----------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10 - Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the quarterly period ended June 25, 2000
[ ] Transition report pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of
1934.
For the Transition Period From to
Commission File Number 0-19084
PMC-Sierra, Inc.
(Exact name of registrant as specified in its charter)
A Delaware Corporation - I.R.S. NO. 94-2925073
900 East Hamilton Avenue
Suite 250
Campbell, CA 95008
(408) 626-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes ___X____ No _______
Common shares outstanding at July 26, 2000 -- 147,669,602
------------------------------------------------
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- Condensed consolidated statements of operations
- Condensed consolidated balance sheets
- Condensed consolidated statements of cash flows
- Notes to condensed consolidated financial statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote by Stockholders
Item 5. Description of Capital Stock
Item 6. Exhibits and Reports on Form 8 - K
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(unaudited)
Three Months Ended Six Months Ended
------------------------- --------------------------
Jun 25, Jun 27, Jun 25, Jun 27,
2000 1999 2000 1999
Net revenues
Networking $ 127,170 $ 55,082 $ 224,923 $ 102,487
Non-networking 6,938 4,805 11,992 7,799
--------- ---------- ----------- ----------
Net revenues 134,108 59,887 236,915 110,286
Cost of revenues 27,741 13,034 48,292 23,954
--------- ---------- ----------- ----------
Gross profit 106,367 46,853 188,623 86,332
Other costs and expenses:
Research and development 32,655 15,902 59,450 29,705
Marketing, general and administrative 19,995 10,043 35,126 19,677
Amortization of deferred stock compensation:
Research and development 2,968 697 6,353 1,155
Marketing, general and administrative 559 175 818 228
Amortization of goodwill 459 478 918 956
Costs of merger 5,776 - 13,678 -
---------- ---------- ----------- ----------
Income from operations 43,955 19,558 72,280 34,611
Interest and other income, net 3,646 1,134 7,266 2,224
Gain on sale of investments 22,992 26,800 27,109 26,800
--------- ---------- ---------- ----------
Income before provision for income taxes 70,593 47,492 106,655 63,635
Provision for income taxes 20,655 12,261 36,571 18,989
---------- ---------- ---------- ----------
Net income $ 49,938 $ 35,231 $ 70,084 $ 44,646
========== ========== ========== ==========
Net income per common share - basic $ 0.33 $ 0.25 $ 0.47 $ 0.32
========== ========== ========== ==========
Net income per common share - diluted $ 0.30 $ 0.23 $ 0.42 $ 0.30
========== ========== ========== ==========
Shares used in per share calculation - basic 149,919 140,245 149,141 139,462
Shares used in per share calculation - diluted 169,002 152,791 168,612 151,315
<FN>
See notes to condensed consolidated financial statements.
</FN>
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except par value)
Jun 25, Dec 26,
2000 1999
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 126,073 $ 90,055
Short-term investments 123,844 106,636
Accounts receivable, net 64,614 36,170
Inventories, net 13,164 7,208
Deferred income taxes 9,270 9,270
Prepaid expenses and other current assets 11,475 7,496
Short-term deposits for wafer fabrication
capacity - 4,637
--------- ----------
Total current assets 348,440 261,472
Property and equipment, net 72,804 48,766
Goodwill and other intangible assets, net 13,433 15,280
Investments and other assets 13,993 11,827
Deposits for wafer fabrication capacity 23,001 14,483
--------- ---------
$ 471,671 $ 351,828
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,926 $ 11,973
Accrued liabilities 21,239 16,123
Deferred income 47,413 34,486
Income taxes payable 22,265 25,912
Current portion of obligations under
capital leases and long-term debt 4,168 2,310
--------- --------
Total current liabilities 120,011 90,804
Deferred income taxes 9,091 9,091
Noncurrent obligations under
capital leases and long-term debt 1,603 3,355
PMC special shares convertible into
4,016 (1999 - 4,242) common stock 6,653 6,998
Stockholders' equity
Preferred stock, par value $0.001;
5,000 shares authorized:
none issued or outstanding in
2000 and 1999
Common stock and additional paid in capital,
par value $0.001;
900,000 shares authorized
(200,000 shares in 1999)
146,229 shares issued and
outstanding (142,938 in 1999) 258,624 226,409
Deferred stock compensation (14,096) (4,530)
Retained earnings 89,785 19,701
--------- ----------
Stockholders' equity 334,313 241,580
--------- ----------
$ 471,671 $ 351,828
========= ==========
See notes to condensed consolidated financial statements.
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
---------------------------
Jun 25, Jun 27,
2000 1999
Cash flows from operating activities:
Net income $ 70,084 $ 44,646
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of plant and equipment 14,104 8,492
Amortization of intangibles 1,847 1,759
Amortization of deferred stock compensation 7,171 1,383
Equity in income of investee (702) -
Gain on sale of investments (27,110) (26,800)
Changes in operating assets and liabilities
Accounts receivable (28,444) 1,399
Inventories (5,956) (1,697)
Prepaid expenses and other (3,862) (464)
Accounts payable and accrued liabilities 18,069 5,540
Income taxes payable (3,647) -
Deferred income 12,927 6,400
--------- ----------
Net cash provided by operating activities 54,481 40,658
--------- ----------
Cash flows from investing activities:
Purchases of short-term investments (123,844) (9,773)
Proceeds from sales and maturities of
short-term investments 106,636 50,893
Investments in other companies (2,262) -
Purchases of plant and equipment (33,682) (11,196)
Proceeds from sale of investments 27,791 28,628
Purchase of intangible assets - (411)
Investment in wafer fabrication deposits (8,584) -
Proceeds from refund of wafer fabrication
deposits 4,703 4,000
--------- ----------
Net cash provided by (used in)
investing activities (29,242) 62,141
--------- ----------
Cash flows from financing activities:
Proceeds from notes payable and long-term debt - 1,438
Repayment of notes payable and long-term debt (2,572) (726)
Principal payments under capital lease obligations (1,782) (6,489)
Proceeds from issuance of common stock 15,133 6,309
--------- ----------
Net cash provided by financing activities 10,779 532
--------- ----------
Net increase in cash and cash equivalents 36,018 103,331
Cash and cash equivalents, beginning of the period 90,055 45,691
---------- ----------
Cash and cash equivalents, end of the period $ 126,073 $ 149,022
========== ==========
See notes to condensed consolidated financial statements.
