
MIPs and Hitachi's SH. Our software development kits and hardware design kits
promote sales of our semiconductor devices by lowering customers' development
costs and by accelerating their ability to bring new products to market.
Demand for networking, telecommunications and other equipment that
transmits, stores and processes information rapidly has dramatically increased
due to the:
- growth of the Internet,
- deployment of high-speed networking, and
- proliferation of multimedia.
Suppliers of this equipment are changing the way they design their products
to reduce product development time and to use their scarce engineering resources
more efficiently. Until recently, these suppliers typically developed their own
system components and the connections between the components. Now, however, they
are increasingly building their equipment based on industry standard connection
methods, and they are purchasing components supplied by other companies that
comply with these standards. By doing so, they reduce the time and resources
required for product development. Consequently, there is a growing demand for
standards-based components that connect systems together, such as our
semiconductor devices. The majority of PLX's products are based on Peripheral
Component Interconnect, or PCI, a standard that is widely used in our markets.
Our objective is to expand our advantages in data transfer technology by:
- focusing on high-growth markets,
- delivering comprehensive solutions, including semiconductor devices,
software development kits and hardware design kits,
- extending our technology advantages by incorporating new functions and
technologies,
- driving industry standards, and
- strengthening and expanding our industry relationships.
1
<PAGE> 7
PLX Technology, Inc. was incorporated in California in May 1986. In March
1999, our state of incorporation was changed to Delaware. Our principal
executive office is located at 390 Potrero Avenue, Sunnyvale, California 94086,
and our telephone number at this address is (408) 774-9060. We maintain a World
Wide Web site address at www.plxtech.com. The reference to this World Wide Web
site address does not constitute incorporation by reference of the information
contained therein.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.................. 3,300,000 shares
Common stock outstanding after this
offering............................ 21,665,551 shares(1)
Use of proceeds....................... We intend to use the offering proceeds
for working capital and general
corporate purposes.
Nasdaq National Market symbol......... PLXT
</TABLE>
- -------------------------
(1) Excludes 1,300,000 shares of common stock reserved for issuance under our
1998 Stock Incentive Plan and 1,000,000 shares of common stock reserved for
issuance under our 1999 Stock Incentive Plan. See "Description of Capital
Stock -- Authorized and Outstanding Capital Stock" and Note 5 to
Consolidated Financial Statements.
2
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues................ $ 4,043 $ 9,316 $ 9,813 $17,534 $26,276
Gross profit................ 2,238 3,805 5,287 10,558 16,605
Income from operations...... 49 1,016 893 1,991 3,383
Net income.................. 71 1,049 891 1,924 2,766
Historical basic net income
per share................. $ 0.02 $ 0.36 $ 0.28 $ 0.58 $ 0.77
Pro forma basic net income
per share(1).............. $ 0.16
Historical and pro forma
diluted net income per
share(1).................. $ 0.00 $ 0.06 $ 0.05 $ 0.11 $ 0.15
Shares used to compute
historical basic net
income per share.......... 2,848 2,897 3,137 3,293 3,601
Shares used to compute pro
forma basic net income per
share(1).................. 17,340
Shares used to compute
historical and pro forma
diluted net income per
share(1).................. 16,653 16,768 17,287 17,758 18,405
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------
AS
ACTUAL ADJUSTED(2)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 5,638 $31,025
Working capital........................................... 6,116 31,503
Total assets.............................................. 11,766 37,153
Long-term debt............................................ -- --
Total stockholders' equity................................ 7,760 33,147
</TABLE>
- -------------------------
(1) Pro forma information is based on the conversion of all outstanding shares
of our preferred stock into shares of common stock.
(2) As adjusted to reflect the sale of 3,300,000 shares of our common stock,
based on an initial public offering price of $8.50 per share, the
application of the estimated net proceeds therefrom and the conversion of
all outstanding shares of our preferred stock into shares of common stock
upon the closing of the offering. See "Use of Proceeds."
3
<PAGE> 9
RISK FACTORS
You should carefully consider the following factors as well as other
information contained in this prospectus before deciding to invest in shares of
the common stock.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO FACTORS WHICH ARE NOT
WITHIN OUR CONTROL
Our quarterly operating results have fluctuated significantly in the past
and are expected to fluctuate significantly in the future based on a number of
factors, many of which are not in our control. Our operating expenses, which
include product development costs and selling, general and administrative
expenses, are relatively fixed in the short-term. If our revenues are lower than
we expect because we sell fewer semiconductor devices, delay the release of new
products or the announcement of new features, or for other reasons, we may not
be able to quickly reduce our spending in response.
Other circumstances that can affect our operating results include:
- our ability to develop, introduce and market new products and
technologies on a timely basis,
- the timing of significant orders, order cancellations and reschedulings,
- changes in our pricing policies or those of our competitors or suppliers,
including decreases in unit average selling prices of our products,
- introduction of products and technologies by our competitors,
- shifts in our product mix toward lower margin products,
- the availability of production capacity at the fabrication facilities
that manufacture our products,
- purchasing patterns related to the Year 2000, and
- the availability and cost of materials to our suppliers.
These factors are difficult to forecast, and these or other factors could
adversely affect our business. Any shortfall in our revenues would have a direct
impact on our business. In addition, fluctuations in our quarterly results could
adversely affect the market price of our common stock in a manner unrelated to
our long-term operating performance.
OUR LENGTHY SALES CYCLE CAN RESULT IN UNCERTAINTY AND DELAYS WITH REGARD TO OUR
EXPECTED REVENUES
Our customers typically perform numerous tests and extensively evaluate our
products before incorporating them into their systems. The time required for
test, evaluation and design of our products into the customer's equipment can
range from six to twelve months or more. It can take an additional six to twelve
months or more before a customer commences volume shipments of equipment that
incorporates our products. Because of this lengthy sales cycle, we may
experience a delay between the time when we increase expenses for research and
development and sales and marketing efforts and the time when we generate higher
revenues, if any, from these expenditures.
4
<PAGE> 10
In addition, the delays inherent in our lengthy sales cycle raise
additional risks of customer decisions to cancel or change product plans. When
we achieve a design win, there can be no assurance that the customer will
ultimately ship products incorporating our products. Our business could be
materially adversely affected if a significant customer curtails, reduces or
delays orders during our sales cycle or chooses not to release products
incorporating our products.
RAPID TECHNOLOGICAL CHANGE COULD MAKE OUR PRODUCTS OBSOLETE
The semiconductor industry is characterized by rapidly changing technology
and industry standards, along with frequent new product introductions.
Consequently, our future success depends on our ability to identify trends in
our target markets and to offer new semiconductor devices, as well as other
products and services, that address the changing needs of our target customers.
WE MUST MAKE SIGNIFICANT RESEARCH AND DEVELOPMENT EXPENDITURES PRIOR TO
GENERATING REVENUES FROM PRODUCTS
To establish market acceptance of a new semiconductor device, we must
dedicate significant resources to research and development, production and sales
and marketing. We incur substantial costs in developing, manufacturing and
selling a new product, which often significantly precede meaningful revenues
from the sale of this product. Consequently, new products can require
significant time and investment to achieve profitability. Prospective investors
should note that our efforts to introduce new semiconductor devices or other
products or services may not be successful or profitable. In addition, products
or technologies developed by others may render our products or technologies
obsolete or noncompetitive.
We record as expenses the costs related to the development of new
semiconductor devices and other products as these expenses are incurred. As a
result, our profitability from quarter to quarter and from year to year may be
adversely affected by the number and timing of our new product launches in any
period and the level of acceptance gained by these products.
OUR INDEPENDENT MANUFACTURERS MAY NOT BE ABLE TO MEET OUR MANUFACTURING
REQUIREMENTS
We do not manufacture any of our semiconductor devices. Therefore, we are
referred to in the semiconductor industry as a "fabless" producer of
semiconductors. Consequently, we depend upon third party manufacturers to
produce semiconductors that meet our specifications. We currently have third
party manufacturers that can produce semiconductors which meet our needs.
However, as the semiconductor industry continues to progress to smaller
manufacturing and design geometries, the complexities of producing
semiconductors will increase. Decreasing geometries may introduce new problems
and delays that may affect product development and deliveries. Due to the nature
of the semiconductor industry and our status as a "fabless" semiconductor
company, we could encounter fabrication related problems that may affect the
availability of our semiconductor devices, may delay our shipments or may
increase our costs.
5
<PAGE> 11
OUR RELIANCE ON SINGLE SOURCE MANUFACTURERS OF OUR SEMICONDUCTOR DEVICES COULD
DELAY SHIPMENTS AND INCREASE OUR COSTS
None of our semiconductor devices is currently manufactured by more than
one supplier. We place our orders on a purchase order basis and do not have a
long term purchase agreement with any of our existing suppliers. In the event
that the supplier of a semiconductor device was unable or unwilling to continue
to manufacture this product in the required volume, we would have to identify
and qualify a substitute supplier. Introducing new products or transferring
existing products to a new third party manufacturer or process may result in
unforeseen device specification and operating problems. These problems may
affect product shipments and may be costly to correct. Silicon fabrication
capacity may also change, or the costs per silicon wafer may increase.
Manufacturing-related problems may have a material adverse effect on our
business.
INTENSE COMPETITION IN THE MARKETS IN WHICH WE OPERATE MAY REDUCE THE DEMAND FOR
OR PRICES OF OUR PRODUCTS
Competition in the semiconductor industry is intense. If our main target
market, the embedded systems market, continues to grow, the number of
competitors may increase significantly. In addition, new semiconductor
technology may lead to new products that can perform similar functions as our
products. Some of our competitors and other semiconductor companies may develop
and introduce products that integrate into a single semiconductor device the
functions performed by our semiconductor devices. This would eliminate the need
for our products in some applications.
In addition, competition in our markets comes from companies of various
sizes, many of which are significantly larger and have greater financial and
other resources than we do and thus can better withstand adverse economic or
market conditions. Also, as we start to sell our processor products, we will
compete with established embedded microprocessor companies and others. Many of
these indirect competitors and microprocessor companies have significantly
greater financial, technical, marketing and other resources than PLX. Therefore,
we cannot assure you that we will be able to compete successfully in the future
against existing or new competitors, and increased competition may adversely
affect our business. See "Business -- Competition," and " -- Products."
FAILURE TO HAVE OUR PRODUCTS DESIGNED INTO THE PRODUCTS OF ELECTRONIC EQUIPMENT
MANUFACTURERS WILL RESULT IN REDUCED SALES
Our future success depends on electronic equipment manufacturers that
design our semiconductor devices into their systems. We must anticipate market
trends and the price, performance and functionality requirements of current and
potential future electronic equipment manufacturers and must successfully
develop and manufacture products that meet these requirements. In addition, we
must meet the timing requirements of these electronic equipment manufacturers
and must make products available to them in sufficient quantities. These
electronic equipment manufacturers could develop products that provide the same
or similar functionality as one or more of our products and render these
products obsolete in their applications.
We do not have purchase agreements with our customers that contain minimum
purchase requirements. Instead, electronic equipment manufacturers purchase our
products pursuant to short-term purchase orders that may be canceled without
charge. We believe that in order to obtain broad penetration in the markets for
our products, we must
6
<PAGE> 12
maintain and cultivate relationships, directly or through our distributors, with
electronic equipment manufacturers that are leaders in the embedded systems
markets. Accordingly, we will often incur significant expenditures in order to
build relationships with electronic equipment manufacturers prior to volume
sales of new products. If we fail to develop relationships with additional
electronic equipment manufacturers, to have our products designed into new
embedded systems or to develop sufficient new products to replace products that
have become obsolete, our business would be materially adversely affected.
LOWER DEMAND FOR OUR CUSTOMERS' PRODUCTS WILL RESULT IN LOWER DEMAND FOR OUR
PRODUCTS
Demand for our products depends in large part on the development and
expansion of the high-performance embedded systems markets including networking
and telecommunications, enterprise storage, imaging and industrial applications.
The size and rate of growth of these embedded systems markets may in the future
fluctuate significantly based on numerous factors. These factors include the
adoption of alternative technologies, capital spending levels and general
economic conditions. Demand for products that incorporate high-performance
embedded systems may not grow.
DEFECTS IN OUR PRODUCTS COULD INCREASE OUR COSTS AND DELAY OUR PRODUCT SHIPMENTS
Our products are complex. While we test our products, these products may
still have errors, defects or bugs that we find only after commercial production
has begun. We have experienced errors, defects and bugs in the past in
connection with new products.
Our customers may not purchase our products if the products have
reliability, quality or compatibility problems. This delay in acceptance can
make it more difficult to retain our existing customers and to attract new
customers. Moreover, product errors, defects or bugs can result in additional
development costs, diversion of technical and other resources from our other
development efforts, claims by our customers or others against us, or the loss
of credibility with our current and prospective customers. In the past, the
additional time required to correct defects has caused delays in product
shipments and resulted in lower revenues. We may have to spend significant
amounts of capital and resources to address and fix problems in new products.
We must continuously develop our products using new process technology with
smaller geometries to remain competitive on a cost and performance basis.
Migrating to new technologies is a challenging task requiring new design skills,
methods and tools and is difficult to achieve.
FAILURE TO HIRE ADDITIONAL PERSONNEL AND TO IMPROVE OUR OPERATIONS WILL LIMIT
OUR GROWTH
We have experienced rapid growth which places a significant strain on our
limited personnel and other resources. To manage our expanded operations
effectively, we will need to further improve our operational, financial and
management systems. We will also need to successfully hire, train, motivate and
manage our employees. We may not be able to manage our growth effectively, which
could have a material adverse effect on our business. Also, we are seeking to
hire additional skilled development engineers, who are currently in short
supply. Our business could be adversely affected if we encounter delays in
hiring additional engineers.
7
<PAGE> 13
WE COULD LOSE KEY PERSONNEL DUE TO COMPETITIVE MARKET CONDITIONS AND ATTRITION
Our success depends to a significant extent upon our senior management and
key technical and sales personnel. The loss of one or more of these employees
could have a material adverse effect on our business. We do not have employment
contracts with any of our executive officers.
Our success also depends on our ability to attract and retain qualified
technical, sales and marketing, customer support, financial and accounting, and
managerial personnel. Competition for such personnel in the semiconductor
industry is intense, and we may not be able to retain our key personnel or to
attract, assimilate or retain other highly qualified personnel in the future. In
addition, we may lose key personnel due to attrition, including health, family
and other reasons. We have experienced, and may continue to experience,
difficulty in hiring and retaining candidates with appropriate qualifications.
If we do not succeed in hiring and retaining candidates with appropriate
qualifications, our business could be materially adversely affected.
A LARGE PORTION OF OUR REVENUES IS DERIVED FROM SALES TO THIRD-PARTY
DISTRIBUTORS WHO MAY TERMINATE THEIR RELATIONSHIPS WITH US AT ANY TIME
We depend on distributors to sell a significant portion of our products. In
1998, net revenues through distributors accounted for approximately 49% of our
net revenues. Some of our distributors also market and sell competing products.
Distributors may terminate their relationships with us at any time. Our future
performance will depend in part on our ability to attract additional
distributors that will be able to market and support our products effectively,
especially in markets in which we have not previously distributed our products.
We may lose one or more of our current distributors or may not be able to
recruit additional or replacement distributors. The loss of one or more of our
major distributors could have a material adverse effect on our business.
THE DEMAND FOR OUR PRODUCTS DEPENDS UPON OUR ABILITY TO SUPPORT EVOLVING
INDUSTRY STANDARDS
Substantially all of our revenues are derived from sales of products which
rely on the PCI standard. If the embedded systems markets move away from this
standard and begin using new standards, we may not be able to successfully
design and manufacture new products that use these new standards. There is also
the risk that new products we develop in response to new standards may not be
accepted in the market. In addition, the PCI standard is continuously evolving,
and we may not be able to modify our products to address new PCI specifications.
Any of these events would have a material adverse effect on our business.
THE SUCCESSFUL MARKETING AND SALES OF OUR PRODUCTS DEPEND UPON OUR THIRD PARTY
RELATIONSHIPS, WHICH ARE NOT SUPPORTED BY WRITTEN AGREEMENTS
When marketing and selling our semiconductor devices, we believe we enjoy a
competitive advantage based on the availability of development tools offered by
third parties. These development tools are used principally for the design of
other parts of the embedded system but also work with our products. We will lose
this advantage if these third party tool vendors cease to provide these tools
for existing products or do not offer
8
<PAGE> 14
them for our future products. This event could have a material adverse effect on
our business. We generally have no written agreements with these third parties,
and these parties could choose to stop providing these tools at any time.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
COULD ADVERSELY AFFECT OUR COMPETITIVE POSITION
Our future success and competitive position depend upon our ability to
obtain and maintain proprietary technology used in our principal products.
Currently, we have limited protection of our intellectual property in the form
of patents and rely instead on trade secret protection. Our existing or future
patents may be invalidated, circumvented, challenged or licensed to others. The
rights granted thereunder may not provide competitive advantages to us. In
addition, our future patent applications may not be issued with the scope of the
claims sought by us, if at all. Furthermore, others may develop technologies
that are similar or superior to our technology, duplicate our technology or
design around the patents owned or licensed by us. In addition, effective
patent, trademark, copyright and trade secret protection may be unavailable or
limited in foreign countries where we may need protection. We cannot be sure
that steps taken by us to protect our technology will prevent misappropriation
of the technology.
We may from time to time receive notifications of claims that we may be
infringing patents or other intellectual property rights owned by other third
parties. While there is currently no intellectual property litigation pending
against us, litigation could result in significant expenses to us, adversely
affect sales of the challenged product or technology. This litigation could also
divert the efforts of our technical and management personnel, whether or not the
litigation is determined in our favor. In addition, we may not be able to
develop or acquire non-infringing technology or procure licenses to the
infringing technology under reasonable terms. This could require expenditures by
us of substantial time and other resources. Any of these developments would have
a material adverse effect on our business. See "Business -- Intellectual
Property."
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY MAY LEAD TO SIGNIFICANT
VARIANCES IN THE DEMAND FOR OUR PRODUCTS
In the last two years, the semiconductor industry has been characterized by
significant downturns and wide fluctuations in supply and demand. Also, during
this time, the industry has experienced significant fluctuations in anticipation
of changes in general economic conditions, including economic conditions in
Asia. This cyclicality has led to significant variances in product demand and
production capacity. It has also accelerated erosion of average selling prices
per unit. We may experience periodic fluctuations in our future financial
results because of industry-wide conditions.
9
<PAGE> 15
BECAUSE WE SELL OUR PRODUCTS TO CUSTOMERS OUTSIDE OF NORTH AMERICA AND BECAUSE
OUR PRODUCTS ARE INCORPORATED WITH PRODUCTS OF OTHERS THAT ARE SOLD OUTSIDE OF
NORTH AMERICA WE FACE FOREIGN BUSINESS, POLITICAL AND ECONOMIC RISKS
Sales outside of North America accounted for 21%, 22% and 34% of our
revenues in 1996, 1997 and 1998, respectively. We anticipate that these sales
may increase in future periods and may account for an increasing portion of our
revenues. In addition, equipment manufacturers who incorporate our products into
their products, sell their products outside of North America, thereby exposing
us indirectly to foreign risks. Further, most of our semiconductor products are
manufactured outside of North America. Accordingly, we are subject to
international risks, including:
- difficulties in managing distributors,
- difficulties in staffing and managing foreign subsidiary and branch
operations,
- political and economic instability,
- foreign currency exchange fluctuations,
- difficulties in accounts receivable collections,
- potentially adverse tax consequences,
- timing and availability of export licenses,
- changes in regulatory requirements, tariffs and other barriers,
- difficulties in obtaining governmental approvals for telecommunications
and other products, and
- the burden of complying with complex foreign laws and treaties.
Although less than 10% of our revenues were attributable to sales in Asia
during 1998, the recent Asian economic instability could adversely affect our
business, particularly to the extent that this instability impacts the sales of
products manufactured by our customers.
Because sales of our products have been denominated to date exclusively in
United States dollars, increases in the value of the United States dollar will
increase the price of our products so that they become relatively more expensive
to customers in the local currency of a particular country, leading to a
reduction in sales and profitability in that country.
WE COULD EXPERIENCE DISRUPTIONS FROM IMPORTANT SUPPLIERS AND CUSTOMERS BECAUSE
THEY ARE NOT YEAR 2000 COMPLIANT
We are highly dependent on our computer software programs and operating
systems in operating our business. We also depend on proper functioning of
computer systems of third parties, such as suppliers and customers. Any computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 instead of the year 2000. We have completed audits of our internal
systems, including our accounting, sales and technical support automation
system, and obtained assurances from our major suppliers and customers that they
have done the same. However, we do not have the resources to verify these
assurances. Thus, there is a risk that some of our customers' and suppliers'
systems will not function adequately. If they do not, the result could be a
system failure or miscalculation causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal
10
<PAGE> 16
business activities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Readiness Disclosure."
OUR POTENTIAL FUTURE ACQUISITIONS MAY NOT BE SUCCESSFUL BECAUSE WE HAVE NOT MADE
ACQUISITIONS IN THE PAST
There have been a significant number of mergers and acquisitions in the
semiconductor industry in the past. As part of our business strategy, we expect
to review acquisition prospects that would complement our existing product
offerings, improve market coverage or enhance our technological capabilities. We
have no current agreements or negotiations underway with respect to any
acquisitions, and we may not be able to locate suitable acquisition
opportunities. Future acquisitions could result in the following:
- potentially dilutive issuances of equity securities,
- large one-time write-offs,
- the incurrence of debt and contingent liabilities or amortization
expenses related to goodwill and other intangible assets,
- difficulties in the assimilation of operations, personnel, technologies,
products and the information systems of the acquired companies,
- diversion of management's attention from other business concerns, and
- risks of entering geographic and business markets in which we have no or
limited prior experience and potential loss of key employees of acquired
organizations.