PMC-Sierra, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. Summary of Significant Accounting Policies
Description of business. PMC-Sierra, Inc (the "Company" or "PMC-Sierra")
provides customers with internetworking semiconductor system solutions for
high-speed transmission and networking systems.
Basis of presentation. All historical financial information has been restated to
reflect the acquisitions of Toucan Technology Limited, AANetcom, Inc. in the
second quarter of fiscal 2000 and Extreme Packet Devices, Inc. in the second
quarter of fiscal 2000. These acquisitions were accounted for as poolings of
interests.
The accompanying financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules or regulations. The
interim financial statements are unaudited, but reflect all adjustments which
are, in the opinion of management, necessary to present a fair statement of
results for the interim periods presented. These financial statements should be
read in conjunction with the financial statements and the notes thereto in the
Company's Annual Report on Form 10-K for the year ended December 26, 1999. The
results of operations for the interim period are not necessarily indicative of
results to be expected in future periods.
Inventories. Inventories are stated at the lower of cost (first-in, first out)
or market (estimated net realizable value). The
components of inventories are as follows:
(in thousands) Jun 25, Dec 26,
20000 1999
(unaudited)
Work-in-progress $ 4,948 $ 4,031
Finished goods 8,216 3,177
--------- ---------
$ 13,164 $ 7,208
========= =========
Recently issued accounting standards. In June 1998, the FASB issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments and
hedging activities. The Statement will require the recognition of all
derivatives on the Company's consolidated balance sheet at fair value. The
Financial Accounting Standards Board has subsequently delayed implementation of
the standard for the financial years beginning after June 15, 2000. The Company
expects to adopt the new Statement effective January 1, 2001. The impact on the
Company's financial statements is not expected to be material.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation". The Company
will be required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees". The Company does not expect the application of FIN
44 to have a material impact on its consolidated financial position or results
of operations.
NOTE 2. Business Combinations.
Acquisition of Extreme Packet Devices, Inc.
In April 2000, the Company acquired Extreme Packet Devices, Inc., a privately
held fabless semiconductor company located in Canada. Extreme develops
semiconductors for high speed IP and ATM traffic management at 10 Gigabits per
second rates. PMC-Sierra issued approximately 2,000,000 exchangeable shares and
PMC-Sierra stock options in exchange for all of the outstanding equity
securities and options of Extreme.
Exchangeable Shares. As a result of the acquisition of Extreme, each holder of
an Extreme common share received 0.2240 exchangeable shares. The exchangeable
shares are exchangeable, at the option of the holder, for PMC-Sierra common
stock on a share-for-share basis. The exchangeable shares remain securities of
PMC-Sierra and entitle the holders to dividend and other rights economically
equivalent to that of PMC-Sierra common stock and, through a voting trust, to
vote at shareholder meetings of PMC-Sierra. As at December 31, 1999, 1,620 of
these exchangeable shares were outstanding.
The transaction was accounted for as a pooling of interests and accordingly, all
prior periods have been restated.
During the quarter ended June 25, 2000, PMC-Sierra recorded merger-related
transaction costs of $5,776,000 related to the acquisition of Extreme. These
charges, which consist primarily of investment banking and other professional
fees, will be included under costs of merger in the Consolidated Statements of
Operations in the quarter ended June 25, 2000.
The historical results of operations of the Company and Extreme for the periods
prior to the mergers are as follows:
Three Months Ended Year Ended
-------------------------- -----------
Mar 26, Mar 27, Dec 26,
2000 1999 1999
Net revenues
PMC, as previously reported $ 102,807 $ 50,399 $ 263,281
Extreme - - -
----------- ----------- --------
Combined $ 102,807 $ 50,399 263,281
=========== =========== ========
Net income (loss)
PMC, as previously reported 22,993 9,415 83,589
Extreme (2,847) - (1,987)
----------- ----------- ----------
Combined $ 20,146 $ 9,415 $ (81,602)
=========== =========== ==========
Acquisition of AANetcom, Inc.
In March 2000, the Company acquired AANetcom, Inc., a privately held fabless
semiconductor company located in the United States. AANetcom's technology is
designed for use in gigabit or terabit switches and routers, telecommunication
access equipment, and optical networking switches in applications ranging from
the enterprise to the core of the Internet. PMC-Sierra issued approximately
4,800,000 shares of PMC-Sierra common stock in exchange for all of the
outstanding equity securities and options of AANetcom.
The transaction was accounted for as a pooling of interests and accordingly, all
prior periods have been restated.
During the quarter ended March 26, 2000, PMC-Sierra recorded merger-related
transaction costs of $7,368,000 related to the acquisition of AANetcom. These
charges, which consist primarily of investment banking and other professional
fees, will be included under costs of merger in the Consolidated Statements of
Operations in the quarter ended March 26, 2000.
Acquisition of Toucan Technology.
In January 2000, the Company acquired Toucan Technology, a privately held
integrated circuit design company located in Ireland. Toucan offers expertise in
telecommunications semiconductor design. At December 31, 1999, the Company owned
seven per cent of Toucan and purchased the remainder for approximately 300,000
shares of PMC-Sierra common stock and PMC-Sierra stock options.
The transaction was accounted for as a pooling of interests and accordingly, all
prior periods have been restated.
During the quarter ended March 26, 2000, PMC-Sierra recorded merger-related
transaction costs of $534,000 related to the acquisition of Toucan. These
charges, which consist primarily of professional fees, will be included under
costs of merger in the Consolidated Statements of Operations in the quarter
ended March 26, 2000.
The historical results of operations of the Company, Toucan, AANetcom, and
Extreme for the periods prior to the mergers are as follows:
Three Months Ended Year Ended
----------------------- -----------
Mar 26, Mar 27, Dec 26,
2000 1999 1999
Net revenues
PMC $ 102,807 $ 50,399 $ 262,477
Toucan - - 24
AANetcom - - 780
Extreme - - -
----------- ----------- --------
Combined $ 102,807 $ 50,399 $ 263,281
=========== =========== ========
Net income (loss)
PMC 28,708 11,076 90,020
Toucan (404) (452) (221)
AANetcom (5,311) (1,209) (6,210)
Extreme (2,847) - (1,987)
----------- ----------- ----------
Combined $ 20,146 $ 9,415 $ (81,602)
=========== =========== ==========
NOTE 3. Sale of Investment
During the second quarter ended June 25, 2000, the Company realized a pre-tax
gain of $23.0 million related to the disposition of 512,705 common shares of
Sierra Wireless, Inc., a publicly held company. These shares were previously
subject to escrow restrictions and were not available for sale until the second
quarter of fiscal 2000. The remaining 2.9 million common shares of Sierra
Wireless held by the Company are subject to certain resale provisions of which
469 thousand shares are available for sale in August of this year with the
remaining not available for sale until fiscal 2001.
During the quarter ended March 26, 2000, the Company realized a pre-tax gain of
$4.1 million related to the disposition of 92,360 common shares of Cypress
Semiconductor, Inc., a publicly held company. These shares were previously
subject to escrow restrictions and were not available for sale until the second
quarter of fiscal 2000.
NOTE 4. Segment Information
The Company has two operating segments: networking and non-networking products.
The networking segment consists of internetworking semiconductor devices and
related technical service and support to equipment manufacturers for use in
their communications and networking equipment. The non-networking segment
includes custom user interface products. The Company is supporting the
non-networking products for existing customers, but has decided not to develop
any further products of this type.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on revenues and gross margins from operations of the two segments.
Three Months Ended Six Months Ended
-------------------------- -----------------------------
(in thousands) Jun 25, Jun 27, Jun 25, Jun 27,
2000 1999 2000 1999
Net revenues
Networking $ 127,170 $ 55,082 $ 224,923 $ 102,487
Non-Networking 6,938 4,805 11,992 7,799
----------- ----------- ------------ ------------
Total $ 134,108 $ 59,887 $ 236,915 $ 110,286
=========== =========== ============ ============
Gross profit
Networking $ 103,190 $ 44,627 $ 183,198 $ 82,694
Non-Networking 3,177 2,226 5,425 3,638
----------- ----------- ------------ ------------
Total $ 106,367 $ 46,853 $ 188,623 $ 86,332
=========== =========== ============ ============
NOTE 5. Net Income Per Share
The following table sets forth the computation of basic and diluted net income
per share:
Three Months Ended Six Months Ended
-------------------- -------------------
(in thousands, except for Jun 25, Jun 27, Jun 25, Jun 27,
per share amounts) 2000 1999 2000 1999
Numerator:
Net income $ 49,938 $ 35,231 $ 70,084 $ 44,646
======== ======== ======== =========
Denominator:
Basic weighted average common
shares outstanding (1) 149,919 140,245 149,141 139,462
-------- -------- -------- --------
Effect of dilutive securities:
Stock options 18,839 12,456 19,266 11,764
Stock warrants 244 90 205 89
-------- -------- -------- --------
Shares used in calculation of
diluted net income per share 169,002 152,791 168,612 151,315
======== ======== ======== ========
Net income per common share - basic $ 0.33 $ 0.25 $ 0.47 $ 0.32
Net income per common share - diluted $ 0.30 $ 0.23 $ 0.42 $ 0.30
(1) Exchangeable shares (see note 2) and PMC-Sierra, Ltd. special shares are
included in the calculation of basic net income per share.
NOTE 6. Stock Split
In February 2000, the Company effected a two-for-one stock split in the form of
a stock dividend. Accordingly, all references to share and per-share data for
all periods presented have been adjusted to reflect this event.
NOTE 7. Subsequent Events
On June 27, 2000, the Company acquired Malleable Technologies Inc., a privately
held fabless semiconductor company located in the United States. The Company
issued approximately 1,219,000 PMC-Sierra common shares and 474,000 options in
exchange for the remaining 85% interest of Malleable's outstanding common stock,
options and warrants that the Company did not already own. This transaction will
be accounted for as a purchase.
On July 11, 2000, the Company announced the intent to acquire Quantum Effect
Devices, Inc., a publicly held semiconductor company located in the United
States and listed on the NASDAQ. This agreement provides for the Company to
issue PMC-Sierra common shares and options at an exchange ratio of 0.385
PMC-Sierra common share per QED common share in exchange for all outstanding
common stock and options of QED. This transaction, subject to QED stockholder
and regulatory approval, will be accounted for as a pooling of interests.
On July 21, 2000, the Company acquired Datum Telegraphic Inc., a privately held
fabless semiconductor company located in Canada. The Company issued
approximately 550,000 PMC-Sierra common stock, 44,000 options to purchase
PMC-Sierra common stock and approximately $17 million in cash in exchange for
the remaining 92% interest of Datum's outstanding common stock and options that
the Company did not already own. This transaction will be accounted for as a
purchase.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some statements in this report constitute "forward looking statements" within
the meaning of the federal securities laws, including those statements relating
to:
- - Our mergers and their accounting treatment;
- - revenues;
- - gross margins;
- - gross profit;
- - research and development expenses;
- - marketing, general and administrative expenditures;
- - in-process research and development and goodwill;
- - deferred stock compensation; and
- - capital resources sufficiency.