Since we have not made any acquisitions in the past, we are not certain
that we will be able to successfully integrate any businesses, products,
technologies or personnel that may be acquired in the future. Our failure to do
so could have a material adverse effect on our business.
OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS
THAT MAY NOT BE IN THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS
Immediately after the offering, our executive officers, directors and other
principal stockholders will, in the aggregate, beneficially own approximately
45% of our outstanding common stock. Although these stockholders will not have
majority control, they currently have, and likely will continue to have,
significant influence with respect to the election of our directors and approval
or disapproval of our significant corporate actions. This influence over our
affairs might be adverse to the interests of other stockholders. In addition,
the voting power of these stockholders could have the effect of delaying or
preventing a change in control of PLX. Commencing at the first annual meeting of
stockholders following the annual meeting of stockholders when we shall have had
at least 800 stockholders, our stockholders will not be entitled to cumulate
their votes in the election of directors, and the holders of a majority of the
common stock present at a meeting of stockholders will be able to elect all of
our directors.
11
<PAGE> 17
THE ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION COULD ADVERSELY
AFFECT THE RIGHTS OF THE HOLDERS OF OUR COMMON STOCK
Anti-takeover provisions of Delaware law and our Certificate of
Incorporation may make a change in control of PLX more difficult, even if a
change in control would be beneficial to the stockholders. These provisions may
allow the Board of Directors to prevent changes in the management and control of
PLX. Under Delaware law, our Board of Directors may adopt additional
anti-takeover measures in the future.
One anti-takeover provision that we have is the ability of our Board of
Directors to determine the terms of preferred stock and issue preferred stock
without the approval of the holders of the common stock. Effective upon the
offering, our Certificate of Incorporation allows the issuance of up to
5,000,000 shares of preferred stock. At the time of the offering, there are no
shares of preferred stock outstanding. However, because the rights and
preferences of any series of preferred stock may be set by the Board of
Directors in its sole discretion without approval of the holders of the common
stock, the rights and preferences of this preferred stock may be superior to
those of the common stock. Accordingly, the rights of the holders of common
stock may be adversely affected.
THE SALE OF A SUBSTANTIAL NUMBER OF OUR SHARES OF COMMON STOCK COULD CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO DECLINE
We will have 21,665,551 shares of our common stock outstanding immediately
after the offering. The shares sold in the offering will be freely transferable.
Additional shares may be sold in the public market to the extent permitted by
Rule 144 or exemptions under the Securities Act. The market price of our common
stock could decline as a result of sales of a large number of shares of our
common stock in the market after the offering, or the perception that these
sales could occur. These factors also could make it more difficult for us to
raise funds through future offerings of common stock. See "Shares Eligible for
Future Sale."
OUR COMMON STOCK HAS NOT BEEN PUBLICLY TRADED AND WE EXPECT THAT THE PRICE OF
OUR STOCK MAY FLUCTUATE SUBSTANTIALLY
Recently, the stock prices of technology companies, like PLX, have been
quite volatile. Moreover, prior to this offering, there has been no public
market for our common stock. The initial public offering price was determined
through negotiations between the underwriters and us. You may not be able to
resell your shares at or above the initial public offering price due to a number
of factors, including:
- actual or anticipated fluctuations in our operating results,
- changes in expectations as to our future financial performance,
- changes in financial estimates of securities analysts,
- technological innovations by others, and
- the operating and stock price performance of other comparable companies.
Due to the above factors, the price of our stock may decline and the value
of your investment would be reduced.
12
<PAGE> 18
NEW INVESTORS WILL INCUR SUBSTANTIAL AND IMMEDIATE DILUTION
The present owners of our issued and outstanding shares of common stock
have acquired a controlling interest in PLX at a cost substantially less than
the price at which the investors in this offering may purchase their shares.
Therefore, the investors in this offering will bear a substantial portion of the
risk of loss. Investors in this offering will suffer immediate and substantial
dilution. See "Dilution."
13
<PAGE> 19
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about PLX, including:
- Our ability to identify trends in our target markets and to offer new
semiconductor devices that address the changing needs of our target
customers,
- Availability of production capacity at the fabrication facilities that
manufacture our products,
- Changes in our pricing policies and those of our competitors or
suppliers,
- Our ability to compete successfully against direct and indirect
competitors, and
- Growth in demand for embedded systems.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
TRADEMARKS
Each trademark, trade name or service mark appearing in this prospectus
belongs to its respective holder. Among the trademarks that we claim rights to
are PLX, PLXMon, PLXMon 98, I(2)O Manager, I(2)OMon, Data Pipe Architecture and
FlexPORT.
INFORMATION IN PROSPECTUS
Unless otherwise specifically stated, the information in this prospectus
has been adjusted to reflect the automatic conversion of all outstanding shares
of preferred stock into shares of common stock, but does not take into account
the possible sale of additional shares of common stock to the underwriters
pursuant to the underwriters' right to purchase additional shares to cover
over-allotments.
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent accounting firm and quarterly
reports for the first three quarters of each fiscal year containing interim
unaudited financial information.
14
<PAGE> 20
USE OF PROCEEDS
Based on an assumed initial public offering price of $8.50 per share, our
net proceeds from the sale of the 3,300,000 shares of our common stock will be
approximately $25,386,500. If the underwriters' over-allotment option is
exercised in full, our net proceeds will be approximately $29,299,475.
The principal purposes of this offering are:
- to increase our working capital,
- to create a public market for our common stock,
- to facilitate future access by us to public equity markets, and
- to provide increased visibility and credibility to us.
We intend to use the net proceeds primarily for general corporate purposes,
including working capital. We may, when and if the opportunity arises, use an
unspecified portion of the net proceeds to acquire or invest in complementary
businesses, products and technologies. We have no present understandings,
commitments or agreements with respect to any material acquisition of, or
investment in, third parties. Pending use of the net proceeds for the above
purposes, we intend to invest the funds in interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock, and
currently we do not intend to pay dividends in the foreseeable future. We plan
to retain any earnings for use in the operation of our business and to fund
future growth.
15
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of PLX as of December 31,
1998 as follows:
- on an actual basis;
- on a pro forma basis to give effect to the conversion of all outstanding
shares of our preferred stock into common stock; and
- on a pro forma, as adjusted basis to reflect the application of the
estimated net proceeds from the initial public offering and the
conversion of all outstanding shares of our preferred stock into common
stock.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------
PRO FORMA
PRO AS
ACTUAL FORMA ADJUSTED
------ ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Stockholders' equity(1):
Preferred stock, $0.001 par value; 5,000,000 shares
authorized -- pro forma as adjusted, no shares
issued and outstanding -- actual, pro forma and
pro forma as adjusted........................... $ -- $ -- $ --
Redeemable convertible preferred stock, $0.001 par
value; 5,000,000 shares authorized, 4,868,738
shares designated, 4,579,636 shares issued and
outstanding -- actual; no shares issued and
outstanding -- pro forma and pro forma as
adjusted........................................ 5 -- --
Common stock, $0.001 par value; 30,000,000 shares
authorized, 4,626,643 shares issued and
outstanding -- actual; 18,365,551 shares issued
and outstanding -- pro forma; 21,665,551 shares
issued and outstanding -- pro forma as
adjusted(2)..................................... 5 18 22
Additional paid in capital......................... 5,616 5,608 30,991
Retained earnings.................................. 2,580 2,580 2,580
Deferred compensation.............................. (283) (283) (283)
Stockholders' notes receivable..................... (163) (163) (163)
------ ------ -------
Total stockholders' equity......................... 7,760 7,760 33,147
------ ------ -------
Total capitalization....................... $7,760 $7,760 $33,147
====== ====== =======
</TABLE>
- -------------------------
(1) Reflects our reincorporation in Delaware in March 1999.
(2) Excludes 1,300,000 shares of common stock reserved for issuance under our
1998 Stock Incentive Plan and 1,000,000 shares of common stock reserved for
issuance under our 1999 Stock Incentive Plan. See "Description of Capital
Stock -- Authorized and Outstanding Capital Stock" and Note 5 to
Consolidated Financial Statements.
16
<PAGE> 22
DILUTION
The pro forma net tangible book value of PLX at December 31, 1998, after
giving effect to the conversion of all outstanding shares of our preferred stock
into shares of common stock upon completion of this offering, was approximately
$7,759,798, or $0.42 per share. Pro forma net tangible book value per share is
equal to our total tangible assets less our total liabilities, divided by the
total number of shares of our common stock outstanding, after giving effect to
the conversion of all outstanding shares of our preferred stock into shares of
common stock. After giving effect to the sale of 3,300,000 shares of our common
stock offered by PLX hereby at an assumed initial public offering price of $8.50
per share and after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us, our as adjusted pro forma net
tangible book value at December 31, 1998 would have been approximately
$33,146,298, or $1.53 per share. This represents an immediate increase in net
tangible book value of $1.11 per share to existing stockholders and an immediate
dilution of $6.97 per share to new investors purchasing shares of our common
stock in this offering. The following table illustrates the per share dilution
to the new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $8.50
Pro forma net tangible book value per share at December
31, 1998............................................... $0.42
Increase per share attributable to this offering.......... 1.11
As adjusted pro forma net tangible book value per share
after the offering........................................ 1.53
-----
Dilution per share to new investors in this offering........ $6.97
=====
</TABLE>
The following table summarizes on a pro forma basis, as of December 31,
1998, the total number of shares of our common stock purchased from PLX, the
total consideration paid and the average price per share paid by the existing
stockholders and by the new investors in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing
stockholders....... 18,365,551 84.8% $ 5,264,682 15.8% $0.29
New investors........ 3,300,000 15.2 28,050,000 84.2 8.50
---------- ----- ----------- -----
Total...... 21,665,551 100.0% $33,314,682 100.0%
========== ===== =========== =====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
outstanding as of December 31, 1998. As of December 31, 1998, there were options
outstanding to purchase a total of 645,250 shares of common stock at a weighted
average exercise price of $4.91 per share and 154,750 shares reserved for future
grant under our 1998 Stock Option Plan. To the extent that any of these shares
are issued, there will be further dilution to new investors. See
"Capitalization," "Management -- Stock Option Plans" and Note 5 of Notes to
Consolidated Financial Statements.
17
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of PLX, including the
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus. The
consolidated statement of operations data for the years ended December 31, 1996,
1997 and 1998 and consolidated balance sheet data at December 31, 1997 and 1998
have been derived from the consolidated financial statements, that have been
audited by Ernst & Young LLP, independent auditors, included elsewhere in this
prospectus. The consolidated statement of operations for the years ended
December 31, 1995 and the consolidated balance sheet data at December 31, 1995
and 1996 were derived from the consolidated financial statements that have been
audited by Ernst & Young LLP, independent auditors, which are not included in
this prospectus. The consolidated statement of operations data for the year
ended December 31, 1994 and the consolidated balance sheet data at December 31,
1994 have been derived from unaudited consolidated financial statements not
included in this prospectus. The unaudited consolidated financial statements
have been prepared by us on a basis consistent with our audited consolidated
financial statements and, in management's opinion, include all adjustments,
necessary for a fair presentation of such information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net revenues........................................ $4,043 $9,316 $9,813 $17,534 $26,276
Cost of revenues.................................... 1,805 5,511 4,526 6,976 9,671
------ ------ ------ ------- -------
Gross profit........................................ 2,238 3,805 5,287 10,558 16,605
Operating expenses:
Research and development.......................... 1,281 1,544 1,854 4,156 6,552
Selling, general and administrative............... 908 1,245 2,540 4,411 6,670
------ ------ ------ ------- -------
Total operating expenses.................. 2,189 2,789 4,394 8,567 13,222
------ ------ ------ ------- -------
Income from operations.............................. 49 1,016 893 1,991 3,383
Interest income (expense) and other, net............ 22 49 37 44 75
------ ------ ------ ------- -------
Income before income taxes.......................... 71 1,065 930 2,035 3,458
Provision for income taxes.......................... -- 16 39 111 692
------ ------ ------ ------- -------
Net income.......................................... $ 71 $1,049 $ 891 $ 1,924 $ 2,766
====== ====== ====== ======= =======
Historical basic net income per share............... $ 0.02 $ 0.36 $ 0.28 $ 0.58 $ 0.77
Pro forma basic net income per share(1)............. $ 0.16
Historical and pro forma diluted net income per
share(1).......................................... $ 0.00 $ 0.06 $ 0.05 $ 0.11 $ 0.15
Shares used to compute basic net income per share... 2,848 2,897 3,137 3,293 3,601
Shares used to compute pro forma basic net income
per share(1)...................................... 17,340
Shares used to compute historical and pro forma
diluted net income per share(1)................... 16,653 16,768 17,287 17,758 18,405
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents........................... $ 331 $1,444 $1,077 $ 2,701 $ 5,638
Working capital..................................... 763 1,682 2,257 3,591 6,116
Total assets........................................ 1,672 3,149 4,053 8,013 11,766
Long-term debt...................................... -- -- -- -- --
Total stockholders' equity.......................... 919 1,989 2,909 4,889 7,760
</TABLE>
- -------------------------
(1) Calculated on a pro forma basis to give effect to the conversion of all
outstanding shares of our preferred stock into common stock.
18
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under "Risk Factors" and elsewhere in this prospectus.
The following discussion should be read in conjunction with our Consolidated
Financial Statements and related notes thereto included elsewhere in this
prospectus.
OVERVIEW
PLX was founded in 1986, and since 1994 we have focused on development of
I/O interface semiconductors and related software and development tools that are
used in systems incorporating the PCI standard. In 1994 and 1995, a significant
portion of our revenues was from the sale of semiconductor devices that perform
similar functions as our current products, except they were based on a variety
of industry standards. Our revenues since 1996 have been derived predominantly
from the sale of semiconductor devices based on the PCI standard to a large
number of customers in a variety of applications including networking and
telecommunications, enterprise storage, imaging, industrial and other embedded
applications as well as in related adapter cards. We generate a small portion of
our revenues from sales of our software and development tools.
We utilize a "fabless" semiconductor business model whereby we purchase
packaged and tested semiconductor devices from independent manufacturing
foundries. This approach allows us to focus on defining, developing, and
marketing our products and eliminates the need for us to invest large amounts of
capital in manufacturing facilities and work-in-process inventory.
We rely on a combination of direct sales personnel and distributors and
manufacturers' representatives throughout the world to sell a significant
portion of our products. We pay manufacturers' representatives a commission on
sales while we sell products to distributors at a discount from the selling
price. We recognize revenue at the time of product shipment to electronic
equipment manufacturers. Revenues from sales to distributors that are made under
agreements which allow the return of products unsold by the distributor are not
recognized until the distributor ships the product to its customer. See "Risk
Factors -- A Large Portion of Our Revenues Is Derived From Sales to Third-Party
Distributors Who May Terminate Their Relationships with Us at Any Time."
Our gross margins have fluctuated in the past and are expected to fluctuate
in the future due to changes in product mix, the position of our products in
their respective life cycles, and specific product manufacturing costs.
The time period between initial customer evaluation and design completion
can range from six to twelve months or more. Furthermore, there is typically an
additional six to twelve month or greater period after design completion before
a customer commences volume production of equipment incorporating our products.
Due to these lengthy sales cycles, we may experience significant fluctuations in
new orders from month to month. Consequently, if anticipated sales and shipments
in any quarter do not occur when expected, expenses and inventory levels could
be disproportionately high, and our results for that quarter and potentially
future quarters would be materially and adversely affected.
19
<PAGE> 25
Our long-term success will depend on our ability to introduce new products.
Although typically new products generate little or no revenues during the first
twelve to twenty-four months following their introduction, our revenues in
subsequent periods depend upon these new products. Due to the lengthy sales
cycle and additional time for customers to commence volume production,
significant revenues from our new products typically occur only twelve to
twenty-four months after product introduction. As a result, revenues from newly
introduced products have been a small percentage of revenues in the year the
product was introduced. See "Risk Factors -- Our Lengthy Sales Cycle Can Result
in Uncertainty and Delays with Regard to Our Expected Revenues."
RESULTS OF OPERATIONS
The following table summarizes historical results of operations as a
percentage of net revenues for the periods shown.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Net revenues........................................... 100.0% 100.0% 100.0%
Cost of revenues....................................... 46.1 39.8 36.8
----- ----- -----
Gross profit........................................... 53.9 60.2 63.2
Expenses:
Research and development............................. 18.9 23.7 24.9
Selling, general and administrative.................. 25.9 25.2 25.4
----- ----- -----
Total operating expenses..................... 44.8 48.9 50.3
----- ----- -----
Operating income....................................... 9.1 11.3 12.9
Interest income (expense) and other, net............... 0.4 0.3 0.3
----- ----- -----
Income before income taxes............................. 9.5 11.6 13.2
Provision for income taxes............................. 0.4 0.6 2.6
----- ----- -----
Net income............................................. 9.1% 11.0% 10.6%
===== ===== =====
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
Net Revenues. Revenues consist of product revenues generated principally by
sales of our semiconductor devices. Revenues for 1998 were $26.3 million, an
increase of $8.8 million or 50% from 1997. Revenues for 1997 were $17.5 million,
an increase of $7.7 million or 79% from $9.8 million for 1996. In each year the
increase was primarily due to higher volume shipments of PCI products.
Gross Profit. Gross profit represents net revenues less the cost of
revenues. Cost of revenues includes the cost of purchasing packaged
semiconductor devices from our independent foundries, our operating costs
associated with the procurement, storage, and shipment of products, as well as
royalty expenses paid on some of our products. Gross profit for 1998 was $16.6
million, an increase of $6.0 million or 57% from 1997. Gross profit for 1997 was
$10.6 million, an increase of $5.3 million or 100% from $5.3 million for 1996.
Gross profit as a percentage of revenues was 63.2% in 1998, 60.2% in 1997 and
53.9% in 1996. In each year, the increase in absolute dollars was primarily due
to higher revenues. Gross margin as a percentage of revenues increased in 1998
from 1997 and in 1997 from 1996 primarily due to lower product costs.
20
<PAGE> 26
Research and Development Expenses. Research and development expenses
consist primarily of salaries and related costs of employees engaged in
research, design, and development activities. In addition, expenses for outside
engineering consultants and non-recurring engineering at our independent
foundries are included in research and development expenses. Research and
development expenses for 1998 were $6.6 million, an increase of $2.4 million or
57% from 1997. Research and development expenses for 1997 were $4.2 million, an
increase of $2.3 million or 124% from 1996 expenses of $1.9 million. Research
and development expenses as a percentage of revenues were 24.9% in 1998, 23.7%
in 1997 and 18.9% in 1996. In each year, the increase in absolute dollars was
primarily due to the addition of personnel for the development of new products
and the enhancement of existing products, as well as payments to outside
consultants where specific resources were needed in the development process. The
increase in research and development expenses as a percentage of revenues
reflects an increase in the number of new semiconductor products being developed
by us as well as an increase in the number of new development tools and software
being developed. We expect that research and development expenses in absolute
dollars will likely increase in future periods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of employee related expenses,
professional fees, trade show and other promotional expenses, and sales
commissions to manufacturers' representatives. Selling, general and
administrative expenses for 1998 were $6.7 million, an increase of $2.3 million
or 51% from 1997. Selling, general and administrative expenses for 1997 were
$4.4 million, an increase of $1.9 million or 74% from $2.5 million in 1996.
Selling, general and administration expenses as a percentage of revenues were
25.4% in 1998, 25.2% in 1997 and 25.9% in 1996. In each year, the increase in
absolute dollars principally reflected higher personnel related costs resulting
from an increase in sales and marketing personnel as well as increased sales
commissions from higher product revenues. We expect that selling, general and
administrative expenses in absolute dollars will likely increase in future
periods, but will generally remain constant as a percentage of revenues.
Deferred Compensation. In connection with the grant of restricted stock and
options to our employees during 1997 and 1998, we recorded aggregate deferred
compensation of $361,300, representing the difference between the deemed value
of our common stock for accounting purposes and the restricted stock purchase
price or stock option exercise price at the date of grant. The amount of
deferred compensation is presented as a reduction of stockholders' equity and
amortized ratably over the vesting period of the applicable stock grants.
Amortization of deferred compensation recorded in 1998 was $78,681. We currently
expect to record amortization of deferred compensation related to these stock
grants of approximately $20,000 per quarter through December 31, 2001.
Interest Income (Expense) and Other, Net. Interest and other income, net
reflects interest earned on average cash, cash equivalents and short-term
investment balances, less interest on our bank credit line. Interest and other
income, net for 1998 was $75,163. Interest and other income, net for 1997 was
$43,898, an increase of $6,883 or 19% from $37,015 in 1996. In each year, the
increase was primarily due to interest earned on higher levels of short-term
investments and cash balances.
Provision for Income Taxes. Income tax expenses as a percentage of pretax
income were 20%, 5% and 4%, for the years ended December 31, 1998, 1997 and
1996, respectively. Our effective tax rate in 1998 differs from the applicable
statutory rate primarily due to the benefit of research and development tax
credits and the realization of deferred tax assets. Our tax rates in 1997 and
1996 differ from the applicable statutory rate primarily due to the
21
<PAGE> 27
benefit of net operating loss and research and development tax credit
carryforwards. We expect that the effective tax rate in future periods will
increase from historical rates.
The valuation allowance for deferred tax assets decreased by $407,000 and
$639,000 in 1998 and 1997, respectively. Decreases in the valuation allowance
were based upon taxable income earned in 1998 and 1997, as well as management's
expectations of future taxable income. Although realization is not assured, we
believe we will generate future taxable income sufficient to realize the benefit
of the net deferred tax assets recognized.