Our results may differ materially from those expressed or implied by the
forward-looking statements for a number of reasons, including those described
below in "Factors That You Should Consider Before Investing in PMC-Sierra." We
may not, nor are we obliged to, release revisions to forward-looking statements
to reflect subsequent events.
Acquisitions
On April 6, 2000, PMC acquired Extreme Packet Devices Inc., or Extreme, a
British Columbia corporation located in Kanata, Ontario, Canada. Extreme was
privately held. Extreme develops semiconductors for high speed Internet Protocol
and ATM traffic management at 10 gigabit per second rates. PMC acquired Extreme
for shares exchangeable into approximately 2,000,000 shares of PMC stock and PMC
stock options in exchange for all the outstanding stock and stock options of
Extreme. The transaction was accounted for as a pooling of interests.
On June 13, 2000, PMC announced an agreement to acquire Malleable Technologies,
Inc., or Malleable, which was completed on June 27, 2000. Malleable is a
Delaware corporation located in San Jose, California. Malleable makes digital
signal processors for voice-over-packet processing applications which bridge
voice and high speed data networks by compressing voice traffic into ATM or
Internet Protocol packets.
PMC purchased the 85% of Malleable that PMC did not already own for
approximately 1,219,000 shares of PMC common stock and 474,000 options to
purchase PMC common stock. The purchase price had been determined when PMC
invested in Malleable preferred stock in July 1999 and received an option to
purchase Malleable. A PMC employee had served as a director of Malleable since
the July 1999 investment. PMC will account for the acquisition using the
purchase method. While PMC expects to record a charge during the third quarter
of 2000 due to the acquisition of in process research and development, the
amount of the charge has not yet been determined.
On July 21, 2000, PMC acquired Datum Telegraphic Inc., or Datum, a British
Columbia corporation located in Vancouver, Canada. Datum is privately held.
Datum develops semiconductors for wireless base stations. PMC acquired the 92%
of Datum which PMC did not already own for approximately 550,000 shares of PMC
common stock, 44,000 options to purchase PMC common stock and approximately $17
million cash. PMC will account for the acquisition using the purchase method.
PMC expects to record a charge during the third quarter of 2000 due to the
acquisition of in process research and development.
Results of Operations
Second Quarters of 2000 and 1999
Net Revenues ($000,000)
Second Quarter
----------------------
2000 1999 Change
Networking products $ 127.2 $ 55.1 131%
Non-networking products 6.9 4.8 44%
----------------------
Total net revenues $ 134.1 $ 59.9 124%
======================
Net revenues increased by 124% in the second quarter of 2000 compared to the
same quarter in 1999. Our networking revenue increased 131% in the same periods
and our non-networking revenues grew 44%.
Networking revenue growth was driven by growth in our customers' networking
equipment business, our customers' continued transition from internally
developed application specific semiconductors to our standard semiconductors,
and our introduction and sale of chips addressing additional network functions.
Non-networking revenues grew as a result of our customers' ordering patterns. We
expect our non-networking revenues to fluctuate in the future as they have in
the past. In the long run, we expect non-networking revenues to reduce to zero
as we have not developed any new products of this type since 1996.
Gross Profit ($000,000)
Second Quarter
--------------------
2000 1999 Change
Networking $ 103.2 $ 44.6 131%
Non-networking 3.2 2.3 39%
---------------------
Total gross profit $ 106.4 $ 46.9 127%
=====================
Percentage of net revenues 79% 78%
Total gross profit grew 127% from $46.9 million in the second quarter of 1999 to
$106.4 million in the same quarter of 2000. Total gross profit grew as a result
of higher sales volumes of both networking and non-networking products.
Total gross profit as a percentage of net revenue increased in the second
quarter of 2000 as our networking revenues comprised a greater portion of our
total revenues. Our networking gross profit as a percentage of net revenue is
high relative to the overall gross margins in the semiconductor industry because
our products are complex and are sold in relatively low volumes. We believe
that, should the market for our networking products grow and our customers
purchase in greater volume, our gross profit as a percentage of revenue will
decline.
Non-networking gross profit as a percentage of non-networking revenue declined
in the second quarter of 2000 compared to the same period in 1999 as a result of
price changes on these older products.
Operating Expenses and Charges ($000,000)
Second Quarter
---------------------------
2000 1999 Change
Research and development $ 32.7 $ 15.9 106%
Percentage of net revenues 24% 27%
Marketing, general & administrative $ 20.0 $ 10.0 100%
Percentage of net revenues 15% 17%
Amortization of deferred stock compensation:
Research and development $ 3.0 $ 0.7
Marketing, general and administrative 0.5 0.2
-------------------
Total $ 3.5 $ 0.9 289%
===================
Percentage of net revenues 3% 2%
Amortization of goodwill $ 0.5 $ 0.5
Costs of merger $ 5.8 $ -
Our research and development ("R&D") expenses of $32.7 million in the second
quarter of 2000 increased 106% over the second quarter of 1999. Our R&D expenses
increased in absolute dollars but decreased as a percentage of net revenues. R&D
expenditures increased in the second quarter of 2000 because we hired more R&D
employees and acquired Extreme.
We incur R&D expenditures in order to attain technological leadership from a
multi-year perspective. This has caused R&D spending to fluctuate from quarter
to quarter. We expect such fluctuations, particularly when measured as a
percentage of net revenues, to occur in the future, primarily due to the timing
of expenditures and changes in the level of net revenues. We expect R&D expenses
to continue to increase in future periods.
We increased marketing, general and administrative expenses by 100% in the
second quarter of 2000 compared to the second quarter of 1999. Marketing,
general and administrative expenses decreased as a percentage of net revenue
compared to the second quarter of 1999 because many marketing, general and
administrative expenses are fixed in the short term. Therefore, in periods of
rising revenues, these expenses decline as a percentage of revenues.
We recorded a $3.5 million charge for amortization of deferred stock
compensation in the second quarter of 2000 compared to a $0.9 million charge in
the prior year's second quarter. Deferred compensation charges increased as a
result of the AANetcom, Inc. acquisition, which closed in the first quarter of
2000, and the Extreme acquisition. AANetcom and Extreme had, in the past, issued
shares at prices lower than the deemed fair value of the stock. We are
amortizing these amounts using the accelerated method over the vesting period.
We expect to charge additional deferred stock compensation expenses in future
periods as a result of the Datum and Malleable acquisitions.
We incurred $0.5 million in non-cash goodwill charges in the second quarters of
2000 and 1999 in connection with goodwill recorded as a result of prior
acquisitions. We expect to incur a significant third quarter 2000 charge for
purchased in process research and development and significant future period
amortization charges for purchased goodwill in relation to our Datum and
Malleable acquisitions. We may acquire products, technologies or companies in
the future for which the purchase method of accounting may be used. This could
also result in significant goodwill amortization charges in future periods which
could materially impact our operating results.
During the second quarter of 2000, we recorded $5.8 million in merger costs
related to the acquisition of Extreme. These charges consist primarily of
investment banking and other professional fees. We expect to incur significant
merger costs related to future acquisitions.
Interest and other income, net
Net interest and other income increased to $3.7 million in the second quarter of
2000 from $1.1 million in last year's second quarter due to higher cash balances
available to earn interest.
Gain on sale of investment
During the second quarter of 2000, we realized a pre-tax gain of approximately
$23.0 million as a result of our disposition of a portion of our investment in
Sierra Wireless, Inc., a publicly held company. These shares were previously
subject to escrow restrictions and were not available for sale until the second
quarter of fiscal 2000. The remaining 2.9 million common shares of Sierra
Wireless held by the Company are subject to certain resale provisions of which
469 thousand shares are available for sale in August of this year, with the
remaining not available for sale until fiscal 2001.
Provision for income taxes
The provision for income taxes consists primarily of estimated taxes on Canadian
and other foreign operations.
Recently issued accounting standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Statement will
require the recognition of all derivatives on our consolidated balance sheet at
fair value. The Financial Accounting Standards Board has subsequently delayed
implementation of the standard for the financial years beginning after June 15,
2000. We expect to adopt the new Statement effective January 1, 2001. We expect
the impact of this accounting standard will be immaterial to our financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation". The Company
will be required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees". The Company does not expect the application of FIN
44 to have a material impact on its consolidated financial position or results
of operations.
First Six Months of 2000 and 1999
Net Revenues ($000,000)
First six months
---------------------
2000 1999 Change
Networking products $ 224.9 $ 102.5 119%
Non-networking products 12.0 7.8 54%
---------------------
Total net revenues $ 236.9 $ 110.3 115%
=====================
Net revenue of $236.9 million in the first six-months of 2000 increased 115%
over the comparable period of 1999 as a result of strong networking revenue
growth and relatively moderate non-networking revenue growth.
Gross Profit ($000,000)
First six months
--------------------
2000 1999 Change
Networking $ 183.2 $ 82.7 122%
Non-networking 5.4 3.6 50%
--------------------
Total gross profit $ 188.6 $ 86.3 119%
====================
Percentage of net revenues 80% 78%
Gross profit increased in the first half of 2000 compared to the same period in
1999 as a result of the growth of networking and non-networking revenues. Gross
profit as a percentage of sales increased for the same periods as higher gross
margin networking products represented a greater percentage of overall net
revenues.
Operating Expenses and Charges ($000,000)
First six months
---------------------------
2000 1999 Change
Research and development $ 59.5 $ 29.7 100%
Percentage of net revenues 25% 27%
Marketing, general & administrative $ 35.1 $ 19.7 78%
Percentage of net revenues 15% 18%
Amortization of deferred stock compensation:
Research and development $ 6.4 $ 1.2
Marketing, general and administrative 0.8 0.2
--------------------
Total $ 7.2 $ 1.4 414%
===================
Percentage of net revenues 3% 1%
Amortization of goodwill $ 0.9 $ 1.0
Costs of merger $ 13.7 $ -
R&D expenses increased in dollars but decreased as a percentage of net revenues
in the first half of 2000 compared to the first half of 1999 as we increased R&D
spending at a slower rate than our revenue growth. All of the R&D spending in
2000 and 1999 related to our networking products.
Marketing, general and administrative expenses increased in dollars and
decreased as a percentage of net revenues in the first half of 2000 compared to
the first half of 1999.
Amortization of deferred stock compensation increased in the first half of 2000
compared to the first half of 1999 as Extreme and AANetcom had, in the past,
issued shares at prices lower than their deemed fair market value.
We incurred amortization charges in the first six months of 2000 and 1999
related to goodwill we capitalized as a result of prior acquisitions. We expect
additional significant goodwill charges in the future.
We incurred $13.7 million in merger costs in the first half of 2000. These costs
related primarily to investment banking and other professional fees incurred
during the second quarter of 2000 acquisition of Extreme and the first quarter
of 2000 acquisitions of AANetcom and Toucan Technologies Limited.
Liquidity and Capital Resources
Cash and cash equivalents and short term investments increased from $196.6
million at the end of 1999 to $249.9 million at June 25, 2000.