22
<PAGE> 28
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected quarterly financial information for
each quarter of 1997 and 1998. This information is unaudited but, in the opinion
of our management, reflects all adjustments (consisting only of normal recurring
adjustments) that we consider necessary for a fair presentation of this
information in accordance with generally accepted accounting principles. These
quarterly results are not necessarily indicative of future results of
operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(IN THOUSANDS)
---------------------------------------------------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31,
1997 1997 1997 1997 1998 1998 1998 1998
------- -------- -------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............................ $3,890 $3,605 $4,805 $5,234 $5,413 $5,626 $7,385 $7,852
Cost of revenues........................ 1,829 1,616 1,639 1,892 2,008 2,108 2,622 2,933
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............................ 2,061 1,989 3,166 3,342 3,405 3,518 4,763 4,919
Expenses:
Research and development.............. 756 841 1,003 1,556 1,798 1,600 1,531 1,623
Selling, general and administrative... 836 983 1,168 1,424 1,448 1,568 1,686 1,968
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses................ 1,592 1,824 2,171 2,980 3,246 3,168 3,217 3,591
------ ------ ------ ------ ------ ------ ------ ------
Operating income........................ 469 165 995 362 159 350 1,546 1,328
Interest income (expense) and other
net................................... 10 11 9 14 14 14 19 28
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes.............. 479 176 1,004 376 173 364 1,565 1,356
Provision for (benefit from) income
taxes................................. 71 27 149 (136) 35 73 313 271
------ ------ ------ ------ ------ ------ ------ ------
Net income.............................. $ 408 $ 149 $ 855 $ 512 $ 138 $ 291 $1,252 $1,085
====== ====== ====== ====== ====== ====== ====== ======
Historical basic net income per share... $ 0.13 $ 0.05 $ 0.26 $ 0.15 $ 0.04 $ 0.08 $ 0.34 $ 0.28
Pro forma basic net income per share.... $ 0.01 $ 0.02 $ 0.07 $ 0.06
Historical and pro forma diluted net
income per share...................... $ 0.02 $ 0.01 $ 0.05 $ 0.03 $ 0.01 $ 0.02 $ 0.07 $ 0.06
Shares used in computing historical
basic net income per share............ 3,174 3,283 3,335 3,379 3,441 3,508 3,638 3,819
Shares used in computing pro forma basic
net income per share.................. 17,180 17,247 17,377 17,558
Shares used in computing historical and
pro forma diluted net income per
share................................. 17,385 17,505 17,863 18,280 18,420 18,420 18,405 18,375
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET REVENUES THREE MONTHS ENDED
---------------------------------------------------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31,
1997 1997 1997 1997 1998 1998 1998 1998
------- -------- -------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues......................... 47.0 44.8 34.1 36.1 37.1 37.5 35.5 37.3
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............................. 53.0 55.2 65.9 63.9 62.9 62.5 64.5 62.7
Expenses:
Research and development............... 19.4 23.3 20.9 29.7 33.2 28.4 20.7 20.7
Selling, general and administrative.... 21.5 27.3 24.4 27.1 26.8 27.9 22.8 25.1
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses....... 40.9 50.6 45.3 56.8 60.0 56.3 43.5 45.8
----- ----- ----- ----- ----- ----- ----- -----
Operating income......................... 12.1 4.6 20.6 7.1 2.9 6.2 21.0 16.9
Interest income (expense) and other
income, net............................ 0.3 0.3 0.2 0.3 0.3 0.2 0.3 0.4
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes............... 12.4 4.9 20.8 7.4 3.2 6.4 21.3 17.3
Provision for income taxes............... 1.8 0.7 3.1 (2.6) 0.6 1.3 4.2 3.5
----- ----- ----- ----- ----- ----- ----- -----
Net income............................... 10.6% 4.2% 17.7% 10.0% 2.6% 5.1% 17.1% 13.8%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
23
<PAGE> 29
Net Revenues. Revenues increased each quarter from the second quarter of
1997 through the fourth quarter of 1998 as a result of higher unit shipments of
our PCI products. The decrease in net revenues from $3.9 million in the first
quarter of 1997 to $3.6 million in the second quarter of 1997 was primarily due
to a reduction of unit shipments.
Gross Profit. Gross profit increases as a percentage of net revenues to
65.9% in the third quarter of 1997 and to 64.5% in the third quarter of 1998
were the result of lower product costs. The gross profit percentage in the
fourth quarter of 1998 declined slightly to 62.7%, due primarily to changes in
product mix.
Research and Development Expenses. Research and development expenses
increased in absolute dollars in each quarter from the first quarter of 1997
through the first quarter of 1998 primarily due to a significant increase in the
number of new product development programs including new software and
development tools. Research and development expenses as a percentage of net
revenues increased in each quarter from the first quarter of 1997 through the
first quarter of 1998, except for the third quarter of 1997 when net revenues
grew faster than research and development expenditures. These increases were due
to the increased number of new product development programs relative to product
shipments. Research and development expenses as a percentage of net revenues
declined each quarter from the second quarter of 1998 through the fourth quarter
of 1998. This reduction was due primarily to reductions in outside consulting
and non-recurring engineering expenses, which related to the timing and
completion of product development projects, and increased product shipments.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased in absolute dollars through the fourth quarter
of 1998 as we expanded our infrastructure to accommodate higher unit shipments
and expanding operations. In addition, commissions to manufacturers'
representatives have increased with revenues and marketing expenses have
increased due to new product introductions.
Fluctuations in Quarterly Results. Our quarterly results of operations have
fluctuated significantly in the past and are expected to fluctuate significantly
in the future based on a number of factors, many of which are not in our
control. We believe period to period comparisons are not necessarily meaningful
and should not be relied upon as indicative of future results. See "Risk
Factors -- Our Operating Results May Fluctuate Significantly Due to Factors
Which Are Not Within Our Control."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through a combination of
private sales of equity securities and cash generated by operations. At December
31, 1998, we had $6.1 million in working capital and $5.6 million in cash and
cash equivalents. Our operating activities generated cash of $4.0 million, $2.6
million and $307,688 in 1998, 1997 and 1996, respectively. Cash provided by
operating activities in 1998, 1997, and 1996 was primarily attributable to net
income adjusted for depreciation. In addition, cash provided by operating
activities in 1998 was also due to a decrease in our accounts receivable
balance. The decrease in accounts receivable was primarily due to the fact that,
as compared with the fourth quarter of 1997, there were more shipments of
products earlier in the fourth quarter of 1998, which enabled us to collect more
of our 1998 accounts receivable prior to year end.
24
<PAGE> 30
Our investing activities used cash of $1.1 million in 1998 and $1.0 million
and $602,850 in 1997 and 1996, respectively. These investing activities were
primarily for the purchase of capital equipment. Cash provided by financing
activities was approximately $26,000 in 1998 and $56,000 in 1997. Cash used in
financing activities was approximately $72,000 in 1996. The main source of cash
from financing activities in 1998 was the repayment of notes receivable from
stockholders. In 1996, cash was used to repay outstanding notes payable.
In February 1999, we signed a commitment letter with Comerica Bank for a
$1.5 million line of credit. Currently, this line of credit has not been
finalized and there are no amounts outstanding.
As of December 31, 1998, we had no material commitments outstanding.
We believe that the net proceeds of this offering, together with cash
generated from our operations and funds available under our credit facilities
will be sufficient to meet our capital requirements for at least the next twelve
months. Our future capital requirements will depend on many factors, including
the inventory levels we maintain, the level of investment we make in new
technologies and improvements to existing technologies, the levels of monthly
expenses required to launch new products. To the extent that the funds generated
by this offering, together with existing resources and future earnings, are
insufficient to fund our future activities, we may need to raise additional
funds through public or private financing. Additional funds may not be available
or, if available, we may not be able to obtain them on terms favorable to us and
our stockholders. See "Use of Proceeds."
YEAR 2000 READINESS DISCLOSURE
State of Readiness. We utilize a number of computer software programs and
operating systems across our entire organization, including applications used in
financial business systems and various administrative functions. To the extent
that our software applications contain source code that is unable to
appropriately interpret the upcoming Year 2000 and beyond, some level of
modification or replacement of such applications will be necessary. We believe
that our internal Year 2000 issues are limited to information technology, or IT
systems such as software programs and computer operating systems, and we are
working closely with the suppliers of such systems to ensure that all systems
are Year 2000 compliant. Employing a team made up of internal personnel, we have
completed our identification of IT systems that are not yet Year 2000 compliant
and have commenced modification or replacement of non-compliant systems as
necessary. We have also completed our assessment of the Year 2000 compliance
issues presented by our semiconductor hardware and software products. We
anticipate that modification or replacement and testing of these systems will be
completed by September 30, 1999. None of our hardware or software products has
Year 2000 issues that require product modification or replacement.
We are highly dependent on a few semiconductor foundry companies to produce
the majority of our products. To the extent that Year 2000 issues effect these
suppliers' ability to deliver product, we must review the suppliers plans for
Year 2000 compliance and satisfy ourselves that they have made the necessary
modifications to or replacements of their affected systems. We have requested
these plans and will evaluate them as they are received. We anticipate that this
evaluation will be completed by September 30, 1999. We will rely primarily on
the suppliers' commitments to accomplish this task but have no contractual
commitment from the suppliers regarding Year 2000 issues.
25
<PAGE> 31
Costs of Addressing Year 2000 Issues. Given the information known at this
time about our non-compliant systems, coupled with ongoing, normal
course-of-business efforts to upgrade or replace critical systems, as necessary,
we do not expect Year 2000 compliance costs to have any material adverse impact
on our business. We estimate that total costs for the Year 2000 compliance
assessment and remediation will not exceed $50,000. The costs of this assessment
and remediation will be paid out of general and administrative expenses.
Risks of Year 2000 Issues. In light of our assessment and remediation
efforts to date, and the planned, normal course-of-business upgrades, we believe
that any residual Year 2000 risk is limited to non-critical business
applications and support hardware. No assurance can be given, however, that all
of our systems will be Year 2000 compliant or that compliance will not have a
material adverse effect on our business. We also do not have any assurance that
the manufacturers who supply semiconductors for us will be Year 2000 compliant
with their internal systems; a reduction in the supply of product from these
suppliers could have a material adverse effect on our business.
Contingency Plans. We believe that, if our suppliers are not Year 2000
compliant, the reasonably likely worst case would be that we would be unable to
receive products from them on a timely basis which would disrupt our shipments
to customers and could materially adversely affect our business. In addition, if
our IT systems are not Year 2000 compliant, we may be unable to process customer
orders, which could also lead to shipment delays. We plan to develop a
contingency plan for all operations to address the most reasonably likely worst
case scenarios regarding Year 2000 compliance. We expect this contingency plan
to be completed by June 30, 1999.
FINANCIAL MARKET RISK
Our principal financial market risk relates to the interest rates
associated with our available-for-sale securities. At December 31, 1998, our
market risk related to these investments was immaterial and all these
investments had original maturities not exceeding 90 days.
26
<PAGE> 32
BUSINESS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of factors,
including those set forth under "Risk Factors" and elsewhere in this prospectus.
INDUSTRY BACKGROUND
Embedded systems are found in many common products and offer varying levels
of performance depending on each product's requirements. These products range
from low performance devices such as electronic toys and microwave ovens to very
complex, high-performance electronic equipment such as network routers and
switches. High-performance embedded systems offer increased data processing
capabilities and typically utilize one or more 32-bit or 64-bit microprocessors,
fast memories and peripherals, and sophisticated operating systems or control
code.
Demand for high-performance embedded systems, which are designed to
transmit, store and process information rapidly, has dramatically increased due
to the:
- growth of the Internet,
- deployment of high-speed networking and
- proliferation of multimedia.
Markets for electronic equipment that rely on high-performance embedded
systems include the following:
Networking and Telecommunications. Networking and telecommunications
applications include digital telephony, remote access servers, routers,
network switches and cable modem equipment. This market segment is growing
rapidly due to the rise of the Internet and the proliferation of high
bandwidth communication technologies such as Fast Ethernet, Gigabit
Ethernet, Asynchronous Transfer Mode, or ATM, cable modem, and Digital
Subscriber Line, or xDSL.
Enterprise Storage. Enterprise storage applications include disk storage
subsystems, automated tape libraries and file servers. The growing use of
multimedia applications and storage networks is driving corporate demand
for increased data storage capacity.
Imaging. Imaging applications include printers, copiers, medical
instrumentation and video and graphics equipment. The demand for better
image quality and faster performance, as well as connection of these
applications to high-speed networks, have increased their data processing
requirements.
Industrial. Industrial applications include a wide range of process control
computers and factory automation equipment. These products have high data
transfer rate requirements, are used to monitor and control complex
processes in real-time and are being increasingly attached to networks.
Manufacturers of products that rely on high-performance embedded systems
seek to maximize the performance and minimize the cost of their increasingly
complex products. In addition, these manufacturers must develop and bring new
products to market quickly to keep pace with technological advancements.
27
<PAGE> 33
THE I/O SUBSYSTEM
A typical embedded system can be described in terms of four primary
functions: the host microprocessor, the memory, the peripherals and the
input/output, or I/O, subsystem. The host microprocessor is the primary control
center for the system. The memory acts as a storage area for instructions to be
executed and data to be processed. The peripherals enable connections between
the system and other external devices such as network components, printers and
storage systems. The I/O subsystem is the circuitry and software that connects
these three other functions and allows for the transfer of instructions and data
among these functions. The I/O subsystem includes the system bus which is a
physical connection between these different functions. High-performance
electronic equipment can contain multiple embedded systems, each requiring a
separate I/O subsystem. The following diagram illustrates the major components
of a typical embedded system:
[Diagram illustrating the major components of a typical embedded system.]
To enable increased performance and functionality from computer systems,
semiconductor suppliers have historically focused on improving the operation of
peripherals, microprocessors and memories. The I/O subsystem must also improve
to keep pace with these improvements by transferring more information at faster
speeds.
As data transfer requirements for the I/O subsystem have increased, so has
the complexity of its interface components such as processors, logic and related
software. Until recently, most embedded systems used simple I/O subsystems that
contained no processors, limited logic and rudimentary software, if any. Complex
I/O subsystem components such as processors, elaborate control logic and
advanced software were costly, and therefore their use was confined to very
high-end equipment such as mainframe computers. Furthermore, the lack of widely
accepted I/O standards impeded the use of complex I/O subsystems in other than
high-end applications. However, advances in semiconductor technology combined
with the widespread adoption of standards in embedded systems have enabled the
development of highly integrated semiconductor devices that can better manage
I/O subsystem performance at lower cost.
PENETRATION OF I/O STANDARDS IN EMBEDDED SYSTEMS
Until recently embedded systems manufacturers relied on a wide variety of
proprietary and a fragmented set of industry standard I/O architectures. For
example, many
28
<PAGE> 34
networking, imaging, storage and industrial applications employed proprietary
architectures to meet their specific performance and cost requirements. A mix of
standard buses such as VMEbus, Multibus and ISA was used in some industrial,
telecommunications and military applications. Embedded system software was even
more fragmented with many proprietary and application specific software
architectures in use. While embedded developers could take advantage of many
standard microprocessor, memory and peripheral components supplied by external
vendors, the lack of acceptable I/O standards forced many to develop custom I/O
subsystems internally, placing a heavy demand on development resources.
The deployment of the PCI standard was one of the catalysts for the
widespread adoption of I/O standards in embedded systems. In the early 1990s, PC
manufacturers developed PCI, a new standard hardware architecture to connect the
major components of a PC at high speed. It offered up to a one hundred times
improvement in I/O data transfer rates over the previous architectures. By the
mid-1990s, PCI became the most widely used bus architecture in the PC market.
Consequently, most suppliers of peripheral semiconductor components used in PCs
adopted PCI as the standard system interface. PCI is now emerging as the
standard I/O architecture for many high-performance embedded systems because it
allows the use of low cost and state-of-the-art peripheral semiconductor
components developed for the PC market and provides a foundation for embedded
system interoperability. PCI also offers equivalent or superior performance to
the in-house developed standards of many embedded equipment suppliers.
Furthermore, the use of PCI enables faster time to market, lower development
cost and the ability to quickly integrate new I/O components.
Although the PCI standard has resolved many development issues relating to
I/O hardware architectures, software remains a challenge. The lack of standards
for I/O control software and the wide use of proprietary operating systems place
a significant demand on development resources. Consequently, embedded developers
are increasingly adopting standard operating systems with well-defined I/O
structures as opposed to developing their own software internally. Examples
include Windows NT, Windows CE and standard operating systems from companies
such as Wind River and Integrated Systems. In a related development, a
consortium of industry leaders approved a new specification, Intelligent I/O, or
I(2)O, in 1997 to address software compatibility and performance issues. I(2)O
architecture enables more efficient use of the PCI bus and can result in higher
data transfer rates and thus increased embedded system performance. Instead of
designing proprietary software, developers can use I(2)O architecture as a
standard software architecture that reduces software development time and costs.
Furthermore, by using I(2)O architecture, embedded system suppliers can more
easily integrate third party system components, thereby reducing development
costs and improving time-to-market.
NEED FOR STANDARD I/O PRODUCTS AND COMPREHENSIVE I/O SOLUTIONS
Even with standard I/O specifications, design teams must still create the
circuitry and related software that implements these specifications. Designers
must also update their I/O subsystems to include frequent improvements in these
specifications.
Instead of developing all the hardware and software technology internally,
embedded systems developers seek to focus their scarce engineering resources on
the proprietary features of their products. By using standard semiconductor
devices in the I/O subsystem instead of using custom-designed devices they are
able to implement the basic framework of the system more easily and thereby
reduce the I/O subsystem design effort, providing faster time-to-market and
lower development cost. Standard products allow the design
29
<PAGE> 35
teams to concentrate their efforts on differentiating hardware and software
features. In addition to standard semiconductor devices, embedded designers can
benefit from several other design elements, such as data control software,
hardware design kits and third-party development tools to complete their
development work in a timely manner. These additional elements simplify
development and improve time to market. They provide the design team with proven
hardware and software design examples and the tools to adapt these examples to
the embedded designers' needs.
Due to the availability and adoption of I/O standards by embedded
developers, there is now a large demand for I/O subsystem components based on
these standards.
THE PLX SOLUTION
PLX develops and supplies semiconductor devices and software that
accelerate and manage the transfer of data in high-performance embedded systems.
Our solution consists of three related products:
- semiconductor devices,
- software development kits which assist in developing systems that
incorporate our semiconductor devices, and
- hardware design kits that allow development of a system using our
semiconductor devices and software development kits.
Development tools provided by third parties support these three related
products. These development tools are used for the design of other parts of the
embedded system but also work with our products.
Our products are designed for use in a variety of high-performance embedded
applications including networking and telecommunications, enterprise storage,
imaging and industrial. We focus on I/O accelerators and I/O processors, which
are highly integrated, cost-effective semiconductor devices that optimize the
flow of data and simplify the development of high-performance I/O subsystems.
Our software development kits and hardware design kits promote sales of our
semiconductor devices by lowering customers' development costs and allowing them
to bring new products to market more quickly.
PLX products provide I/O connectivity solutions for PCI and I(2)O and other
industry standards. As new I/O standards evolve, we expect to support them where
appropriate. More than 500 electronic equipment manufacturers use PLX
semiconductor devices in a wide variety of embedded systems applications.
Customers currently shipping systems that incorporate our products include 3Com,
Cisco Systems, Compaq Computer, Hewlett-Packard, IBM, Lucent Technologies,
Nortel Networks, Siemens and Tektronix.
STRATEGY
Our objective is to continue to expand our market position as a developer
and supplier of I/O connectivity solutions for high-performance embedded
systems. Key elements of our strategy include the following:
Focus on High-Growth Markets. We focus on high-growth embedded systems
markets including networking and telecommunications, enterprise storage, imaging
and industrial. Within these markets, there are many highly differentiated
applications with
30
<PAGE> 36
different design criteria such as product function, performance, cost, power
consumption, software, size limitations and design support. The requirements of
many of these differentiated applications are addressed by our products, and we
target those applications where we believe we can attain a leadership position.
Deliver Comprehensive Solutions. Our products provide embedded systems
developers with a comprehensive, proven development environment to simplify I/O
subsystem design, enhance performance, reduce development costs and accelerate
time-to-market. This solution consists of semiconductor devices, software
development kits and hardware design kits. These design elements are supported
by development tools provided by third parties. For example, our PCI 9080 I/O
accelerator is supported by two software development kits and five hardware
design kits which support microprocessors from Hitachi, IBM, IDT, Intel, and
Motorola.
Extend I/O Subsystem Technology. We offer our customers highly integrated
semiconductor devices and related software that incorporate many of the latest
advances in I/O technology. Our semiconductor devices and software are designed
to enable quick adoption of new I/O technologies and enhancements to existing
I/O standards. We seek to integrate additional I/O-related functions into our
semiconductor devices to provide our customers with increasing functionality at
the same or lower costs. For example, we are developing our IOP 480, a device
that will integrate IBM's PowerPC core with our PCI technology. We employ a team
of engineers with considerable expertise in embedded systems architectures,
product definition, semiconductor and software design and engineering to
maintain our I/O subsystem technology advantages.
Drive I/O Subsystem Standards for Embedded Applications. We believe that
our understanding of I/O technology trends and market requirements allows us to
bring to market more quickly new products that support the latest I/O
technologies. Through our participation in key industry groups responsible for
standards such as the PCI Special Interest Group, the PCI Industrial Computer
Manufacturers' Group and the I(2)O Special Interest Group, we have taken an
active role in defining new I/O standards.
Strengthen and Expand Industry Relationships. We work with industry leaders
in developing software development tools and marketing programs that promote the
use of each company's products. Key microprocessor partners include Hitachi,
IBM, IDT, Intel and Motorola, and key software partners include Integrated
Systems, Microsoft, Synopsys and Wind River. As a result of these relationships,
we enable embedded systems designers to choose the best products for their
particular applications while still employing our product as the core of their
I/O subsystem design.
CUSTOMERS
We supply our products to customers for a wide variety of high-performance
embedded systems applications including networking and telecommunications,
enterprise storage, imaging and industrial. We also have sales in other markets
such as the personal computer, server and consumer markets. The typical product
life cycle of a high performance embedded system is one to two years or more of
product development and initial marketing activity followed by two to five years
or more of volume production, assuming the product is successful in the market.