During the first half of 2000, operating activities provided $54.5 million in
cash. Net income of $70.1 million includes non-cash charges of $14.1 million for
depreciation, $1.8 million of intangible amortization, $7.2 million of deferred
stock compensation and a non-cash gain of $27.1 million from the sale of
investments.
Our year to date investing activities included the maturity of short-term
investments, the bulk of which were reinvested as cash and cash equivalents.
They also included an investment of $33.7 million in plant and equipment, $27.8
million of proceeds from the sale of an investment and net wafer fabrication
deposits of $3.9 million.
Our year to date financing activities provided $10.8 million. We used $4.4
million for debt and lease repayments and received $15.1 million of proceeds
from issuing common stock on exercise of stock options.
Our principal source of liquidity at June 25, 2000 was our cash and cash
equivalents of $249.9 million. We also have a line of credit with a bank that
allows us to borrow up to $15 million provided, along with other restrictions,
that we do not pay cash dividends or make any material divestments without the
bank's written consent.
We believe that existing sources of liquidity and anticipated funds from
operations will satisfy our projected working capital, capital expenditure and
wafer deposit requirements through the end of 2000. We expect to spend
approximately $50 million on new capital additions over the balance of 2000.
FACTORS THAT YOU SHOULD CONSIDER BEFORE INVESTING IN PMC-SIERRA
Our company is subject to a number of risks - some are normal to the fabless
networking semiconductor industry, some are the same or similar to those
disclosed in previous SEC filings, and some may be present in the future. You
should carefully consider all of these risks and the other information in this
report before investing in PMC. The fact that certain risks are endemic to the
industry does not lessen the significance of the risk.
As a result of these risks, our business, financial condition or operating
results could be materially adversely affected. This could cause the trading
price of our common stock to decline, and you may lose part or all of your
investment.
Our business strategy contemplates acquisition of other companies or
technologies, which could adversely affect our operating performance
PMC has recently closed or announced seven acquisitions. Acquiring products,
technologies or businesses from third parties is an integral part of our
business strategy. Management may be diverted from our operations while they
identify and negotiate these acquisitions and integrate an acquired entity into
our operations. Also, we may be forced to develop expertise outside our existing
businesses, and replace key personnel who leave due to an acquisition. We have
not previously attempted to integrate several acquisitions simultaneously and
may not succeed in this effort.
An acquisition could absorb substantial cash resources, require us to incur or
assume debt obligations, or issue additional equity. If we issue more equity, we
may dilute our common stock with securities that have an equal or a senior
interest.
Acquired entities also may have unknown liabilities, and the combined entity may
not achieve the results that were anticipated at the time of the acquisition.
PMC may not realize the anticipated benefits of the recently announced
agreement to merge with Quantum Effect Devices, Inc.
PMC recently announced a definitive agreement to merge with Quantum Effect
Devices, Inc., a publicly traded semiconductor company. PMC may not realize the
anticipated benefits of this merger because of the following challenges.
- - Acquiring QED's shareholder approval to consummate the merger
- - Incorporating QED's microprocessor technology into PMC's next generation of
products
- - Integrating QED's relatively small technical team with PMC's larger and
more widely dispersed engineering organization, without losing the services
of QED's technical experts in the microprocessor field
- - Integrating QED's non-networking products with PMC's business
- - Integrating different enterprise resource planning and accounting systems
The integration of PMC and QED will be complex, time consuming and expensive and
may disrupt PMC's and QED's businesses. In particular, PMC does not have
experience manufacturing, selling or supporting these products, which are sold
to customers that PMC does not normally service.
Some of QED's suppliers, vendors, licensees and licensors are PMC's competitors
and as a result may alter their business relationship with QED following the
merger.
PMC's or QED's customers may, in response to the announcement of the proposed
merger, delay or defer purchasing decisions. If PMC's or QED's customers delay
or defer purchasing decisions the combined company's revenues could materially
decline. Similarly, PMC and QED employees may experience uncertainty about their
future role with the combined company. This may harm the combined company's
ability to attract and retain key management, marketing and technical personnel.
Also, speculation regarding the likelihood of the closure of the merger could
increase the volatility of PMC's and QED's stock prices.
QED has contracts with some of its suppliers, customers, licensors, licensees
and other business partners which require QED to obtain consent from these other
parties in connection with the reorganization agreement. If their consent cannot
be obtained, QED may suffer a loss of potential future revenue and may lose
rights to facilities or intellectual property that are material to QED's
business and the business of the combined company.
PMC has not yet achieved revenues from its recent acquisitions
The products from five of the companies PMC has recently acquired have been
incorporated into customer equipment designs that have yet to generate
significant revenue for PMC. These or any follow-on products may not achieve
commercial success. These acquisitions may not generate future revenues or
earnings.
PMC initiated its presence in the digital signal processing market with the
recently announced acquisitions of Toucan, Malleable and Datum. Prior to these
acquisitions, PMC had limited design expertise in this technology, and may fail
to bring digital signal processing products to market successfully.
In addition, Datum's technology is applicable to the radio frequency wireless
networking market - a market in which PMC had limited prior experience.
PMC's operating results may be impacted differently depending on which
method we use to account for acquisitions
A future acquisition could adversely affect operating results, particularly if
we record the acquisition as a purchase. In purchase acquisitions, we may incur
a significant charge for purchased in process research and development, or
IPR&D, in the period in which the acquisition is closed. In addition, we may
capitalize a significant goodwill asset that would be amortized over its
expected period of benefit. The resulting amortization expense could seriously
impact operating results for many years.
PMC closed two purchase transactions in the third quarter of fiscal 2000 and we
expect a material charge related to IPR&D and goodwill capitalization in the
third quarter of 2000. The IPR&D charge will decrease financial statement
earnings in the third quarter of 2000 and the goodwill asset will be amortized
over the expected period of benefit and will materially impact operating
results. PMC may enter into additional purchase acquisitions in the future.
We have accounted for a number of our recent mergers as poolings of interests
and intend to use this method account for the QED merger. If, after completion
of these mergers, events occur that cause the mergers to fail to qualify for
pooling of interests accounting treatment, the purchase method of accounting
would apply. Purchase accounting treatment would seriously harm the reported
operating results of the combined company because the estimated fair value of
PMC common stock issued in the mergers is much greater than the historical net
book value of the assets in each of the acquired companies' accounts.
If one or more of our customers changes their ordering pattern or if we lose one
or more of our customers, our revenues could decline
We depend on a limited number of customers for a major portion of our revenues.
Through direct, distributor and subcontractor purchases, Lucent Technologies and
Cisco Systems each accounted for more than 10% of our fiscal 1999 revenues. We
do not have long-term volume purchase commitments from any of our major
customers.
Our customers often shift buying patterns as they manage inventory levels,
decide to use competing products, are acquired or divested, market different
products, change production schedules or change their orders for other reasons.
If one or more customers were to delay, reduce or cancel orders, our overall
order levels may fluctuate greatly, particularly when viewed on a quarterly
basis.
If our customers use our competitors' products instead of ours, suffer a decline
in demand for their products or are acquired or sold, our revenues may decline
Our expenses are relatively fixed so that fluctuation in our revenues may cause
our operating results to fluctuate as well. Demand for our products and, as a
result our revenues, may decline for the following reasons outside our control.
As our customers increase the frequency by which they design next
generation systems and select the chips for those new systems, our
competitors have an increased opportunity to convince our customers to
switch to their products, which may cause our revenues to decline
The markets for our products are intensely competitive and subject to rapid
technological advancement in design tools, wafer manufacturing techniques,
process tools and alternate networking technologies. We must identify and
capture future market opportunities to offset the rapid price erosion that
characterizes our industry. We may not be able to develop new products at
competitive pricing and performance levels. Even if we are able to do so, we may
not complete a new product and introduce it to market in a timely manner. Our
customers may substitute use of our products in their next generation equipment
with those of current or future competitors.
We typically face competition at the design stage, where customers evaluate
alternative design approaches that require integrated circuits. Our competitors
have increasingly frequent opportunities to supplant our products in next
generation systems because of shortened product life and design-in cycles in
many of our customers' products.
Major domestic and international semiconductor companies, such as Intel, IBM,
and Lucent Technologies, are concentrating an increasing amount of their
substantially greater financial and other resources on the markets in which we
participate. This represents a serious competitive threat to PMC. Emerging
companies also provide significant competition in our segment of the
semiconductor market.
Our competitors include Applied Micro Circuits Corporation, Broadcom, Conexant
Systems, Cypress Semiconductor, Dallas Semiconductor, Galileo Technology,
Integrated Device Technology, IBM, Infineon, Intel, Lucent Technologies,
Motorola, MMC Networks, Texas Instruments, Transwitch and Vitesse Semiconductor.
Over the next few years, we expect additional competitors, some of which also
may have greater financial and other resources, to enter the market with new
products. In addition, we are aware of venture-backed companies that focus on
specific portions of our broad range of products. Competition is particularly
strong in the market for optical networking and optical telecommunication chips,
in part due to the market's growth rate, which attracts larger competitors, and
in part due to the number of smaller companies focused on this area. These
companies, individually or collectively, could represent future competition for
many design wins, and subsequent product sales.
We must often redesign our products to meet rapidly evolving industry
standards and customer specifications, which may delay an increase in
our revenues
We sell products to a market whose characteristics include rapidly evolving
industry standards, product obsolescence, and new manufacturing and design
technologies. Many of the standards and protocols for our products are based on
high speed networking technologies that have not been widely adopted or ratified
by one of the standard setting bodies in our customers' industry. Our customers
often delay or alter their design demands during this standard-setting process.
In response, we must redesign our products to suit these changing demands.
Redesign usually delays the production of our products. Our products may become
obsolete during these delays.
If demand for our customers' products changes, including due to a
downturn in the networking industry, our revenues could decline
Our customers routinely build inventories of our products in anticipation of end
demand for their products. Many of our customers have numerous product lines,
numerous component requirements for each product, and sizeable and very complex
supplier structures. This makes forecasting their production requirements
difficult and can lead to an inventory surplus of certain of their suppliers'
components.
In the past, some of our customers have built PMC component inventories that
exceeded their production requirements. Those customers materially reduced their
orders and impacted our operating results. This may happen again.
In addition, while all of our sales are denominated in US dollars, our
customers' products are sold worldwide. Any major fluctuations in currency
exchange rates could materially affect our customers' end demand, and force them
to reduce orders, which could cause our revenues to decline.
Since we develop products many years before their volume production, if
we inaccurately anticipate our customers' needs, our revenues may not
increase
Our products generally take between 18 and 24 months from initial
conceptualization to development of a viable prototype, and another 6 to 18
months to be designed into our customers' equipment and into production. They
often need to be redesigned because manufacturing yields on prototypes are
unacceptable or customers redefine their products to meet changing industry
standards. As a result, we develop products many years before volume production
and may inaccurately anticipate our customers' needs.
There have been times when we either designed products that had more features
than were demanded when they were introduced to the market or conceptualized
products that were not sufficiently feature-rich to meet the needs of our
customers or compete effectively against our competitors. This may happen again.
If the recent trend of consolidation in the networking industry
continues, our customers may be acquired or sold, which could cause
those customers to cancel product lines or development projects and our
revenues to decline
The networking equipment industry has experienced significant merger activity
and partnership programs. Through mergers or partnerships, our customers could
seek to remove redundancies in their product lines or development initiatives.