The embedded system design team typically selects the sole-source hardware and
software components early in the design cycle. Generally, the embedded system
will incorporate these same components throughout its product life because
changes require an expensive re-engineering effort. Therefore, when
31
<PAGE> 37
our products are designed into an embedded system, they are likely to be used in
that system throughout its two to five year or more production life.
Our products are standard semiconductor devices that may be incorporated
into equipment used in several of our target markets. More than 500 electronic
equipment manufacturers incorporate our semiconductor devices in their products.
The following table lists representative customers that purchased directly or
through distributors more than $100,000 of our products in 1998.
<TABLE>
<CAPTION>
NETWORKING AND
TELECOMMUNICATIONS ENTERPRISE STORAGE
- ----------------------------- -----------------------------
<S> <C>
3Com Compaq Computer
Artesyn Technologies IBM
Ascend Communications Network Appliance
Cabletron Systems IMAGING
Cisco Systems -----------------------------
Dialogic Hewlett-Packard
Digi International Kofax Image Products
Eicon Technology Optibase
Emulex Pinnacle Systems
Fore Systems Scitex
Gilat Satellite Networks Tektronix
IBM INDUSTRIAL
Intel -----------------------------
Interphase Siemens
Lucent Technologies Tektronix
Nortel Networks
Performance Technology
SDL
Shiva
</TABLE>
PRODUCTS
Our products consist of semiconductor devices, software development kits
and hardware design kits. Development tools provided by third parties support
these three design elements. Our semiconductor device products include I/O
accelerators and our announced I/O processor, which are designed to simplify the
development of high-performance I/O subsystems. The sales of these semiconductor
devices account for a substantial majority of our revenues. We generate a small
portion of our revenues from sales of our software and hardware design kits. The
other layers of our solution promote sales of our semiconductor devices by
lowering customers' development costs and allowing them to bring new products to
market more quickly.
I/O Accelerators and I/O Processors. Our I/O accelerators are semiconductor
devices that accelerate movement of data across a PCI bus and between one or
more devices or subsystems that need to communicate across the PCI bus. These
products incorporate the Data Pipe Architecture technology, a set of circuits
and features that enable efficient flow of data within systems with minimal
supervision from the system processor. Our I/O accelerators address a range of
applications and provide flexible interfaces that allow them to connect to a
wide variety of semiconductor devices, including processors such as IBM's and
Motorola's PowerPC, Intel's i960, Hitachi's SH, IDT's
32
<PAGE> 38
MIPs, and Motorola's 68K series. Customers also use these semiconductor devices
in connection with digital signal processors, or DSPs, which are specialized
microprocessors, from Texas Instruments, Analog Devices and others. The I/O
accelerators can be connected with a wide range of peripheral devices, including
LAN, WAN, disk control and graphics.
We have announced, but are not yet shipping, the IOP 480, our first I/O
processor, which combines the features of our I/O accelerator devices with a
microprocessor core and memory controller that can connect to a variety of
memory types and sizes. An I/O processor is a microprocessor designed to manage
I/O tasks and move data efficiently. The I/O processor will enhance overall
system performance by maximizing data flow and off-loading more I/O tasks from
the host processor, compared with an I/O accelerator. It will integrate, in one
cost and space-saving device, many of the circuit elements required for I/O
management. By combining several functions into one semiconductor device, the
IOP 480 will enable a more compact, power-efficient design, compared with
designs that use several semiconductor devices to achieve these functions.
Software Development Kits. Our software development kits are designed to
simplify and accelerate the development of systems that incorporate our
semiconductor devices. For PCI technology we offer PCI SDK software, which
shortens the time needed to develop the software used to transfer data through a
PCI bus. It includes a programming interface that enables developers to execute
complex transactions with simple commands. This programming interface allows
customers to migrate their designs, with the same software interface, from our
existing 32 bit I/O accelerators to our 64 bit I/O accelerators and I/O
processor products. This common interface allows customers to preserve their
software investment even as their designs evolve in complexity and as new I/O
architectures are deployed. The PCI SDK is applicable to both proprietary and
standard operating systems. Our software development kit for I(2)O Architecture
simplifies the development of software for I(2)O architecture-based technology.
Hardware Design Kits. We offer hardware design kits that support the
development of systems incorporating PLX semiconductor devices. We call our
hardware design kits "reference design kits." Designers use the hardware design
kits to evaluate our semiconductor devices and to simplify and accelerate
product development. Each hardware design kit includes a development circuit
board that designers can use to evaluate the PLX products and also design their
own system. These hardware design kits also include technical drawings,
documentation and other design assistance tools. Current hardware design kits
support IBM's PowerPC processors, Motorola's PowerQuicc processors, Intel's i960
processors, IDT's MIPs processors and Hitachi's SH processors.
To offer additional design support, we work with third party companies that
provide development tools for our customers. Although we receive no revenues
from these development tools, they promote sales of our semiconductor devices
because these tools often make it easier to develop embedded systems
incorporating our products. Examples include software development tools from
Diab Data, IBM, Integrated Systems, Microsoft, Netware, and Wind River and
software modeling tools from Synopsys.
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<PAGE> 39
Our principal product offerings and functions include the following:
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------
CATEGORY PRODUCT DESCRIPTION
- -----------------------------------------------------------------------------
SEMICONDUCTOR DEVICES
- -----------------------------------------------------------------------------
32-bit Target I/O PCI 9050 - Enables connection of 8-,
Accelerators PCI 9052 16- and 32-bit peripherals and
personal computer adapters
to PCI.
- -----------------------------------------------------------------------------
32-bit Master I/O PCI 9060 - Provides the flexibility to
Accelerators PCI 9060ES connect with a wide range of
PCI 9060SD processors, peripherals and
PCI 9080 memory including Motorola
PCI 9054 PowerQuicc, Intel i960, IBM
PowerPC, Hitachi SH, IDT
MIPs and Texas Instruments
DSPs.
- -----------------------------------------------------------------------------
32-bit I/O IOP 480 - Incorporates PowerPC
Processors microprocessor and memory
(Announced, in controller in addition to a
development) 32- bit master I/O
accelerator.
- -----------------------------------------------------------------------------
64-bit/66 MHz I/O PCI 9610 - Provides the flexibility to
Accelerators connect with a wide range of
(Announced, in microprocessors, peripherals
development) and memory including
Motorola PowerQuicc,
PowerQuiccII, Intel i960,
IBM PowerPC, Hitachi SH, IDT
MIPs and Texas Instruments
DSPs.
- -----------------------------------------------------------------------------
SOFTWARE DEVELOPMENT KITS
- -----------------------------------------------------------------------------
PCI Software PCI SDK - Provides tools for
accelerating design of data
transport software.
- Includes development and
debugging utilities, sample
firmware and drivers.
- -----------------------------------------------------------------------------
I(2)O Software SDK for I(2)O - Enables rapid development of
Architecture I(2)O software.
- -----------------------------------------------------------------------------
HARDWARE DESIGN KITS
- -----------------------------------------------------------------------------
Reference Design Eight kits supporting a - Include evaluation boards,
Kits range of products PCI SDK software,
documentation and schematics
to assist system
development.
- -----------------------------------------------------------------------------
</TABLE>
34
<PAGE> 40
TECHNOLOGY
We believe that supplying high-performance I/O connectivity solutions for
I/O subsystems requires expertise in four areas:
- semiconductor design,
- software technology,
- system design, and
- industry standards.
Semiconductor Design. Our engineers have substantial expertise in
semiconductor design and have developed a comprehensive library of complex
functional blocks for use in semiconductor devices for I/O connectivity. As a
result of this expertise, we offer both innovative architectures and high levels
of functionality. For example, our proprietary Data Pipe Architecture technology
allows the system developer a high degree of control over the PCI bus in order
to address specific design needs. In high-performance systems, the Data Pipe
Architecture technology enables data throughput that is several times faster
than typical approaches. We continue to integrate more functionality in our
semiconductor devices to reduce cost, improve performance, reduce size and
simplify the customer's design effort.
Software Technology. We devote substantial engineering resources to the
development of software technology used to assist the system developer in
debugging hardware and creating data control software. The quality and
availability of these tools are key differentiating factors between PLX and
competing alternatives. We are now shipping, as part of our software development
kits, our third generation PCI debugger, PLXMon 98. We continue to enhance and
expand our software development kits, which contain a set of programming
interfaces that simplify the development of software. Our software development
kit for I(2)O Architecture was the first commercially available private platform
I(2)O software development kit. As an example of our software advantages, we
licensed our I(2)O software technology to Integrated Systems, a leading supplier
of embedded operating systems, for use in Integrated System's I(2)O products.
Our software expertise provides us with valuable insights into our customers'
software development issues, which aids the definition and development of future
semiconductor devices.
System Design. We employ a team of system level design engineers that are
dedicated to the development of hardware design kits. These kits are
high-performance adapters and embedded systems that customers can use to assist
development of their products. Each of these hardware design kits is a system or
adapter similar in complexity to those built by our customers. The system design
experience provides us valuable insights which we can use to improve future
semiconductor device and software products.
Industry Standards. Through our participation in the key industry groups
responsible for standards such as the PCI Special Interest Group, the I(2)O
Special Interest Group and the PCI Industrial Computer Manufacturers' Group, we
take an active role in defining new I/O standards. In addition, we are closely
monitoring new I/O technologies to determine their applicability to our embedded
market customer base.
The following diagram displays a typical embedded system incorporating PLX
I/O Accelerators, I/O Processors and Data Control Software. The I/O subsystem
depicted below includes buses, semiconductor devices and software for moving
data through the
35
<PAGE> 41
system. The example shows a host connected to three types of peripherals which
have different performance levels and functions. The host software and three
sets of peripheral software shown on the right run on the corresponding hardware
on the left.
[Diagram showing a typical embedded system incorporating PLX I/O accelerators,
I/O processors and data control software]
COMPETITION
Competition in the semiconductor industry is intense. If our main target
market, the embedded systems market, continues to grow, the number of
competitors may increase significantly. In addition, new semiconductor
technology may lead to new products that can perform similar functions as our
products.
Competition in the various markets served by us comes from companies of
various sizes, many of which are significantly larger and have greater financial
and other resources than we do and thus can better withstand adverse economic or
market conditions than we. Our principal products compete with standard products
from companies such as Anchor Chips, Applied Micro Circuits, Galileo Technology,
Tundra Semiconductor, and V3 Semiconductor.
In addition, two alternative devices can perform some or all of the
functions of our semiconductor devices. The first is the Application Specific
Integrated Circuit, or ASIC. With the ASIC approach, a customer creates a custom
semiconductor device for a particular application. Because the customer buys the
ASIC directly from the semiconductor foundry, this approach may lead to lower
unit production costs. However, this approach entails a large initial investment
in developing the custom device. The second alternative device is the Field
Programmable Gate Array, or FPGA. The FPGA is a semiconductor device whose logic
function can be programmed by the system manufacturer. This requires less design
effort than the ASIC approach. However, because of the additional circuitry
required to enable the device to be programmed, this approach entails higher
unit production costs which can be prohibitive compared to ASICs or standard
semiconductor devices. Accordingly, we also experience indirect competition from
leading ASIC suppliers, including IBM, LSI Logic, NEC, and Toshiba as well as
from FPGA suppliers, including Altera, Atmel, Lucent
36
<PAGE> 42
Technologies, Quicklogic, Vantis, and Xilinx. As we start to sell our I/O
processor products, we will compete with established embedded microprocessor
companies including Hitachi, IBM, IDT, Intel, Motorola and others. Many of these
indirect competitors and processor companies are large companies that have
significantly greater financial, technical, marketing and other resources than
PLX.
We believe that the principal factors of competition in our business
include functionality, product performance, price, product innovation,
availability of development tools, customer service and reliability. We believe
that we compete favorably with respect to each of these factors. We
differentiate our products from those of our competitors by incorporating
innovative features that allow our customers to build systems based on industry
standards that are more efficient and higher in performance. Furthermore, in
general, our software and hardware development tools are more comprehensive than
competing solutions. However, we cannot assure you that we will be able to
compete successfully in the future against existing or new competitors, and
increased competition may adversely affect our business.
SALES, MARKETING AND TECHNICAL SUPPORT
Our sales and marketing strategy is to achieve design wins at leading
embedded systems companies in high-growth market segments. We market and sell
our products in the United States through a combination of direct regional sales
managers, a national distributor, and a network of independent manufacturers'
representatives. We maintain United States direct sales offices in Baltimore,
Boston, Chicago, Los Angeles, Raleigh and Sunnyvale.
Outside the United States, we have engaged a team of manufacturers'
representatives, stocking representatives and distributors to sell and market
our products. Our international network includes representatives in Australia,
Belgium, Canada, Denmark, France, Germany, Hong Kong, Israel, Japan, Korea,
Norway, Singapore, South Africa, Sweden, Taiwan, The Netherlands, and the United
Kingdom. We maintain a direct sales office in the United Kingdom to service
customers in Europe and the Middle East.
As of December 31, 1998, we employed 21 individuals in sales and marketing
and 9 in field and factory applications support. Sales in North America
represented 66%, 78% and 79% of product revenues for 1998, 1997 and 1996,
respectively. All sales to date have been denominated in U.S. dollars.
In 1998, sales to our exclusive United States distributor Unique
Technologies accounted for 22% of our revenues, and sales to a European
distributor, A2M, accounted for 11% of our revenues. Revenues related to sales
through distributors are expected to continue to account for a significant
portion of our total revenues. See "Risk Factors -- A Large Portion of Our
Revenues Is Derived from Sales to Third-Party Distributors Who May Terminate
Their Relationships with Us at Any Time."
Net revenues through distributors accounted for approximately 49%, 56% and
41% of our net revenues for 1998, 1997 and 1996, respectively. Sales to IBM
directly or through distributors accounted for 13% of our revenues. In 1997,
sales to no single customer accounted for 10% or more of our total revenues.
Technical support to customers is provided through field and factory
applications engineers, technical marketing personnel and, if necessary, product
design engineers. Local field support is provided in person or by telephone. We
also use our World Wide Web site
37
<PAGE> 43
to provide product documentation and technical support information. We believe
that providing customers with comprehensive product support is critical to
remaining competitive in the markets we serve. In addition, our close contact
with customer design engineers provides valuable input into existing product
enhancements and next generation product specifications.
RESEARCH AND DEVELOPMENT
Our future success will depend to a large extent on our ability to rapidly
develop and introduce new products and enhancements to our existing products
that meet emerging industry standards and satisfy changing customer
requirements. We have made and expect to continue to make substantial
investments in research and development and to participate in the development of
new and existing industry standards.
Our research and development has been focused in three main areas: PCI I/O
accelerators and I/O processors, hardware design kits and software development
kits. The majority of our engineers are involved in semiconductor device design
and verification, with the remaining engineers working on software and reference
design hardware. Before development of a new product commences, our marketing
managers work closely with research and development engineers and customers to
develop a comprehensive requirements specification. In addition, our marketing
managers and engineers review the applicable industry standards and incorporate
desired changes into the new product specification. After the product is
designed and commercially available, our engineers continue to work with various
customers on specific design issues to understand emerging requirements that may
be incorporated into future product generations or product upgrades.
Our research and development expenditures totaled $6.6 million in 1998 and
$4.2 million in 1997. Research and development expenses consist primarily of
salaries and related costs of employees engaged in research, design, and
development activities. In addition, expenses for outside engineering
consultants and non-recurring engineering at our independent foundries are
included in research and development expenses. As of December 31, 1998, there
were 31 employees engaged in research and development. We perform our research
and development activities at our headquarters in Sunnyvale, California. We are
seeking to hire additional skilled development engineers, who are currently in
short supply. Our business could be adversely affected if we encounter delays in
hiring additional engineers. See "Risk Factors -- Our Potential Future
Acquisitions May Not be Successful Because We Have Not Made Acquisitions in the
Past."
Our future performance depends on a number of factors, including our
ability to identify emerging technology trends in our target markets, define and
develop competitive new products in a timely manner, enhance existing products
to differentiate them from those of competitors and bring products to market at
competitive prices. The technical innovations and product development required
for us to remain competitive are inherently complex and require long development
cycles. We typically must incur substantial research and development costs
before the technical feasibility and commercial viability of a product can be
ascertained. We must also continue to make significant investments in research
and development in order to continually enhance the performance and
functionality of our products to keep pace with competitive products and
customer demands for improved performance. Revenues from future products or
product enhancements may not be sufficient to recover the development costs
associated with these products or enhancements. The failure to successfully
develop new products on a timely basis could have a material adverse effect on
our business. See "Risk Factors -- Rapid Technological Change Could Make Our
Products Obsolete."
38
<PAGE> 44
MANUFACTURING
We have adopted a "fabless" semiconductor manufacturing model and outsource
all of our semiconductor manufacturing, assembly and testing. This approach
allows us to focus our resources on the design, development and marketing of
products and significantly reduces our capital requirements. We subcontract
substantially all of our semiconductor manufacturing to Seiko-Epson
Semiconductor in Japan and Taiwan Semiconductor Manufacturing Corporation in
Taiwan. In the second quarter of 1999, IBM will become an additional
manufacturing subcontractor for one of our principal new products. None of our
products is currently manufactured by more than one supplier, and all of our
products are expected to be single-source manufactured for the foreseeable
future. We must place orders two to four months in advance of expected delivery.
We maintain inventory levels based on current lead times from foundries plus
safety stock to account for anticipated fluctuations in demand. Our inventory
comprises a major portion of our working capital. As a result, we have limited
ability to react to fluctuations in demand for our products, which could cause
us to have an excess or a shortage of inventory of a particular product and
reduced product revenues.
In the event of a loss of, or a decision by us to change, a key supplier or
foundry, qualifying a new supplier or foundry and commencing volume production
would likely involve delay and expenses, resulting in lost revenues, reduced
operating margins and possible detriment to customer relationships. Since we
place our orders on a purchase order basis and do not have a long term volume
purchase agreement with any of our existing suppliers, any of these suppliers
may allocate capacity to the production of other products while reducing
deliveries to us on short notice. While we believe we currently have good
relationships with our foundries and adequate capacity to support our current
sales levels, there can be no assurance that adequate foundry capacity will be
available in the future on acceptable terms, if at all. See "Risk Factors -- We
May Experience Shipment Delays and Increased Cost Due to Our Dependence on
Independent Manufacturers."
Our PCI devices are currently fabricated using a range of semiconductor
manufacturing processes. We must continuously develop our devices using more
advanced processes to remain competitive on a cost and performance basis.
Migrating to new technologies is a challenging task requiring new design skills,
methods and tools. We believe that the transition of our products to smaller
geometries will be important for us to remain competitive. Our business could be
materially adversely affected if any transition to new processes is delayed or
inefficiently implemented. See "Risk Factors -- Defects in Our Products Could
Increase Our Costs and Delay Our Product Shipments."
INTELLECTUAL PROPERTY
Our future success and competitive position depend upon our ability to
obtain and maintain the proprietary technology used in our principal products.
Most of our current products include implementations of the PCI and I(2)O
industry standards, which are available to other companies. We currently have no
patents on any of our PCI or I(2)O products and rely instead on trade secret
protection. We have two patents on technology in our other products that expire
in September 2007 and September 2014. In the future, we plan to seek patent
protection when we feel it is necessary.
Our existing or future patents may be invalidated, circumvented, challenged
or licensed to others. The rights granted thereunder may not provide competitive
advantages to us. In addition, our future patent applications may not be issued
with the scope of the claims sought by us, if at all. Furthermore, others may
develop technologies that are
39
<PAGE> 45
similar or superior to our technology, duplicate our technology or design around
the patents owned or licensed by us. In addition, effective patent, trademark,
copyright and trade secret protection may be unavailable or limited in foreign
countries where we may need this protection. We cannot be sure that steps taken
by us to protect our technology will prevent misappropriation of our technology.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions. This often results in
significant and often protracted and expensive litigation. There is no
intellectual property litigation currently pending against us. However, we may
from time to time receive notifications of claims that we may be infringing
patents or other intellectual property rights owned by other third parties. If
it is necessary or desirable, we may seek licenses under these third party
patents or intellectual property rights. However, we cannot be sure that
licenses will be offered or that the terms of any offered licenses will be
acceptable to us.
The failure to obtain a license from a third party for technology used by
us could cause us to incur substantial liabilities and to suspend the
manufacture or shipment of products or our use of processes requiring the
technology. Litigation could result in significant expenses to us, adversely
affect sales of the challenged product or technology and divert the efforts of
our technical and management personnel, whether or not the litigation is
determined in our favor. In the event of an adverse result in any litigation, we
could be required to pay substantial damages, cease the manufacture, use, sale
or importation of infringing products, expend significant resources to develop
or acquire non-infringing technology, and discontinue the use of processes
requiring the infringing technology or obtain licenses to the infringing
technology. We may not be successful in the development or acquisition, or the
necessary licenses may not be available under reasonable terms, and any
development, acquisition or license could require expenditures by us of
substantial time and other resources. Any of these developments would have a
material adverse effect on our business. See "Risk Factors -- Our Limited
Ability to Protect Our Intellectual Property and Proprietary Rights Could
Adversely Affect Our Competitive Position."
FACILITIES
We lease two adjacent facilities in Sunnyvale, California, which have
approximately 20,000 square feet and 15,000 square feet pursuant to two leases
which expire in February 2001 and November 2004, respectively. These two
facilities comprise our headquarters and include our research and development,
sales and marketing and administration departments. We believe that our current
facilities will be adequate through 1999.
EMPLOYEES
As of December 31, 1998, we employed a total of 71 full-time employees,
including 31 engaged in research and development, 30 engaged in sales and
marketing, 4 engaged in manufacturing operations and 6 engaged in general
administration activities. We also from time to time employ part-time employees
and hire contractors. Our employees are not represented by any collective
bargaining agreement, and we have never experienced a work stoppage. We believe
that our employee relations are good.
BACKLOG
PLX's backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period. This results from expected changes in
product delivery schedules
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<PAGE> 46
and cancellation of product orders. In addition, PLX's sales will often reflect
orders shipped in the same quarter that they are received.
LEGAL PROCEEDINGS
We may from time to time be a party to litigation matters incidental to the
conduct of our business. As of the date of this prospectus, there is no pending
or threatened legal proceeding to which we are a party.
41
<PAGE> 47
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, their ages and their positions as of
December 31, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael J. Salameh........... 44 President and Director
Kenyon Mei, Ph.D............. 53 Vice President, Engineering
Scott M. Gibson.............. 40 Vice President, Finance, Chief Financial
Officer and Secretary
Mark R. Easley............... 43 Vice President, Marketing
Michael A. Hopwood........... 36 Vice President, Worldwide Sales
William E. Hart.............. 46 Vice President, Operations
D. James Guzy, Sr.(1)(2)..... 62 Chairman of the Board of Directors
Eugene Flath(2).............. 61 Director
Timothy Draper(1)............ 40 Director
Young K. Sohn(3)............. 42 Nominee Director
John H. Hart(4).............. 53 Nominee Director
</TABLE>
- -------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Mr. Sohn has agreed to be nominated as director and is expected to be
elected to the Board of Directors immediately after the closing of the
offering.
(4) Mr. Hart has agreed to be nominated as director and is expected to be
elected to the Board of Directors immediately after the closing of the
offering.
Michael J. Salameh co-founded PLX and has served as our President and as a
member of the Board of Directors since PLX's inception in May 1986. From 1980
through 1986, Mr. Salameh was employed in various marketing management positions
with Hewlett-Packard Company. Mr. Salameh received a B.S. in Engineering and
Applied Science from Yale University and an M.B.A. from Harvard Business School.
Kenyon Mei, Ph.D., has served as our Vice President of Engineering since
joining us in August 1997. From 1985 through August 1997, Dr. Mei held various
senior level executive positions with Cirrus Logic, Inc., a semiconductor
company, including General Manager of the Personal Systems Division from 1992
through July 1997 and Senior Vice President of Engineering from 1985 through
1991. Dr. Mei received a B.S. and an M.S. in Electrical Engineering from the
University of California, Davis and a Ph.D. in Electrical Engineering from
Stanford University.
Scott M. Gibson has served as our Vice President of Finance and Chief
Financial Officer since joining us in October 1997. Mr. Gibson was employed by
YieldUP International Corporation, a semiconductor equipment manufacturer, as
Vice President and Chief Financial Officer from September 1995 through March
1997. Mr. Gibson served as Vice President of Customer Service for Tencor
Instruments, a semiconductor equipment manufacturer, from April 1994 through
June 1995. Mr. Gibson was employed by Prometrix Corporation, a semiconductor
equipment manufacturer, as Vice President and Chief Financial Officer from April
1992 until its merger with Tencor Instruments in
42
<PAGE> 48
February 1994. Mr. Gibson received a B.S. in Industrial Engineering from Iowa
State University and an M.B.A. from the University of Michigan Business School.
Mark R. Easley has served as our Vice President of Marketing since March
1996. From October 1993 through March 1996, he owned Mission Research
Enterprises Technical Sales, a manufacturers' representative company. From March
1986 through October 1993, Mr. Easley held various positions at Adaptec, Inc., a
semiconductor company including Director of Sales for Asia-Pacific and Japan
from July 1988 through October 1993 and Strategic Marketing Manager from March
1986 through June 1988. Mr. Easley is also a director of Sebring Systems, Inc.
Mr. Easley received a B.S. in Computer Science from Purdue University.
Michael A. Hopwood has served as our Vice President of Worldwide Sales
since 1995. From 1989 to 1995, he held a variety of other sales management
positions with our Company. From 1984 until 1989, Mr. Hopwood held various sales
positions at Intel Corporation, a semiconductor manufacturer. Mr. Hopwood
received a B.S. in Physics Engineering from Pacific Lutheran University.
William E. Hart has served as our Vice President of Operations since
January 1996. Between July 1993 and January 1996, he served as our Operations
Manager and Controller. From January 1992 to June 1993, Mr. Hart was employed by
Euphonix Inc., a digital audio equipment company, as its production manager.
From November 1982 through December 1991, Mr. Hart was employed as a
manufacturing manager for NTX Communications, a computer company. Mr. Hart
received a B.A. from St. Mary's College and a Masters degree in Public
Administration from California State University, Hayward.
D. James Guzy, Sr. has been a director of PLX since 1986. Mr. Guzy is the
Chairman, President and CEO of SRC Computer Corporation, a developer of super-
computer systems. Since 1969, he has also served as the President of the Arbor
Company, a limited partnership involved in the electronics and computer
industry. Mr. Guzy is also a director of Cirrus Logic, Inc., Intel Corporation,
Micro Component Technology, Inc., Novellus Systems, Inc., Davis Selected Group
of Mutual Funds and Alliance Capital Management Technology Fund, and a member of
the board of directors of several private technology companies, including
Sebring Systems. Mr. Guzy received a B.S. from the University of Minnesota and
an M.S. from Stanford University.
Eugene Flath has been a director of PLX since May 1989. Mr. Flath has been
a General Partner of Associated Venture Investors since February 1988 and a
Special General Partner of Applied Technology Investors since July 1994. Mr.
Flath also serves on the board of directors of several private companies. Mr.
Flath received a B.S. in Electrical Engineering and a B.S. in Naval Science from
the University of Wisconsin and an M.S. in Electrical Engineering from the
University of New Hampshire.
Timothy Draper has been a director of PLX since 1986. Mr. Draper has been a
Managing Director of Draper Fisher Jurvetson, an investment company since 1992.
Mr. Draper managed Draper Associates LP from 1986 to 1992. Mr. Draper received a
B.S. in Electrical Engineering from Stanford University and an M.B.A. from
Harvard Business School.
Young K. Sohn will become a member of our Board of Directors immediately
after completion of the offering. Mr. Sohn is currently serving as CEO of Oak
Technology, a semiconductor manufacturer. From 1992 until March 1999, Mr. Sohn
held various executive management positions at Quantum Corporation, a disk drive
manufacturer,
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<PAGE> 49
including President of the Hard Disk Drive Business. Prior to joining Quantum,
Mr. Sohn was employed for nine years at Intel as a Marketing and Sales Executive
and Director of Worldwide Channel Marketing in Intel's Reseller Channel
organization. Mr. Sohn received a B.S. in Electrical Engineering from the
University of Pennsylvania and an M.B.A. from MIT's Sloan School of Management.
John H. Hart will become a member of our Board of Directors immediately
after completion of the offering. Mr. Hart has been Senior Vice President and
Chief Technical Officer of 3Com Corporation since August 1996. From the time Mr.
Hart joined 3Com in September 1990 until July 1996, he was Vice President and
Chief Technical Officer. Prior to joining 3Com, Mr. Hart worked for Vitalink
Communications Corporation for seven years, where his most recent position was
Vice President of Network Products.
Officers are appointed by the Board of Directors. Our Bylaws provide that
the Board of Directors shall consist of five members. Directors are elected at
our annual general meeting of stockholders by a vote of the holders of a
majority of the voting power represented at the meeting. A director may be
re-elected for subsequent terms.
BOARD COMMITTEES
The Compensation Committee of the Board of Directors reviews and makes
recommendations to the Board regarding our compensation policies and all forms
of compensation to be provided to our executive officers and directors,
including annual salaries and bonuses and stock option and other incentive
compensation arrangements. In addition, the Compensation Committee reviews bonus
and stock compensation arrangements for all our other employees. The
Compensation Committee also administers our 1998 Stock Incentive Plan and 1999
Stock Incentive Plan. The current members of the Compensation Committee are
Messrs. Flath and Guzy.
The Audit Committee of the Board of Directors reviews and monitors our
corporate financial reporting and external audits, including our internal
control functions, the results and scope of the annual audit and other services
provided by our independent auditors and our compliance with legal matters that
have a significant impact on our financial reports. The Audit Committee also
consults with our management and our independent auditors prior to the
presentation of financial statements to stockholders and, as appropriate,
initiates inquiries into aspects of our financial affairs. In addition, the
Audit Committee has the responsibility to consider and recommend the appointment
of, and to review fee arrangements with, our independent auditors. The current
members of our Audit Committee are Messrs. Draper and Guzy.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Non-employee directors of PLX receive for their service as directors cash
compensation in the amount of $4,000 upon election at the annual stockholders
meeting and $2,000 for each Board meeting that they attend. In addition, each
new non-employee director will receive an option to purchase 15,000 shares of
our common stock upon joining the Board of Directors. Each incumbent
non-employee director who has served on the Board for at least eleven months
will be granted an option to purchase an additional 5,000 shares of our common
stock after each annual stockholders' meeting. All options are immediately
exercisable upon grant. See "Stock Option Plans -- 1999 Stock Incentive Plan."
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<PAGE> 50
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established a Compensation Committee in July 1990.
The Compensation Committee is currently comprised of Messrs. Flath and Guzy.
Neither of these individuals were at any time since the formation of PLX an
executive officer or employee of PLX. Prior to the establishment of the
Compensation Committee, all decisions relating to executive compensation were
made by the Board. For a description of the transactions between PLX and members
of the Compensation Committee and entities affiliated with the Compensation
Committee members, see "Transactions Between PLX and its Officers, Directors or
Significant Stockholders." None of our executive officers serves as a member of
the board of directors or compensation committee of any entity which has one or
more executive officers serving as a member of our Board of Directors or
Compensation Committee.
NO EMPLOYMENT CONTRACTS
None of our executive officers has an employment agreement with PLX.
EXECUTIVE COMPENSATION
The following table provides summary information concerning the
compensation earned by our chief executive officer and our next four most highly
compensated executive officers in the fiscal year ended December 31, 1998, whose
salary and bonus exceeded $100,000 for services rendered in all capacities to
PLX and our subsidiary during that fiscal year. This includes bonus amounts in
the fiscal year earned, rather than in the fiscal year in which each bonus
amount was paid. All stock options were granted pursuant to the 1998 Stock
Incentive Plan.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------- -----------------
SHARES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- -------- -------- -----------------
<S> <C> <C> <C>
Michael J. Salameh
President............................... $144,000 $101,258 150,000
Kenyon Mei, Ph.D.
Vice President, Engineering............. 210,000 87,202 0
Mark R. Easley
Vice President, Marketing............... 138,000 109,407 65,000
Michael A. Hopwood
Vice President, Worldwide Sales......... 124,000 96,953 25,000
Scott M. Gibson
Vice President, Finance................. 120,000 48,923 30,000
</TABLE>
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<PAGE> 51
The following table sets forth information concerning grants of options to
purchase shares of our common stock to each of the following officers during
fiscal 1998. In each case, the options vest pursuant to a four-year schedule.
Under this schedule, on the first anniversary of the date of grant, 25% of the
total options granted vest. Thereafter, 2.083% of the total options granted vest
each month.
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES IN EXERCISE TERM(4)
OPTIONS FISCAL YEAR PRICE PER EXPIRATION ---------------------------
NAME GRANTED 1998(1) SHARE(2) DATE(3) 5% 10%
---- ---------- ------------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Salameh.... 150,000 22.79% $5.00 01/20/08 $471,671 $1,195,307
Kenyon Mei, Ph.D. .... -- -- -- -- -- --
Mark R. Easley........ 65,000 9.87 5.00 01/20/08 204,391 517,966
Michael A. Hopwood.... 25,000 3.80 5.00 01/20/08 78,612 199,218
Scott M. Gibson....... 30,000 4.56 5.00 01/20/08 94,334 239,061
</TABLE>
- -------------------------
(1) In fiscal year 1998, we granted options to employees to purchase an
aggregate of 658,250 shares.
(2) Each of these options was granted pursuant to our 1998 Plan and is subject
to the terms of such plan as described below. These options were granted at
an exercise price equal to the fair market value of our common stock as
determined by our Board of Directors on the date of the grant. The Board of
Directors based this determination on our operating results and financial
condition and the valuations of comparable public companies in the
semiconductor industry.
(3) Options may terminate before their expiration dates if the optionee's status
as an employee or consultant is terminated or upon the optionee's death or
disability.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent our estimate or projection of our future common stock prices.
STOCK OPTION PLANS
1986 RESTRICTED STOCK PURCHASE PROGRAM
On May 7, 1986, our Board of Directors approved a form of Restricted Stock
Purchase Agreement to be used to sell restricted shares of our common stock to
our employees, officers and consultants. There was no formal, written plan. From
time to time, the Board of Directors reserved shares of our common stock for
grant under the program. At December 31, 1998, a total of 4,402,060 restricted
shares were issued and outstanding pursuant to the program. The shares were
issued at fair market value as determined by the Board of Directors. The
repurchase price of the restricted shares is the original sales price. The
shares are subject to a repurchase option in favor of PLX that expires over a
period of four years from the date of issuance. On the first anniversary of the
date of issuance, the number of shares subject to the repurchase option is
reduced by 25%; and each month thereafter, the number of shares subject to the
repurchase option is reduced by 2.083% of the total restricted shares issued.
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<PAGE> 52
As consideration for the issuance of these restricted shares, each of the
purchasers has paid 20% of the aggregate purchase price of the restricted shares
issued to him in cash and has executed a promissory note for the remaining 80%
of the aggregate purchase price. These notes bear interest at a rate of 6% per
annum and become due and payable upon the earlier of four years from the date of
issuance or the effectiveness of a registration statement pursuant to which the
subject securities may be offered and sold by such purchasers; provided,
however, that in the event the officers are restricted by the terms of market
stand-off agreements relating to the securities, amounts that would become due
under the notes upon such registration are reduced to the amount that would be
covered by sale of shares allowed to be sold. Each of the directors and officers
that has purchased restricted shares has executed a market stand-off agreement,
which prevents such officers and directors from selling our securities for a
period of at least 150 days following our issuance of securities pursuant to an
underwritten offering. Thus, they will not be required to pay the notes until at
least 150 days after the offering. The due dates of the loans did not extend
past the repurchase option of PLX. The notes are full recourse and, in addition,
each of the purchasers has pledged the restricted shares as collateral to secure
the obligations under his note. The program was terminated upon adoption of our
1998 Incentive Stock Plan on January 15, 1998.
1998 STOCK INCENTIVE PLAN
Our 1998 Stock Incentive Plan was approved by the Board of Directors on
January 15, 1998 and by our stockholders on June 22, 1998. The 1998 Plan
provides for the grant of options intended to qualify as "incentive stock
options" under Section 422 of the Internal Revenue Code of 1986, as amended, and
nonqualified stock options. As of January 31, 1999, a total of 1,300,000 shares
of our common stock have been reserved for issuance under the 1998 Plan. As of
December 31, 1998, no shares of our common stock had been issued upon exercise
of options granted under the 1998 Plan, options to purchase 645,250 shares were
outstanding, and 154,750 shares remained available for future grant. In January
1999, our Board of Directors approved the grant of options to purchase an
aggregate amount of 591,250 shares, to be effective as of the offering. In
addition, we anticipate that our Board of Directors will approve options to
purchase an aggregate amount of 143,000 shares prior to the effective date of
this prospectus. The Board of Directors or a committee designated by the Board
has the power, subject to the limitations contained in the 1998 Plan, to
prescribe the terms and conditions of any option granted under the 1998 Plan,
including the total number of shares to be offered to each optionee. The maximum
term of any stock option granted under the 1998 Plan is ten years, except that
with respect to incentive stock options granted to a person possessing more than
10% of the combined voting power of PLX, the term of these stock options shall
be for no more than five years. The exercise price of incentive stock options
granted under the 1998 Plan must be at least 100% of the fair market value of
our common stock on the grant date except that the exercise price of incentive
stock options granted to a 10% stockholder must be at least 110% of the fair
market value on the date of grant. The aggregate fair market value on the date
of grant of our common stock for which incentive stock options are exercisable
for the first time by an employee during any calendar year may not exceed
$100,000. In the event of a change of control of PLX, all of the options granted
under the 1998 Plan will terminate unless assumed or substituted or except as
provided otherwise in an individual option agreement. The Board of Directors may
amend the 1998 Plan at any time, except to the extent that stockholder approval
is required. The 1998 Plan will terminate in January 2008, unless terminated
earlier by the Board of Directors.
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<PAGE> 53
1999 STOCK INCENTIVE PLAN
Our 1999 Stock Incentive Plan was approved by the Board of Directors on
January 15, 1999 and by our stockholders in March 1999, effective as of the
effective date of the offering. The 1999 Plan permits the grant of securities of
PLX, including options intended to qualify as "incentive stock options" under
Section 422 of the Code, and nonqualified stock options to employees, officers,
directors, independent contractors and consultants; provided, however that
incentive stock options may be granted only to our employees. Initially
1,000,000 shares of common stock were reserved for issuance in connection with
the grant of options under the 1999 Plan. As of January 31, 1999 no options had
been awarded under the 1999 Plan.
The Board of Directors or a committee designated by the Board is authorized
to administer the 1999 Plan, including the selection of persons to whom options
may be granted and the interpretation and implementation of the 1999 Plan.
Options granted under the 1999 Plan will vest and become exercisable as
determined by the Board or the committee at the time of the option grant. The
term of each option will be as determined by the Board or the committee;
provided, however, that the maximum term of an option granted under the 1999
Plan is ten years or five years in the case of an incentive stock option granted
to a 10% stockholder. The aggregate fair market value, on the date of grant, of
our common stock for which incentive stock options are exercisable for the first
time by an employee during any calendar year may not exceed $100,000. The
exercise price of each option granted under the 1999 Plan shall not be less than
the fair market value of our common stock on the date of grant or not less than
110% of fair market value in the case of an incentive stock option granted to a
10% stockholder. In the event there is a change of control of PLX under the 1999
Plan, all of the options granted under the 1999 Plan will terminate unless
assumed or substituted or except as provided otherwise in an individual option
agreement. The 1999 Plan may be amended at any time by the Board of Directors,
except to the extent that stockholder approval is required. The 1999 Plan will
terminate in January 2009, unless earlier terminated by the Board.
Pursuant to the authority granted by the 1999 Plan, the Administrator has
adopted, concurrently with the approval of the 1999 Plan, the 1999 Non-Employee
Director Option Program. Shares issued under the Non-Employee Director Plan will
come from the 1,000,000 shares of common stock reserved for issuance pursuant to
the 1999 Plan. The Non-Employee Director Program provides for the grant of
non-qualified stock options to non-employee directors upon election or
appointment to the Board of Directors and for annual non-qualified stock option
grants thereafter. See "Management -- Director Compensation and Other
Arrangements."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that a director
of a corporation will not be personally liable for monetary damages for breach
of the director's fiduciary duties as a director except for liability
- for any breach of the director's duty of loyalty to PLX or to its
stockholders,
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law,
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<PAGE> 54
- for unlawful payments of dividends or unlawful stock repurchases as
provided in Section 174 of the Delaware General Corporation Law or
- for any transaction from which a director derives an improper personal
benefit.
Our Bylaws provide that PLX shall indemnify its directors and executive
officers and may indemnify its officers, employees and other agents to the full
extent permitted by law. We believe that indemnification under our Bylaws covers
at least negligence and gross negligence on the part of an indemnified party.
Our Bylaws also permit us to advance expenses incurred by an indemnified party
in connection with the defenses of any action or proceeding arising out of the
indemnified party's status or service as a director, officer or employee or
other agent of PLX upon an undertaking by the indemnified party to repay the
advances if it is ultimately determined that the indemnified party is not
entitled to indemnification.
We have entered into separate indemnification agreements with each of our
directors and officers. These agreements require us, among other things, to
indemnify the director or officer, against expenses, judgments, fines and
settlements paid by the individual in connection with any action, suit or
proceeding arising out of the individual's status or service as a director or
officer of PLX, other than Liabilities arising from willful misconduct or
conduct that is knowingly fraudulent or deliberately dishonest. These agreements
also require us to advance expenses incurred by the individual in connection
with any proceeding against the individual with respect to which the individual
may be entitled to indemnification by PLX. We believe that our Certificate of
Incorporation and Bylaw provisions and indemnification agreements are necessary
to attract and retain qualified persons as directors and officers. We also
maintain directors' and officers' liability insurance.
At present we are not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of PLX in which
indemnification will be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for
indemnification.
49
<PAGE> 55
TRANSACTIONS BETWEEN PLX AND ITS OFFICERS, DIRECTORS, OR SIGNIFICANT
STOCKHOLDERS
SALE OF RESTRICTED STOCK TO EXECUTIVE OFFICERS
We have entered into Employee Stock Purchase Agreements with each of the
executive officers listed below which provide for the sale of shares of
restricted PLX common stock to these executive officers subject to a repurchase
option on behalf of PLX. The repurchase price of the restricted stock is the
original sales price. Except as noted below, the number of shares subject to
each repurchase option is reduced according to our standard vesting schedule. As
consideration for the issuance of this restricted stock, each of the officers
has paid 20% of the aggregate purchase price of the restricted stock issued to
him in cash and has executed a promissory note for the remaining 80% of the
aggregate purchase price. The notes contain the standard terms for all notes
issued in connection with the issuance of Restricted Stock.
<TABLE>
<CAPTION>
PRINCIPAL
PURCHASE NUMBER OF PRICE PER AMOUNT OF
NAME DATE SHARES SHARE NOTE NOTE DUE
---- ---------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Kenyon Mei................ 08/01/1997 350,000 $0.15 $42,000 08/01/2001
Michael A. Hopwood........ 03/15/1996 46,000(1) $0.15 $ 5,520 03/15/2000
08/01/1997 35,000 $0.15 $ 4,200 08/01/2001
Scott M. Gibson........... 11/01/1997 110,000 $0.30 $26,400 10/14/2001
William E. Hart........... 03/15/1996 43,000(2) $0.15 $ 5,160 03/15/2000
08/01/1997 25,000(2) $0.15 $ 3,000 08/01/2001
Mark R. Easley............ 03/11/1996 75,000 $0.15 $ 9,000 03/11/2000
03/31/1997 70,000 $0.15 $ 8,400 06/01/2000
08/01/1997 40,000(3) $0.15 $ 4,800 08/01/2001
</TABLE>
- -------------------------
(1) These shares vest as follows:
- on March 15, 1997, the number of shares subject to a repurchase option was
reduced by 9,000 shares;
- each month thereafter until March 15, 1998, the number of shares subject
to the repurchase option was reduced by 750 shares; and
- each month thereafter until March 15, 2000, the number of shares subject
to the repurchase option is reduced by 1,166.67 shares.
(2) These shares vest as follows:
- on March 15, 1997, the number of shares subject to a repurchase option was
reduced by 8,000 shares;
- on March 15, 1998, the number of shares subject to the repurchase option
was reduced by 750 shares; and
- each month thereafter until March 15, 2000, the number of shares subject
to the repurchase option is reduced by 1,083.33 shares.
The 25,000 shares are restricted and were issued to Mr. Hart on August 1,
1997 vest as follows:
- on each of August 1, 1998, 1999 and 2000, the number of shares subject to
the repurchase option is reduced by 5,000 shares; and
- on August 1, 2001, the number of shares subject to the repurchase option
is reduced by 10,000 shares.
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<PAGE> 56
(3) These shares vest as follows:
- on August 1, 1998, the number of shares subject to a repurchase option is
reduced by 6,000 shares; and
- thereafter, the number of shares subject to the repurchase option is
reduced monthly in the aggregate annual amounts of 6,000 shares in each of
the next two years and 22,000 shares in the remaining year of vesting.
GRANT OF STOCK OPTIONS TO EXECUTIVE OFFICERS
Options to purchase the following amounts of shares were granted to our
executive officers in 1998 under the 1998 Plan:
- Michael J. Salameh, 150,000 shares,
- Mark R. Easley, 65,000 shares,
- Michael A. Hopwood, 25,000 shares,
- Scott Gibson, 30,000 shares, and
- William E. Hart, 15,000 shares.
All of these options were issued with an exercise price equal to $5.00 per
share and vest, in the case of Michael J. Salameh, over a period of forty-eight
(48) months and, in the case of the other executive officers, over a period of
thirty-six (36) months, from the date of grant.
Additionally, in January 1999, the Board of Directors approved options to
purchase the following amounts of shares to our executive officers under the
1998 Plan with an exercise price per share equal to the initial public offering
price:
- Michael J. Salameh, 163,000 shares,
- Mark R. Easley, 100,000 shares,
- Michael A. Hopwood, 80,000 shares,
- Scott Gibson, 40,000 shares, and
- William E. Hart, 40,000 shares.
All of these options were approved by the Board of Directors effective upon
the offering. All options are immediately exercisable. Exercised shares are
subject to vesting at the rate of 25% of the shares granted on the first
anniversary of the grant and monthly thereafter.
INVESTMENT IN SEBRING SYSTEMS
On June 18, 1997, we purchased a total of 892,857 shares of Series A
Preferred Stock of Sebring Systems, Inc., a New York corporation, for an
aggregate purchase price of $100,000. Immediately following the investment, PLX
held approximately 3.9% of the outstanding shares of Sebring. Also, three
related parties purchased a total of 22.06% of the then outstanding shares of
Sebring for an aggregate purchase price of $560,000. The related parties are:
- Arbor Company, a PLX stockholder, of which D. James Guzy, Sr., a director
of PLX, is a general partner,
- Draper Associates, L.P., a PLX stockholder, of which Timothy Draper, a
director of PLX, is a general partner, and
- Eugene J. Flath, a director of PLX.
Pursuant to the terms of the purchase and sale documents relating to the above
investment, D. James Guzy, Sr. was elected as a director and Chairman of the
Board of Directors of Sebring.
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<PAGE> 57
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of December 31, 1998, and as adjusted to reflect the sale
of shares in this offering. It shows ownership by:
- each person (or group of affiliated persons) who is known by us to own
beneficially more than five percent of the outstanding shares of our
common stock,
- our chief executive officer and our next four most highly compensated
executive officers in the fiscal year ended December 31, 1998,
- each of our directors, and
- all current officers and directors as a group.
In the table below, the amounts set forth in the column entitled "Number of
Shares Beneficially Owned" include shares set forth in the column titled "Number
of Shares Beneficially Owned as a Result of Options Exercisable Within 60 days
of the Date of this Prospectus." Percentage of beneficial ownership is based
upon 18,365,551 shares of common stock outstanding prior to this offering and
21,665,551 shares of our common stock outstanding after this offering, as of
December 31, 1998 and assuming no exercise of the underwriters' overallotment
option.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED
AS A RESULT OF PERCENTAGE OF
OPTIONS EXERCISABLE SHARES OUTSTANDING
5% BENEFICIAL OWNERS, DIRECTORS, WITHIN 60 DAYS OF ----------------------
NOMINEES FOR DIRECTOR, NAMED NUMBER OF SHARES THE DATE OF BEFORE THE AFTER THE
OFFICERS BENEFICIALLY OWNED THIS PROSPECTUS OFFERING OFFERING
- -------------------------------- ------------------ ------------------- ---------- ---------
<S> <C> <C> <C> <C>
Eugene Flath(1).............. 2,579,826 -- 14.1% 11.9%
AVI II....................... 2,313,978 -- 12.6 10.7
1 First Street #2
Los Altos, CA 94022
Timothy Draper(2)............ 2,084,460 -- 11.4 9.6
Arbor Company................ 1,955,436 -- 10.7 9.0
P.O. Box 128
Glenbrook, NV 89413
D. James Guzy, Sr.(3)........ 1,955,436 -- 10.7 9.0
Draper Associates............ 1,656,294 -- 9.0 7.7
400 Seaport Court, Suite 250
Redwood City, CA 94063
Wei-Ti Liu................... 966,021 -- 5.3 4.5
Michael J. Salameh........... 961,483 313,000(4) 5.2 4.4
Kenyon Mei, Ph.D............. 350,000 -- 1.9 1.6
Mark R. Easley............... 350,000 165,000(5) 1.9 1.6
Michael S. Hopwood........... 240,000 105,000(6) 1.3 1.1
Scott M. Gibson.............. 180,000 70,000(7) 1.0 *
Young K. Sohn................ 15,000 15,000(8) * *
John H. Hart................. 15,000 15,000(8) * *
All directors, nominees for
director and executive
officers as a group (11
persons)................... 8,911,205 738,000 47.8% 41.1%
</TABLE>
52
<PAGE> 58
* Less than one percent.
(1) Includes
- 2,313,978 shares held by AVI II and 39,423 shares held by AVI PGF which
are investments managed by AVI Management Partners II of which Mr. Flath
is a General Partner; and
- 75,027 shares held by AVI Partners II NV and 151,398 shares held by AVI
Partners NV which are investments managed by AVI Management Partners of
which Mr. Flath is a special limited partner. Mr. Flath disclaims
beneficial ownership of these shares except for his proportional interest
therein.
(2) Includes 1,656,294 shares held by Draper Associates L.P. of which Draper
Associates, Inc. is the General Partner. Mr. Draper is the President of
Draper Associates, Inc. Also includes 85,326 shares held by JABE LLC of
which Mr. Draper is a member and 342,840 shares held in trust for Mr.
Draper's minor children.
(3) Includes 1,955,436 shares held by Arbor Company of which Mr. Guzy, Sr. is
President.
(4) Includes an option to purchase 163,000 shares which will be effective as of
the date of this offering. The option will be immediately exercisable, but
the shares will be subject to four-year vesting.
(5) Includes an option to purchase 100,000 shares which will be effective as of
the date of this offering. The option will be immediately exercisable, but
the shares will be subject to four-year vesting.
(6) Includes an option to purchase 80,000 shares which will be effective as of
the date of this offering. The option will be immediately exercisable, but
the shares will be subject to four-year vesting.
(7) Includes an option to purchase 40,000 shares which will be effective as of
the date of this offering. The option will be immediately exercisable, but
the shares will be subject to four-year vesting.
(8) Includes an option to purchase 15,000 shares which will be effective as of
the date of this offering. The option will be immediately exercisable, but
the shares will be subject to four-year vesting.
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<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our authorized capital stock consists of 30,000,000 shares of common stock,
par value $0.001 per share, and 5,000,000 shares of preferred stock, par value
$0.001 per share. Upon consummation of this offering, no shares of preferred
stock and 21,665,551 shares of common stock, or 22,160,551 shares if the
underwriters' over-allotment option is exercised in full, will be outstanding.
The following summary is qualified in its entirety by reference to our
Certificate of Incorporation and Bylaws, copies of which are filed as exhibits
to the Registration Statement of which this prospectus is a part.
Under our 1998 Stock Incentive Plan, 1,300,000 shares of common stock have
been reserved for issuance and options to purchase 645,250 shares were
outstanding as of December 31, 1998. In January 1999, our Board of Directors
approved the grant of options to purchase 639,750 shares at the initial public
offering price under our 1998 Stock Incentive Plan, to be effective as of the
offering. Further, 1,000,000 shares of our common stock have been reserved for
issuance under our 1999 Stock Incentive Plan, under which no options were
outstanding as of December 31, 1998.
COMMON STOCK
As of December 31, 1998, there were 18,365,551 shares of our common stock
outstanding held of record by approximately 123 stockholders, including
13,738,908 shares that will be issued upon the automatic conversion of the
outstanding shares of our preferred stock into common stock upon the closing of
the offering. As of December 31, 1998, 800,000 shares of our common stock were
reserved for issuance pursuant to our Stock Option Plans. In January 1999, the
Board of Directors approved an increase to 1,300,000 shares. In January 1999,
the Board of Directors approved the 1999 Plan under which 1,000,000 shares of
our common stock are reserved for issuance. Upon completion of the offering,
there will be 21,665,551 shares of common stock outstanding.
Pursuant to our Certificate of Incorporation, the holders of our common
stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. However, until, but not including the first annual meeting of
stockholders following the annual meeting of stockholders when PLX shall have
had at least 800 stockholders, the stockholders will have cumulative voting
rights in the election of directors. If any stockholder has properly requested
cumulative voting, each stockholder may cumulate his, her or its votes and give
one candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the stockholder's shares are normally
entitled. The stockholder may also distribute the votes on the same principle
among as many candidates as the stockholder thinks fit. Thereafter, holders of
more than 50% of the shares voting will be able to elect all of the directors.
Subject to preferences that may be applicable to any of our outstanding
preferred stock, the holders of our common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. See "Dividend Policy."
In the event of liquidation, dissolution or winding up of PLX, the holders
of our common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock,
if any, then outstanding.
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<PAGE> 60
Our common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to our
common stock. All outstanding shares of our common stock are fully paid and
nonassessable, and the shares of our common stock to be issued upon completion
of this offering will be fully paid and nonassessable.
PREFERRED STOCK
As of the closing of this offering, no shares of our preferred stock will
be outstanding. Effective at the closing of this offering and pursuant to our
Certificate of Incorporation, the Board of Directors will have the authority,
without further action by the stockholders, to issue the preferred stock in one
or more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of any series,
without further vote or action by the stockholders. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a change in
control of PLX without further action by the stockholders and may adversely
affect the voting and other rights of the holders of our common stock. The
issuance of preferred stock with voting and conversion rights may have the
effect of decreasing the market price of our common stock, and may adversely
affect the voting power of the holders of our common stock, including the loss
of voting control to others. At present, we have no plans to issue any shares of
preferred stock.
REGISTRATION RIGHTS
PLX has entered into registration rights agreements with those individuals
who own 13,738,908 shares of our common stock which will be issued upon the
automatic conversion of their preferred stock into common stock in connection
with this offering. Under the registration rights agreements, the holders or
their transferees are entitled to rights with respect to the registration of
these shares under the Securities Act. If we propose to register any of our
securities under the Securities Act, either for our own account or the account
of other security holders, the holders are entitled to notice of the
registration and, subject to conditions and limitations, are entitled to include
their shares in the registration. In addition, at any time, the holders of at
least 50% of these shares of common stock may require us, on not more than two
occasions, to file a registration statement under the Securities Act with
respect to at least 20% of all of the outstanding registrable securities, or a
lesser percentage if the gross offering price would exceed $5.0 million. We are
required to use our best efforts to effect the required registration, subject to
conditions and limitations set forth in the registration rights agreements.
Further, the holders of these shares of common stock may require us to file
additional registration statements on Form S-3 when the form becomes available
to us, subject to conditions and limitations. The expenses incurred in
connection with all of these registrations will be borne by us.
ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS;
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are subject to Section 203 of the Delaware General Corporation Law, as
amended ("Section 203"), which, subject to exceptions, prohibits a Delaware
corporation from
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<PAGE> 61
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless:
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder,
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by:
- by persons who are directors and also officers; and
- by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or
- on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combinations to include:
- any merger or consolidation involving the corporation or any
majority-owned subsidiary of the corporation and any other person or
entity,
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation or any majority-owned subsidiary of the
corporation involving the interested stockholder,
- any transaction that results in the issuance or transfer by the
corporation or any majority-owned subsidiary of the corporation of any
stock of the corporation to the interested stockholder,
- any transaction involving the corporation or any majority-owned
subsidiary of the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the
corporation or any majority-owned subsidiary of the corporation
beneficially owned by the interested stockholder, or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation or any majority-owned subsidiary of the
corporation. In general, Section 203 defines an interested stockholder as
any entity or person beneficially owning 15% or more or the outstanding
voting stock of the corporation and any entity or person affiliated with
or controlling or controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is BankBoston, N.A.
The Transfer Agent's address is 150 Royall Street, Canton, Massachusetts and its
telephone number is (781) 575-2000.
56
<PAGE> 62
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 21,665,551 shares of our
common stock outstanding. This assumes conversion of all outstanding shares of
our preferred stock, no exercise of the underwriters' over-allotment option and
no exercise of outstanding options under our Option Plans. Of such shares, the
3,300,000 shares sold in this offering will be freely transferable without
restriction or further registration under the Securities Act, except for any
shares held by an existing "affiliate" of PLX, as that term is defined by the
Securities Act, which shares will be subject to the resale limitations of Rule
144 adopted under the Securities Act.
As of the date of this prospectus, 18,365,551 "restricted shares" as
defined in Rule 144 will be outstanding. None of these shares will be eligible
for sale in the public market as of the effective date of this registration
statement. Upon the expiration of agreements not to sell entered into with us,
150 days after the effective date approximately 3,904,708 shares will become
eligible for sale subject to compliance with Rule 144 and Rule 701. Beginning
180 days after the effective date approximately 14,460,843 additional shares
will become eligible for sale subject to compliance with Rule 144 and Rule 701
upon the expiration of agreements not to sell such shares. Restrictions pursuant
to such agreements not to sell may be waived by Merrill Lynch, Pierce, Fenner &
Smith Incorporated. See "Underwriting."
<TABLE>
<CAPTION>
SHARES FIRST
DAYS AFTER DATE OF THIS PROSPECTUS ELIGIBLE FOR SALE COMMENT
- ---------------------------------- ----------------- -------
<S> <C> <C>
Upon Effectiveness............... 3,300,000 Freely tradeable shares sold in
offering.
150 days......................... 3,904,708 PLX lockup released; shares
saleable under Rules 144 and
701.
180 days......................... 14,460,843 Underwriter lockup released;
shares saleable under Rules 144
and 701.
</TABLE>
In general, under Rule 144 as currently in effect, beginning 90 days after
the offering, a person, or persons whose shares are aggregated, who owns shares
that were purchased from us, or any affiliate at least one year previously,
including a person who may be deemed an affiliate of PLX, is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of the following:
- 1% of the then outstanding shares of our common stock; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Any
person, or persons whose shares are aggregated, who is not deemed to have been
an affiliate of PLX at any time during the 90 days preceding a sale, and who
owns shares within the definition of "restricted securities" under Rule 144
under the Securities Act that were purchased from us or any affiliate of PLX at
least two years previously, would be entitled to sell such shares under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements.
57
<PAGE> 63
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by our employees, directors, officers,
consultants or advisers prior to the date the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended,
pursuant to written compensatory benefit plans or written contracts relating to
the compensation of such persons. In addition, the Commission has indicated that
Rule 701 will apply to typical stock options granted by an issuer before it
becomes subject to the reporting requirements of the Exchange Act, along with
the shares acquired upon exercise of such options, including exercises after the
date of this prospectus. Securities issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, beginning 90 days after the date of this prospectus, may be sold by:
- persons other than affiliates, subject only to the manner of sale
provisions of Rule 144, and
- affiliates under Rule 144 without compliance with its one-year holding
period requirement.
We have agreed not to offer, sell or otherwise dispose of any shares of our
common stock or any securities convertible into or exercisable or exchangeable
for our common stock or any rights to acquire our common stock for a period of
180 days after the date of this prospectus, without the prior written consent of
the representatives of the underwriters, subject to limited exceptions. See
"Underwriting."
After the offering, the holders of 13,738,908 shares of our common stock or
their respective transferees, will be entitled to rights with respect to the
registration of the shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights." Registration of the shares under the Securities
Act would result in such shares becoming freely tradable without restriction
under the Securities Act, except for shares purchased by affiliates, immediately
upon the effectiveness of such registration.
We intend to file a registration statement under the Securities Act
covering 2,300,000 shares of our common stock reserved for issuance under the
option plans. See "Management -- Stock Option Plans." This registration
statement is expected to be filed within 90 days after the date of this
prospectus and will automatically become effective upon filing. Following such
filing, shares registered under the registration statement will, subject to the
lockup agreements, Rule 144 volume limitations applicable to affiliates and the
lapsing of our repurchase rights, be available for sale in the open market upon
the exercise of vested options 90 days after the effective date of this
prospectus. At December 31, 1998, options to purchase 645,250 shares were issued
and outstanding under the Option Plans. In January 1999, the Board of Directors
approved the grant of options to purchase 591,250 shares at the initial public
offering price, to be effective at the offering. In addition, we anticipate that
our Board of Directors will approve options to purchase an aggregate amount of
143,000 shares prior to the effective date of this prospectus.
58
<PAGE> 64
UNDERWRITING
GENERAL
We intend to offer our common stock in the United States and Canada through
a number of underwriters. Merrill Lynch, Pierce, Fenner & Smith Incorporated,
NationsBanc Montgomery Securities LLC and Wit Capital Corporation are acting as
representatives of each of the underwriters named below. Subject to the terms
and conditions set forth in a purchase agreement between us and the
underwriters, we have agreed to sell to the underwriters, and each of the
underwriters severally and not jointly has agreed to purchase from us, the
number of shares of our common stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
UNDERWRITERS ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................
NationsBanc Montgomery Securities LLC.......................
Wit Capital Corporation.....................................
---------
Total......................................... 3,300,000
=========
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject to
the terms and conditions set forth in that agreement, to purchase all of the
shares of our common stock being sold under the terms of the agreement if any of
the shares of common stock are purchased. Under the purchase agreement, the
commitments of non-defaulting underwriters may be increased.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments the underwriters may be required to
make in respect of those liabilities.
The expenses of this offering, exclusive of the underwriting discount, are
estimated at $700,000 and are payable by us.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of legal matters by counsel for the underwriters and other
conditions. The underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part.
A prospectus in electronic format is being made available on an Internet
Web site maintained by Wit Capital. In addition, all dealers purchasing shares
from Wit Capital in this offering have agreed to make a prospectus in electronic
format available on Web sites maintained by each of these dealers.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in this offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997.
59
<PAGE> 65
Since that time, Wit Capital has acted as an underwriter, e-Manager or selected
dealer in over 50 public offerings.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that the underwriters propose initially
to offer the shares of our common stock to the public at the initial public
offering price set forth on the cover page of this prospectus, and to dealers at
such price less a concession not in excess of $ per share of common stock.
The underwriters may allow, and such dealers may reallow, a discount not in
excess of $ per share of common stock to other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no exercise
or full exercise by the underwriters of their over-allotment options.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
--------- ------- ------
<S> <C> <C> <C>
Public offering price................................. $ $ $
Underwriting discount................................. $ $ $
Proceeds, before expenses, to PLX..................... $ $ $
</TABLE>
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of an
additional 495,000 shares of our common stock at the initial public offering
price set forth on the cover of this prospectus, less the underwriting discount.
The underwriters may exercise this option solely to cover over-allotments, if
any, made on the sale of our common stock offered hereby. To the extent that the
underwriters exercise this option, each underwriter will be obligated to
purchase a number of additional shares of our common stock proportionate to such
underwriter's initial amount reflected in the foregoing table.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 100,000 of the shares offered hereby to be sold to
some of our employees, directors and other persons with relationships with PLX.
The number of shares of our common stock available for sale to the general
public will be reduced to the extent that those persons purchase the reserved
shares. Any reserved shares which are not orally confirmed for purchase within
one day of the pricing of the offering will be offered by the underwriters to
the general public on the same terms as the other shares offered by this
prospectus.
60
<PAGE> 66
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors have agreed not to directly or
indirectly
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of our common stock or securities convertible into or
exchangeable or exercisable for or repayable with our common stock,
whether now owned or later acquired by the person executing the agreement
or with respect to which the person executing the agreement later
acquires the power of disposition, or file any registration statement
under the Securities Act relating to any shares of our common stock or
- enter into any swap or other agreement or any other agreement that
transfers, in whole or in part, the economic consequence of ownership of
our common stock whether any such swap or transaction is to be settled by
delivery of our common stock or other securities, in cash or otherwise,
without the prior written consent of Merrill Lynch on behalf of the
underwriters for a period of 180 days after the date of the prospectus.
See "Shares Eligible for Future Sale."
NASDAQ NATIONAL MARKET LISTING
Before this offering, there has been no market for our common stock. The
initial public offering price will be determined through negotiations between us
and the representatives of the underwriters. The factors to be considered in
determining the initial public offering price, in addition to prevailing market
conditions, include the valuation multiples of publicly traded companies that
the representatives believe to be comparable to us, some of our financial
information, the history of, and the prospects for, us and the industry in which
we compete, and an assessment of our management, its past and present
operations, the prospects for, and timing of, future revenues of PLX, the
present state of our development, the percentage interest of PLX being sold as
compared to the valuation for PLX and the above factors in relation to market
values and various valuation measures of other companies engaged in activities
similar to ours. There can be no assurance that an active trading market will
develop for our common stock or that our common stock will trade in the public
market subsequent to the offering at or above the initial public offering price.
We expect our common stock to be approved for listing on the Nasdaq
National Market, subject to notice of issuance, under the symbol "PLXT."
The underwriters do not expect sales of our common stock to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares being offered under the prospectus.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of our common stock is completed, rules of the
Commission may limit the ability of the underwriters and selling group members
to bid for and purchase our common stock. As an exception to these rules, the
underwriters are permitted to engage in transactions that stabilize the price of
our common stock. Such transactions consist of bids or purchases for the purpose
of pegging, fixing or maintaining the price of our common stock.
If the underwriters create a short position in our common stock in
connection with the offering, i.e., if they sell more shares of our common stock
than are set forth on the cover
61
<PAGE> 67
page of this prospectus, the underwriters may reduce that short position by
purchasing our common stock in the open market. The underwriters may also elect
to reduce any short position by exercising all or part of the over-allotment
option described above.
PENALTY BIDS
The underwriters may also impose a penalty bid on other underwriters and
selling group members. This means that if the underwriters purchase shares of
our common stock in the open market to reduce the their short position or to
stabilize the price of our common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
LEGAL MATTERS
The validity of our common stock offered hereby will be passed upon for us
by Morrison & Foerster LLP, Palo Alto, California. Certain legal matters in
connection with the offering will be passed upon for the underwriters by Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1997 and 1998, and for each of the three
years in the period ended December 31, 1998, included in this prospectus and
registration statement, as set forth in their report, which is included in this
prospectus and registration statement. The consolidated financial statements are
included in reliance on their report given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission, Washington, D.C. 20549, a Registration
Statement on Form S-1 under the Securities Act with respect to our common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules to the
registration statement. Prior to filing the Registration Statement on Form S-1,
we have not filed any reports with the Commission. For further information with
respect to PLX and our common stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as a part of the
Registration Statement. Statements contained in this prospectus
62
<PAGE> 68
concerning the contents of any contract or any other document are not
necessarily complete; reference is made in each instance to the copy of such
contract or any other document filed as an exhibit to the registration
statement. Each such statement is qualified in all respects by such reference to
such exhibit. The registration statement, including exhibits and schedules
thereto, may be inspected without charge at the Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7 World
Trade Center, 13th Floor, New York, New York 10048 after payment of fees
prescribed by the Commission. You may obtain information on the operation of the
Public Reference Room by calling 1-800-SEC-0330. The Commission also maintains a
World Wide Web site which provides online access to reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at the address http://www.sec.gov.
63
<PAGE> 69
GLOSSARY
<TABLE>
<S> <C>
Architecture A particular methodology for bringing together and
utilizing selected computer hardware, systems software
and applications software to achieve an overall
objective.
Application Specific A broad term that refers to integrated circuits that are
Integrated Circuit custom, semi-custom or user-programmable.
(ASIC)
Bus A common pathway, or channel, between multiple devices.
Central Processing Unit The main processor of the computer.
(CPU)
Direct Memory Access Device which moves data between specified system memory
(DMA) Controller locations.
Embedded system A computer that performs a dedicated task or set of
tasks that is embedded in another product.
Field Programmable Gate A semiconductor device whose logic function can be
Array (FPGA) programmed by the system manufacturer.
Integrated circuit (IC) Microelectronic semiconductor device consisting of many
interconnected transistors and other components.
Intelligent I/O (I(2)O) This standard was developed by the I(2)O Special
Interest Group to provide a common software messaging
standard for high-performance computers.
I/O accelerators Semiconductor devices that incorporate high-level
functions to enable efficient movement of data in
systems.
I/O processors Processors specifically designed to manage I/O tasks
efficiently.
I/O subsystem The circuitry and software that connects the
microprocessor, the memory and peripherals and allows
for the transfer of instructions and data among these
functions.
Mbps Megabits per second (1,000,000 bps).
Peripheral Component This standard was developed by the PCI-SIG (Special
Interconnect (PCI) Interest Group) to provide a high performance, reliable
and cost-effective method of connecting high speed
devices together.
</TABLE>
64
<PAGE> 70
PLX TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 71
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PLX Technology, Inc.
We have audited the accompanying consolidated balance sheets of PLX
Technology, Inc. as of December 31, 1997 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PLX Technology, Inc. at December 31, 1997 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Jose, California
January 14, 1999,
except for Note 11,
as to which the date is
March 22, 1999
F-2
<PAGE> 72
PLX TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
------------------------ DECEMBER 31,
1997 1998 1998
---------- ----------- -------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $2,701,131 $ 5,638,369
Accounts receivable, net of allowance for
doubtful accounts of $158,648 in 1997 and
$173,284 in 1998........................... 2,558,751 2,072,760
Inventories................................... 1,213,413 1,344,346
Deferred tax assets........................... 191,000 735,000
Other current assets.......................... 51,099 332,270
---------- -----------
Total current assets............................ 6,715,394 10,122,745
Property and equipment, net..................... 1,162,642 1,514,693
Deposits and licenses........................... 135,453 129,039
---------- -----------
Total assets.................................... $8,013,489 $11,766,477
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $1,838,729 $ 1,600,931
Accrued compensation and benefits............. 389,407 724,273
Accrued commissions........................... 177,535 100,023
Deferred revenues............................. 292,343 592,470
Other accrued expenses........................ 315,142 546,618
Income tax payable............................ 111,000 442,364
---------- -----------
Total current liabilities....................... 3,124,156 4,006,679
Commitments
Stockholders' equity
Preferred stock, $0.001 par value:
Authorized shares -- 5,000,000 pro forma
Issued and outstanding shares -- none in
1997 and 1998 and pro forma.............. -- -- $ --
Redeemable convertible preferred stock, $0.001
par value:
Authorized shares -- 5,000,000 in 1997 and
1998 and none pro forma
Designated shares -- 4,868,738 in 1997
and 1998
Issued and outstanding shares -- 4,579,636
in 1997 and 1998 and none pro forma
Liquidation preference of $4,946,027 at
December 31, 1998........................ 4,580 4,580 --
Common stock, $0.001 par value:
Authorized shares -- 30,000,000 in 1997 and
1998.....................................
Issued and outstanding shares -- 4,674,416
in 1997 and 4,626,643 in 1998 and
18,365,551 pro forma..................... 4,675 4,627 18,366
Additional paid in capital.................... 5,500,352 5,616,775 5,607,616
Deferred compensation......................... (234,850) (282,619) (282,619)
Notes receivable for employee stock
purchases.................................. (199,014) (163,314) (163,314)
Retained earnings (accumulated deficit)....... (186,410) 2,579,749 2,579,749
---------- ----------- ----------
Total stockholders' equity...................... 4,889,333 7,759,798 $7,759,798
---------- ----------- ==========
Total liabilities and stockholders' equity...... $8,013,489 $11,766,477
========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 73
PLX TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues.............................. $ 9,813,499 $17,533,631 $26,276,201
Cost of revenues.......................... 4,526,402 6,975,659 9,671,384
----------- ----------- -----------
Gross margin.............................. 5,287,097 10,557,972 16,604,817
Operating expenses:
Research and development................ 1,854,213 4,155,809 6,552,187
Selling, general and administrative..... 2,540,056 4,411,312 6,669,634
----------- ----------- -----------
Total operating expenses.................. 4,394,269 8,567,121 13,221,821
----------- ----------- -----------
Income from operations.................... 892,828 1,990,851 3,382,996
Interest income and other, net............ 39,133 43,910 75,197
Interest expense.......................... (2,118) (12) (34)
----------- ----------- -----------
Income before income taxes................ 929,843 2,034,749 3,458,159
Provision for income taxes................ 38,514 110,355 692,000
----------- ----------- -----------
Net income................................ $ 891,329 $ 1,924,394 $ 2,766,159
=========== =========== ===========
Historical basic net income per share..... $ 0.28 $ 0.58 $ 0.77
=========== =========== ===========
Share used to compute historical basic per
share amounts........................... 3,137,446 3,292,560 3,601,250
----------- ----------- -----------
Historical diluted net income per share... $ 0.05 $ 0.11 $ 0.15
=========== =========== ===========
Shares used to compute historical diluted
per share amounts....................... 17,287,153 17,758,122 18,405,143
=========== =========== ===========
Pro forma basic net income per share...... $ 0.16
===========
Shares used to compute pro forma basic net
income per share........................ 17,340,158
===========
Pro forma diluted net income per share.... $ 0.15
===========
Shares used to compute pro forma diluted
net income per share.................... 18,405,143
===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 74
PLX TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
REDEEMABLE RECEIVABLE
CONVERTIBLE FOR RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EMPLOYEE EARNINGS
------------------ ------------------ PAID IN DEFERRED STOCK (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION PURCHASES DEFICIT)
--------- ------ --------- ------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996...... 4,579,636 $4,580 3,039,216 $3,039 $4,991,717 $ -- $ (7,848) $(3,002,133)
Sales of common stock......... -- -- 413,000 413 61,537 -- (38,960) --
Repurchase of common stock.... -- -- (60,883) (61) (6,698) -- -- --
Warrants exercised related to
the guarantee of line of
credit...................... -- -- 224,583 225 10,068 -- -- --
Reduction of stockholder notes
receivable.................. -- -- -- -- -- -- 1,680 --
Net income.................... -- -- -- -- -- -- -- 891,329
--------- ------ --------- ------ ---------- --------- --------- -----------
Balance at December 31, 1996.... 4,579,636 4,580 3,615,916 3,616 5,056,624 -- (45,128) (2,110,804)
Sales of common stock......... -- -- 1,058,500 1,059 208,878 -- (153,886) --
Unearned compensation related
to stock options............ -- -- -- -- 234,850 (234,850) -- --
Net income.................... -- -- -- -- -- -- -- 1,924,394
--------- ------ --------- ------ ---------- --------- --------- -----------
Balance at December 31, 1997.... 4,579,636 4,580 4,674,416 4,675 5,500,352 (234,850) (199,014) (186,410)
Repurchase of common stock.... -- -- (47,773) (48) (10,027) -- -- --
Unearned compensation related
to stock options............ -- -- -- -- 126,450 (126,450) -- --
Amortization of unearned
compensation................ -- -- -- -- -- 78,681 -- --
Reduction of stockholder notes
receivable.................. -- -- -- -- -- -- 35,700 --
Net income.................... -- -- -- -- -- -- -- 2,766,159
--------- ------ --------- ------ ---------- --------- --------- -----------
Balance at December 31, 1998.... 4,579,636 $4,580 4,626,643 $4,627 $5,616,775 $(282,619) $(163,314) $ 2,579,749
========= ====== ========= ====== ========== ========= ========= ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at January 1, 1996...... $1,989,355
Sales of common stock......... 22,990
Repurchase of common stock.... (6,759)
Warrants exercised related to
the guarantee of line of
credit...................... 10,293
Reduction of stockholder notes
receivable.................. 1,680
Net income.................... 891,329
----------
Balance at December 31, 1996.... 2,908,888
Sales of common stock......... 56,051
Unearned compensation related
to stock options............ --
Net income.................... 1,924,394
----------
Balance at December 31, 1997.... 4,889,333
Repurchase of common stock.... (10,075)
Unearned compensation related
to stock options............ --
Amortization of unearned
compensation................ 78,681
Reduction of stockholder notes
receivable.................. 35,700
Net income.................... 2,766,159
----------
Balance at December 31, 1998.... $7,759,798
==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 75
PLX TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
----------- ---------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................. $ 891,329 $1,924,394 $ 2,766,159
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 248,832 455,449 736,628
Amortization of unearned
compensation...................... -- -- 78,681
Changes in operating assets and
liabilities:
Accounts receivable............... (1,066,080) (805,674) 485,991
Inventories....................... 158,068 (700,397) (130,933)
Deferred tax assets............... -- (191,000) (544,000)
Other current assets.............. (18,752) 7,110 (281,171)
Deposits and licenses............. 9,598 (117,743) 6,414
Accounts payable.................. (72,078) 1,244,161 (237,798)
Accrued compensation and
benefits........................ 99,723 274,779 334,866
Accrued commissions............... -- 94,116 (77,512)
Deferred revenues................. 16,908 239,163 300,127
Other accrued expenses............ 40,140 17,070 231,476
Income tax payable................ -- 111,000 331,364
----------- ---------- -----------
Net cash provided by operating
activities........................... 307,688 2,552,428 4,000,292
INVESTING ACTIVITIES
Purchase of property and equipment..... (602,850) (984,274) (1,088,679)
----------- ---------- -----------
Net cash used in investing
activities........................... (602,850) (984,274) (1,088,679)
FINANCING ACTIVITIES
Repayment of note payable.............. (100,000) -- --
Proceeds from sales of common stock.... 33,283 56,051 --
Repurchase of common stock............. (6,759) -- (10,075)
Repayment of stockholder notes
receivable........................... 1,680 -- 35,700
----------- ---------- -----------
Net cash provided by (used in)
financing activities................. (71,796) 56,051 25,625
----------- ---------- -----------
Increase (decrease) in cash and cash
equivalents.......................... (366,958) 1,624,205 2,937,238
Cash and cash equivalents at beginning
of year.............................. 1,443,884 1,076,926 2,701,131
----------- ---------- -----------
Cash and cash equivalents at end of
year................................. $ 1,076,926 $2,701,131 $ 5,638,369
=========== ========== ===========
SCHEDULE OF NONCASH ACTIVITIES
Common stock issued for notes
receivable........................... $ 38,960 $ 153,886 $ --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest................. $ 2,118 $ 12 $ 34
Cash paid for income taxes............. $ 26,000 $ 190,000 $ 905,000
</TABLE>
See accompanying notes.
F-6
<PAGE> 76
PLX TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
PLX Technology, Inc. (the Company) develops and markets I/O
interconnectivity solutions that speed the transfer of data in high-performance
embedded systems. The Company's principal products are high performance
semiconductor devices, as well as related software development kits and hardware
design kits. Semiconductor devices account for a significant portion of the
Company's net revenues.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiary. All intercompany transactions and balances have been
eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (FAS 115). Under FAS 115, management determines the
appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. At December 31,
1998, all debt securities are designated as available-for-sale.
Available-for-sale securities are carried at fair value with unrealized gains
and losses reported in a separate component of stockholders' equity. The
amortized cost of debt securities in this category is adjusted for the
amortization of premiums and the accretion of discounts to maturity. Such
amortization, as well as any interest earned on the securities, is included in
interest income, net. Realized gains and losses and declines in value judged to
be other-than-temporary on available-for-sale securities are included in
interest income and other, net. The cost of securities sold is based on the
specific identification method.
As of December 31, 1997 and 1998, the Company's available-for-sale
securities consisted of $1,394,119 and $3,817 of money market funds, $150,000
and $0 of treasury notes, and $0 and $3,980,195 of commercial paper,
respectively. There were no unrealized gains or unrealized losses as of December
31, 1997 or 1998. All such securities are included in cash and cash equivalents.
F-7
<PAGE> 77
PLX TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market (net realizable value). Inventories were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Raw materials................................. $ 48,337 $ --
Finished goods................................ 1,165,076 1,344,346
---------- ----------
Total............................... $1,213,413 $1,344,346
========== ==========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of three to five years. Leasehold improvements are amortized using
the straight-line method over the shorter of the useful lives of the assets or
the terms of the leases.
The recoverability of the carrying amount of property and equipment is
assessed based on estimated future undiscounted cash flows and if impairment
exists the charge to operations is measured as the excess of the carrying amount
over the fair value of the assets. Based upon this method of assessing
recoverability, no asset impairment occurred in any of the years presented.
Property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
---------- -----------
<S> <C> <C>
Equipment and furniture...................... $1,216,898 $ 1,872,407
Purchased software........................... 731,257 1,164,427
---------- -----------
1,948,155 3,036,834
Accumulated depreciation..................... (785,513) (1,522,141)
---------- -----------
Net property and equipment................... $1,162,642 $ 1,514,693
========== ===========
</TABLE>
STOCK-BASED COMPENSATION
The Company accounts for its stock option and stock grant plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB Opinion No. 25), and has elected to follow the
disclosure-only alternative permitted by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123).
REVENUE RECOGNITION
Sales to original equipment manufacturers are recognized at the time of
product shipment provided there are no significant remaining obligations and
collectibility is probable. Recognition of sales to distributors, including
international distributors, is
F-8
<PAGE> 78
PLX TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
deferred until the product is resold by the distributors to end users, provided
there are no significant remaining obligations and collectibility is probable.
Net revenues from the sale of software development kits is insignificant for all
years presented.
ADVERTISING EXPENSES
The Company accounts for advertising costs as expenses in the period in
which they are incurred. Advertising expenses for 1996, 1997, and 1998 were
$23,158, $28,508, and $70,311, respectively.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed," the Company capitalizes eligible computer software costs upon
achievement of technological feasibility subject to net realizable value
considerations. The Company has defined technological feasibility as completion
of a working model. The period between the achievement of technological
feasibility and release of the Company's software products has been of short
duration. As of December 31, 1998, such capitalizable costs were insignificant.
Accordingly the Company has charged all such costs to research and development
expenses in the accompanying consolidated statements of income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and such
differences may be material to the financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 requires that all items
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company's comprehensive
net income was the same as its net income for the years ended December 31, 1996,
1997 and 1998.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (FAS 131). FAS 131 superseded Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise." FAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. FAS 131 also establishes
standards for related disclosures about products and services, geographic areas,
F-9
<PAGE> 79
PLX TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and major customers. The adoption of FAS 131 did not affect the Company's
results of operations or financial position, and did not affect the disclosure
of segment information (see Note 9).
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. FAS 133 is effective for fiscal years beginning after June
15, 1999 and the Company believes that the adoption of FAS 133 will not have a
significant impact on the Company's operating results or cash flows.
2. NET INCOME PER SHARE AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Basic net income per share is computed
by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted net income per share is calculated using
the weighted average number of outstanding shares of common stock plus dilutive
common stock equivalents.
In February 1998, the SEC issued Staff Accounting Bulletin No. 98 which
requires issuances of common stock, options and warrants for nominal
consideration in periods preceding an initial public offering to be included in
the calculations of earnings per share as if they were outstanding for all
periods presented. To date, the Company has had no issuances of common stock,
options, or warrants for nominal consideration.
If the offering contemplated by this prospectus is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into 13,738,908 shares of common stock based on the
shares of convertible preferred stock outstanding at December 31, 1998. The
unaudited pro forma stockholders' equity reflects this conversion.
F-10
<PAGE> 80
PLX TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of shares used in the calculation of historical and pro
forma basic and diluted net income per share is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net income (numerator)...................... $ 891,329 $ 1,924,394 $ 2,766,159
=========== =========== ===========
Shares used in computing historical basic
net income per share (denominator)........ 3,137,446 3,292,560 3,601,250
=========== =========== ===========
Historical net income per share -- Basic.... $ 0.28 $ 0.58 $ 0.77
=========== =========== ===========
Outstanding weighted average number of
common shares............................. 3,137,446 3,292,560 3,601,250
Effective of dilutive securities:
Stock options............................. -- -- 9,000
Unvested restricted stock................. 410,799 726,654 1,055,985
Redeemable convertible preferred stock.... 13,738,908 13,738,908 13,738,908
----------- ----------- -----------
14,149,707 14,465,562 14,803,893
----------- ----------- -----------
Shares used in computing historical and pro
forma diluted net income per share
(denominator)............................. 17,287,153 17,758,122 18,405,143
=========== =========== ===========
Historical and pro forma net income per
share -- diluted.......................... $ 0.05 $ 0.11 $ 0.15
=========== =========== ===========
Shares used in computing historical basic
net income per share...................... 3,601,250
Adjustment to reflect the effect of the
assumed conversion of weighted average
shares of redeemable convertible preferred
stock outstanding......................... 13,738,908
-----------
Shares used in computing pro forma basic net
income per share.......................... 17,340,158
===========
Pro forma basic net income per share........ $ 0.16
===========
</TABLE>
3. CONCENTRATIONS OF CREDIT, CUSTOMER AND SUPPLIER RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and trade
receivables. The Company generally invests its excess money in money market
funds, commercial paper of corporations with high credit ratings, and treasury
bills. The Company has not experienced any significant losses on its cash
equivalents. The Company performs ongoing credit evaluations of its customers
and generally requires no collateral. A relatively small number of customers and
resellers account for a significant percentage of the Company's revenues. The
Company expects that the sale of its products to a limited number of customers
and resellers may continue to account for a high percentage of revenues for the
foreseeable future. The Company analyzes the need for reserves for potential
credit losses and records reserves when necessary.
F-11
<PAGE> 81
PLX TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Currently, the Company relies on single source suppliers of materials for
the significant majority of its product inventory. As a result, should the
Company's current suppliers not produce and deliver inventory for the Company to
sell on a timely basis, operating results may be adversely impacted.
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Shares of Series A, B, C, and D preferred stock are convertible at the
option of the stockholder into that number of shares of common stock as
determined by dividing $0.167, $0.333, $0.458, and $0.467, respectively, by a
conversion price as determined by the provisions in the Articles of
Incorporation, subject to antidilution provisions. At December 31, 1997 and
1998, each share of preferred stock would convert to common stock on a
three-for-one basis. Conversion is mandatory concurrent with a firm underwritten
public offering of not less than $10,000,000 with a per share price of not less
than $1.67. The preferred stockholders have voting rights equal to the voting
rights of the common stockholders on an as-if-converted basis.
Preferred stockholders are entitled to noncumulative dividends, when and if
declared by the Board of Directors, at an annual amount of $0.05, $0.10,
$0.1375, and $0.14 per share of Series A, B, C, and D preferred stock,
respectively. Such dividends have a preference over the payment of dividends on
common stock.
In the event of liquidation, the preferred stockholders are entitled to a
liquidation preference distribution of $0.50, $1.00, $1.375, and $1.40 per share
of Series A, B, C, and D preferred stock, respectively, plus all declared and
unpaid dividends. Aggregate liquidation preferences amounted to $4,946,027 at
December 31, 1997 and 1998.
The Company may, at the option of the Board of Directors, redeem the Series
A, B, C, or D convertible preferred stock at any time after written request by
the holders of at least 67% of any class of preferred stock outstanding. The
Company may redeem that class of preferred stock in whole or in part by paying
$0.50, $1.00, $1.375, and $1.40 per share of Series A, B, C, and D convertible
preferred stock, respectively, plus all declared but unpaid dividends.
At December 31, 1997 and 1998, 5,000,000 shares of redeemable convertible
preferred stock were authorized. At December 31, 1997 and 1998, designated,
issued, and outstanding redeemable convertible preferred stock by series was as
follows:
<TABLE>
<CAPTION>
SHARES
DESIGNATED ISSUED AND
SERIES SHARES OUTSTANDING
------ ---------- -----------
<S> <C> <C>
A............................................... 1,300,000 1,300,000
B............................................... 650,000 650,000
C............................................... 1,418,738 1,418,529
D............................................... 1,500,000 1,211,107
--------- ---------
Total........................................... 4,868,738 4,579,636
========= =========
</TABLE>
F-12
<PAGE> 82
PLX TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMON STOCK
At December 31, 1998, common stock was reserved for future issuance as
follows:
<TABLE>
<S> <C>
Conversion of preferred stock:
Series A.............................................. 3,900,000
Series B.............................................. 1,950,000
Series C.............................................. 4,255,587
Series D.............................................. 3,633,321
Authorized for future option exercises..................... 800,000
----------
14,538,908
==========
</TABLE>
On May 7, 1986, the Board of Directors of the Company approved a form of
Restricted Stock Purchase Agreement to be used to sell restricted shares of the
Company's common stock (the "Restricted Stock") to its employees, officers and
consultants. There was no formal, written plan. From time to time, the Board of
Directors reserved shares of its common stock for grant under the program. At
December 31, 1998, a total of 4,402,060 shares of Restricted Stock were issued
and outstanding pursuant to the program. The shares were issued at fair market
value as determined by the Board of Directors. The repurchase price of the
restricted shares is the original sales price. The shares are subject to a
repurchase option in favor of the Company (the "Repurchase Option") that expires
over a period of four years from the date of issuance. Under the program's
standard vesting schedule, the number of shares subject to the Repurchase Option
is reduced as follows: (i) on the first anniversary of the date of issuance, the
number of shares subject to the Repurchase Option is reduced by 25%; and (ii)
each month thereafter, the number of shares subject to the Repurchase Option is
reduced by 2.083% of the total Restricted Stock issued. As consideration for the
issuance of such Restricted Stock, each of the officers has paid 20% of the
aggregate purchase price of the Restricted Stock issued to him in cash and has
executed a promissory note (each, a "Note") for the remaining 80% of the
aggregate purchase price. The Notes bear interest at a rate of 6% per annum and
become due and payable upon the earlier of (i) four years from the date of
issuance or (ii) the effectiveness of a registration statement pursuant to which
the subject securities may be offered and sold by such officers; provided,
however, that in the event the officers are restricted by the terms of market
stand-off agreements relating to the securities, amounts that would become due
under the Notes upon such registration are reduced to the amount that would be
covered by sale of shares allowed to be sold. The due dates of the loans did not
extend past the Repurchase Option of the Company. The notes are full recourse
and, in addition, each of the executive officers has pledged the Restricted
Stock as collateral to secure the obligations under his Note. The program was
terminated upon adoption of our 1998 Incentive Stock Plan on January 15, 1998.
The Company's 1998 Stock Incentive Plan (the 1998 Plan) was approved by the
Board of Directors on January 15, 1998. The 1998 Plan provides for the grant of
both incentive and nonqualified stock options. A total of 800,000 shares of
common stock have been reserved for issuance under the 1998 Plan. The maximum
term of any stock option granted under the 1998 Plan is ten years, except that
with respect to incentive stock options granted to a person possessing more than
10% of the combined voting power of the Company (a 10% stockholder), the term of
such stock options shall be for no more than
F-13
<PAGE> 83
PLX TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
five years. The exercise price of incentive stock options granted under the 1998
Plan must be at least 100% of the fair market value of the common stock on the
grant date except that the exercise price of incentive stock options granted to
a 10% stockholder must be at least 110% of such fair market value on the date of
grant. The options generally vest over a period of three to four years.
Activity under the 1998 Plan is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------
OPTIONS AGGREGATE WEIGHTED
AVAILABLE NUMBER OF EXERCISE AVERAGE
FOR GRANT OPTIONS PRICE EXERCISE PRICE
--------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998......... -- -- $ -- $ --
Options authorized............... 800,000 -- -- $ --
Options granted.................. (660,250) 660,250 3,246,250 $4.92
Options canceled................. 15,000 (15,000) (75,000) $5.00
-------- ------- ----------
Balance at December 31, 1998....... 154,750 645,250 $3,171,250 $4.91
======== ======= ==========
</TABLE>
The following table summarizes the information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.00..................... 27,500 9.08 years $3.00 27,500 $3.00
$5.00..................... 617,750 9.43 years $5.00 617,750 $5.00
------- -------
Total..................... 645,250 9.42 years $4.91 645,250 $4.91
======= =======
</TABLE>
As of December 31, 1998, there were 60,124 stock options vested at a
weighted average exercise price of $4.94 per share.
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its stock grants since the alternative fair
market value accounting provided for under FAS 123 requires use of grant
valuation models that were not developed for use in valuing stock grants. Under
APB Opinion No. 25, as the exercise price of the Company's stock grants and
options equals the deemed fair value of the underlying stock on the date of
grant, no compensation expenses are recognized.
During the years ended December 31, 1997 and 1998, the Company recorded
aggregate deferred compensation of $361,300, representing the difference between
the grant price and the deemed fair value of the Company's common stock options
granted during these periods. The amortization of deferred compensation is
charged to operations and is amortized over the vesting period of the options,
which is typically four years. For the years ended December 31, 1997 and 1998,
the amortization expenses were $0 and $78,681, respectively.
F-14
<PAGE> 84
PLX TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro forma information regarding net income is required by FAS 123, which
also requires that the information be determined as if the Company has accounted
for grants subsequent to December 31, 1994 under a method specified by FAS 123.
The fair value of grants of Restricted Stock in 1996 and 1997 and of options
granted in 1998 was estimated at the date of grant using the minimum value
method with the following weighted average assumptions for 1996, 1997, and 1998:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Expected life of options (in years)................... 3.88 3.86 4.00
Dividend yield........................................ 0.00% 0.00% 0.00%
Risk-free interest rate............................... 5.40% 6.14% 4.95%
</TABLE>
If compensation cost for the Company's stock-based compensation plans had
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method of FAS 123, then the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Net income as reported..................... $891,329 $1,924,394 $2,766,159
Pro forma net income....................... $889,300 $1,917,575 $2,642,790
Net income per share as reported
Basic.................................... $ 0.28 $ 0.58 $ 0.77
Diluted.................................. $ 0.05 $ 0.11 $ 0.15
Pro forma net income per share
Basic.................................... $ 0.28 $ 0.58 $ 0.74
Diluted.................................. $ 0.05 $ 0.11 $ 0.14
</TABLE>
The weighted average grant date fair value for the Restricted Stock grants
during the year was $0.02 and $0.04 for 1996 and 1997, respectively. The
weighted average grant date fair value of options granted during 1998 was $0.86.
For purposes of pro forma disclosures, the minimum value of the stock
grants and stock options is deemed amortized over the grant vesting period.
Because FAS 123 is applicable only to stock grants subsequent to December 31,
1994, the pro forma effect will not be fully reflected until 2000.
6. RETIREMENT SAVINGS PLAN
The Company has a retirement savings plan, commonly known as a 401(k) plan,
that allows all full-time employees to contribute from 1% to 25% of their pretax
salary, subject to IRS limits. Beginning in 1996, the Company made a matching
contribution calculated at 50 cents on each dollar of the first 6% of
participant contributions. The Company's contributions to the 401(k) plan were
$17,250, $50,368, and $123,575 for 1996, 1997, and 1998, respectively. There are
six investment funds in which each employee may invest contributions in whole
percentage increments.
F-15
<PAGE> 85
PLX TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
------- -------- ----------
<S> <C> <C> <C>
Federal:
Current.................................... $37,714 $291,000 $1,235,000
Deferred................................... - (191,000) (544,000)
------- -------- ----------
37,714 100,000 691,000
State:
Current.................................... 800 10,355 1,000
Deferred................................... - - -
------- -------- ----------
800 10,355 1,000
------- -------- ----------
Total.............................. $38,514 $110,355 $ 692,000
======= ======== ==========
</TABLE>
The provision for income taxes differs from the amount of income taxes
determined by applying the U.S. statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Tax at the U.S. statutory rate.............. $325,000 $712,000 $1,210,000
Benefit of net operating losses............. (249,000) (502,000) -
Impact of temporary differences............. (48,000) 234,000 -
Research and development credits............ - (215,000) (226,000)
Adjustment of the valuation allowance....... - (191,000) (337,000)
Other....................................... 10,514 72,355 45,000
-------- -------- ----------
$ 38,514 $110,355 $ 692,000
======== ======== ==========
</TABLE>
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
--------- --------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals not currently
deductible................................. $ 434,000 $683,000
Research credit carryforwards................. 70,000 -
Other individually immaterial items........... 94,000 52,000
--------- --------
Total deferred tax assets....................... 598,000 735,000
Valuation allowance for deferred tax assets..... (407,000) --
--------- --------
Net deferred tax assets......................... $ 191,000 $735,000
========= ========
</TABLE>
The valuation allowance decreased by $639,000 and $407,000 in 1997 and
1998, respectively.
8. LEASE COMMITMENTS
The Company leases its facilities under noncancelable lease agreements, and
rental expenses for all leases aggregated approximately $217,000, $264,000, and
$641,000 for the
F-16
<PAGE> 86
PLX TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
years ended December 31, 1996, 1997, and 1998, respectively. Future minimum
lease payments at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................... $ 658,323
2000............................................... 685,040
2001............................................... 495,919
2002............................................... 473,458
2003............................................... 493,520
Beyond 2003........................................ 469,540
----------
Total minimum lease payments....................... $3,275,800
==========
</TABLE>
9. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company operates in one business segment, the sale of semiconductor
devices. The President has been identified as the Chief Operating Decision Maker
(CODM) because he has final authority over resource allocation decisions and
performance assessment. The CODM does not receive discrete financial information
about individual components.
Total net export revenues to regions outside of North America were
$2,047,781, $3,903,566, and $8,896,927 for the years ended December 31, 1996,
1997, and 1998, respectively. Revenues by geographic region were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Revenues:
United States........................ $7,130,882 $12,437,302 $16,370,246
Other North America.................. 634,836 1,192,763 1,009,028
Europe............................... 1,588,893 2,962,959 6,282,975
Asia................................. 458,888 940,607 2,613,952
---------- ----------- -----------
Total.................................. $9,813,499 $17,533,631 $26,276,201
========== =========== ===========
</TABLE>
For the year ended December 31, 1996, one customer, a related party,
accounted for 10% of net revenues. For the year ended December 31, 1997, no
customer accounted for more than 10% of net revenues. For the year ended
December 31, 1998, two customers accounted for more than 10% of net revenues.
One customer, a U.S. distributor, accounted for 22% of net revenues and another
customer, a European distributor, accounted for 11% of net revenues.
10. RELATED PARTY TRANSACTIONS
The Company and a customer are related parties because the chairman of the
Company's Board of Directors also serves on the customer's Board of Directors.
For the years ended December 31, 1996, 1997, and 1998, net revenues, which were
transacted at arms' length prices, to the customer were approximately $962,000,
$765,000, and $330,000, respectively.
In June 1997, the Company purchased 892,857 shares of preferred stock of
Sebring Systems, Inc. for $100,000. The Company expensed this $100,000 in 1997
due to Sebring
F-17
<PAGE> 87
PLX TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
spending this amount on research and development. This amount is included in
research and development expenses in the 1997 consolidated statement of income.
The chairman of the Company's Board of Directors is also the chairman of the
other company.
11. SUBSEQUENT EVENTS
On January 25, 1999, the Company's Board of Directors approved the 1999
Stock Incentive Plan (the 1999 Plan). The 1999 Plan provides for the grant of
incentive and nonqualified stock options. A total of 1,000,000 shares of common
stock have been reserved for issuance under the 1999 Plan. The maximum term of
any stock option granted under the 1999 Plan is ten years, except that with
respect to incentive stock options granted to a person possessing more than 10%
of the combined voting power of the Company (a 10% Stockholder), the term of
such stock options shall be for no more than five years. The exercise price of
incentive stock options granted under the 1999 Plan must be at least 100% of the
fair market value of the common stock on the grant date except that the exercise
price of incentive stock options granted to a 10% Stockholder must be at least
110% of such fair market value on the date of grant.
On January 25, 1999, the Company's Board of Directors approved an increase
in the number of shares reserved for issuance under the 1998 Plan from 800,000
to 1,300,000.
On March 22, 1999 the Company reincorporated in the State of Delaware. The
par value of the preferred and common stock is $0.001 per share. The Company's
Certificate of Incorporation will be amended to authorize 5,000,000 shares of
preferred stock. The Board of Directors has the authority to fix or alter the
designations, powers, preferences and rights of the shares of each such series.
The Company's reincorporation has been reflected in the consolidated financial
statements for all periods presented.
F-18
<PAGE> 88
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH AND INCLUDING , 1999 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
3,300,000 SHARES
LOGO
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
WIT CAPITAL CORPORATION
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 89
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the Registrant in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT*
--------
<S> <C>
Securities and Exchange Commission Filing Fee............... $ 8,441
NASD Filing Fee............................................. 3,536
Nasdaq National Market Listing Fee.......................... 95,000
Accounting Fees and Expenses................................ 150,000
Blue Sky Fees and Expenses.................................. 100,000
Legal Fees and Expenses..................................... 200,000
Transfer Agent and Registrar Fees and Expenses.............. 7,500
Printing Expenses........................................... 85,000
Miscellaneous Expenses...................................... 50,523
--------
Total............................................. $700,000
========
</TABLE>
- -------------------------
* All amounts are estimates except the SEC filing fee, the NASD filing fee and
the Nasdaq National Market listing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporate Law of the State of Delaware,
the Registrant has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Bylaws (Exhibit 3.2 hereto) also provide for mandatory indemnification of its
directors and executive officers, and permissive indemnification of its
employees and agents, to the fullest extent permissible under Delaware law.
The Registrant's Certificate of Incorporation (Exhibit 3.1 hereto) provides
that the liability of its directors for monetary damages shall be eliminated to
the fullest extent permissible under Delaware law. Pursuant to Delaware law,
this includes elimination of liability for monetary damages for breach of the
directors' fiduciary duty of care to the Registrant and its stockholders. These
provisions do not eliminate the directors' duty of care and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Registrant, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for any
transaction from which the director derived an improper personal benefit, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
Prior to the effective date of the Registration Statement, the Registrant
will have entered into agreements with its directors and certain of its
executive officers that require the Registrant to indemnify such persons against
expenses, judgments, fines, settlements
II-1
<PAGE> 90
and other amounts actually and reasonably incurred (including expenses of a
derivative action) in connection with any proceeding, whether actual or
threatened, to which any such person may be made a party by reason of the fact
that such person is or was a director or officer of the Registrant or any of its
affiliated enterprises, provided such person acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the best interests of
the Registrant and, with respect to any criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. The indemnification agreements
also set forth certain procedures that will apply in the event of a claim for
indemnification thereunder.
The Registrant intends to obtain in conjunction with the effectiveness of
the Registration Statement a policy of directors' and officers' liability
insurance that insures PLX's directors and officers against the cost of defense,
settlement or payment of a judgment under certain circumstances.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the period from February 28, 1995 to February 28, 1999, the
Registrant has issued and sold the following unregistered securities:
1. The Registrant granted stock options to employees, directors and
consultants under its 1998 Plan covering an aggregate of 660,250 shares of
the Registrant's Common Stock, at exercise prices ranging from $3.00 to
$5.00 with an average of $4.92 per share.
2. The Registrant granted an aggregate of 1,389,727 shares of
Restricted Stock to employees, directors and consultants pursuant to
restricted stock purchase agreements, at purchase prices ranging from
$0.0633 to $0.3000 with an average of $0.1803 per share. The 1,389,727
shares were sold to 76 employees, directors and consultants for cash in the
aggregate amount of $68,776 and promissory notes in the aggregate amount of
$275,104.
3. The Registrant issued and sold an aggregate of 109,791 shares of
its Common Stock pursuant to the exercise of warrants with an exercise
price of $0.05 per share. These shares were purchased by certain holders of
our preferred stock.
The sale and issuance of securities in the transactions described in
paragraphs 1, 2 and 3 above were deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act or Regulation D
promulgated thereunder as transactions by an issuer not involving a public
offering, where the purchasers represented their intention to acquire securities
for investment only and not with a view to distribution and received or had
access to adequate information about the Registrant, or Rule 701 promulgated
thereunder in that they were offered and sold either pursuant to written
compensatory benefit plans or pursuant to a written contract relating to
compensation.
Appropriate legends were affixed to the stock certificates issued in the
above transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. No underwriters were employed in any of
the above transactions.
II-2
<PAGE> 91
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
The exhibits are as set forth in the Exhibit Index.
(b) FINANCIAL STATEMENT SCHEDULES
II -- Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted since they are
not required or are not applicable or the required information is shown in the
financial statements or related notes. Columns omitted from schedules filed have
been omitted since the information is not applicable.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide the underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 4 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, State of California on the 30th day of March, 1999.
PLX TECHNOLOGY, INC.
By: /s/ MICHAEL J. SALAMEH
-----------------------------------
Michael J. Salameh
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL J. SALAMEH President and Director March 30, 1999
- ------------------------------- (Principal Executive Officer)
Michael J. Salameh
/s/ SCOTT M. GIBSON* Vice President, Finance, Chief March 30, 1999
- ------------------------------- Financial Officer and Secretary
Scott M. Gibson (Principal Financial and Accounting
Officer)
/s/ D. JAMES GUZY, SR.* Director March 30, 1999
- -------------------------------
D. James Guzy, Sr.
/s/ TIMOTHY DRAPER* Director March 30, 1999
- -------------------------------
Timothy Draper
/s/ EUGENE FLATH* Director March 30, 1999
- -------------------------------
Eugene Flath
</TABLE>
*By: /s/ MICHAEL J. SALAMEH
---------------------------------
Michael J. Salameh
Attorney-In-Fact
II-4
<PAGE> 93
PLX TECHNOLOGY, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO COSTS END
DESCRIPTION OF PERIOD AND EXPENSES DEDUCTIONS(1) OF PERIOD
----------- ---------- ---------------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts.... $ 49,110 $73,492 $(44,505) $ 78,097
Year ended December 1997
Deducted from asset accounts:
Allowance for doubtful accounts.... $ 78,097 $87,931 $ (7,380) $158,648
Year ended December 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts.... $158,648 $57,929 $(43,293) $173,284
</TABLE>
- ------------------------
(1) Uncollectible accounts written off, net of recoveries
II-5
<PAGE> 94
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Amended and Restated Certificate of Incorporation of
the Registrant.
3.2* Registrant's Amended and Restated Bylaws.
4.1 Reference is made to Exhibit 3.1.
5.1* Opinion of Morrison & Foerster LLP as to the legality of the
Common Stock being registered.
10.1* Form of Indemnification Agreement between PLX and each of
its Officers and Directors.
10.2* 1998 Stock Incentive Plan.
10.3* 1999 Stock Incentive Plan.
10.4* Lease Agreement dated December 20, 1995 by and between Aetna
Life Insurance Company as Landlord and PLX as Tenant.
10.5* Lease Agreement dated October 17, 1997 between The Arrillaga
Foundation and The Perry Foundation as Landlords and PLX as
Tenant, as amended.
10.6* Form of Restricted Stock Purchase Agreement used in
connection with the 1986 Restricted Stock Purchase Program.
10.7* Form of Pledge Agreement used in connection with the 1986
Restricted Stock Purchase Program.
10.8* Form of Promissory Note used in connection with the 1986
Restricted Stock Purchase Program.
10.9* PLX Technology, Inc. Stock Restriction, Information Rights
and Registration Rights Agreement dated April 19, 1989.
10.10* PLX Technology, Inc. Stock Restriction, Information Rights
and Registration Rights Agreement dated July 3, 1991.
23.1* Consent of Morrison & Foerster LLP. Reference is made to
Exhibit 5.1.
23.2 Consent of Ernst & Young LLP.
24.1* Powers of Attorney.
27.1* Financial Data Schedule.
99.1* Consent of Nominee Director signed by Mr. Sohn.
99.2* Consent of Nominee Director signed by Mr. Hart.
</TABLE>
- -------------------------
* Previously filed.
** To be filed by Amendment
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
January 14, 1999 (except for Note 11, as to which the date is March 22, 1999)
in Amendment No. 4 to the Registration Statement (Form S-1 No. 333-71795) and
related Prospectus of PLX Technology, Inc. for the registration of 3,795,000
shares of its common stock.
Our audits also included the financial statement schedule of PLX
Technology, Inc. for each of the three years in the period ended December 31,
1998 listed in item 16(b) of this Registration Statement. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
San Jose, California
March 25, 1999