This could lead to the cancellation of a product line into which PMC products
are designed or a development project on which PMC is participating. In the
cases of a product line cancellation, PMC revenues could be materially impacted.
In the case of a development project cancellation, we may be forced to cancel
development of one or more products, which could mean opportunities for future
revenues from this development initiative could be lost.
If there is not sufficient market acceptance of the recently developed
specifications and protocols on which our new products are based, we
may not be able to sustain or increase our revenues
We recently introduced a number of ethernet switch products which function at
gigabit and fast ethernet speeds. Gigabit ethernet involves the transmission of
data over ethernet protocol networks at speeds of up to one billion bits per
second. Fast ethernet transmits data over these networks at speeds of up to 100
megabits per second. While gigabit and fast ethernet are well established, it is
not clear whether products meeting these protocols will be competitive with
products meeting alternative protocols, or whether our products will be
sufficiently attractive to achieve commercial success.
Some of our other recently introduced products adhere to specifications
developed by industry groups for transmissions of data signals, or packets, over
high-speed fiber optics transmission standards. These transmission standards are
called synchronous optical network, or SONET, in North America, and synchronous
data hierarchy, or SDH in Europe. The specifications, commonly called
packet-over-SONET/SDH, may be rejected for other technologies, such as mapping
IP directly onto fiber. In addition, we can not be sure whether our products
will compete effectively with packet-over-SONET/SDH offerings of other
companies.
A substantial portion of our business also relies on industry acceptance of
asynchronous transfer mode, or ATM, products. ATM is a networking protocol.
While ATM has been an industry standard for a number of years, the overall ATM
market has not developed as rapidly as some observers had predicted it would. As
a result, competing communications technologies, including gigabit and fast
ethernet and packet-over-SONET/SDH, may inhibit the future growth of ATM and our
sales of ATM products.
We anticipate lower margins on mature and high volume products, which could
adversely affect our profitability
We expect the average selling prices of our products to decline as they mature.
Historically, competition in the semiconductor industry has driven down the
average selling prices of products. If we price our products too high, our
customers may use a competitor's product or an in-house solution. To maintain
profit margins, we must reduce our costs sufficiently to offset declines in
average selling prices, or successfully sell proportionately more new products
with higher average selling prices. Yield or other production problems, or
shortages of supply may preclude us from lowering or maintaining current
operating costs.
We may not be able to meet customer demand for our products if we do not
accurately predict demand or if we fail to secure adequate wafer fabrication or
assembly capacity
Anticipating demand is difficult because our customers face volatile pricing and
demand for their end-user networking equipment. If our customers were to delay,
cancel or otherwise change future ordering patterns, we could be left with
unwanted inventory.
Recently, our suppliers, particularly silicon wafer suppliers, have experienced
an increase in the demand for their products or services. If our silicon wafer
or other suppliers are unable or unwilling to increase productive capacity in
line with the growth in demand, we may suffer longer production lead times.
Longer production lead times require that we forecast the demand for our
products further into the future. Thus, a greater proportion of our
manufacturing orders will be based on forecasts, rather than actual customers
orders. This increases the likelihood of forecasting errors. These forecasting
errors could lead to excess inventory in certain products and insufficient
inventory in others, which could adversely affect our operating results.
In addition, if our suppliers are unable or unwilling to increase productive
capacity in line with demand, we may suffer supply shortages or be allocated
supply. A shortage in supply could adversely impact our ability to satisfy
customer demand, which could adversely affect our customer relationships along
with our current and future operating results.
We rely on a limited source of wafer fabrication, the loss of which
could delay and limit our product shipments
We do not own or operate a wafer fabrication facility. Two outside foundries
supply most of our semiconductor device requirements. Our foundry suppliers also
produce products for themselves and other companies. In addition, we may not
have access to adequate capacity or certain process technologies. We have less
control over delivery schedules, manufacturing yields and costs than competitors
with their own fabrication facilities. If the foundries we use are unable or
unwilling to manufacture our products in required volumes, we may have to
identify and qualify acceptable additional or alternative foundries. This
qualification process could take six months or longer. We may not find
sufficient capacity quickly enough, if ever, to satisfy our production
requirements.
Some companies which supply our customers are similarly dependent on a limited
number of suppliers to produce their products. These other companies' products
may be designed into the same networking equipment into which we are designed.
Our order levels could be reduced materially if these companies are unable to
access sufficient production capacity to produce in volumes demanded by our
customers because our customers may be forced to slow down or halt production on
the equipment into which we are designed.
We depend on third parties in Asia for assembly of our semiconductor
products which could delay and limit our product shipments
Sub-assemblers in Asia assemble all of our semiconductor products. Raw material
shortages, political and social instability, assembly house service disruptions,
currency fluctuations, or other circumstances in the region could force us to
seek additional or alternative sources of supply or assembly. This could lead to
supply constraints or product delivery delays which, in turn, may result in the
loss of customers. We have less control over delivery schedules, assembly
processes, quality assurances and costs than competitors that do not outsource
these tasks.
We depend on a limited number of design software suppliers, the loss of which
could impede our product development
A limited number of suppliers provide the computer aided design, or CAD,
software we use to design our products. Factors affecting the price,
availability or technical capability of these products could affect our ability
to access appropriate CAD tools for the development of highly complex products.
In particular, the CAD software industry has been the subject of extensive
intellectual property rights litigation, the results of which could materially
change the pricing and nature of the software we use. We also have limited
control over whether our software suppliers will be able to overcome technical
barriers in time to fulfill our needs.
We are subject to the risks of conducting business outside the United States to
a greater extent than companies which operate their businesses mostly in the
United States, which may impair our sales, development or manufacturing of our
products
We are subject to the risks of conducting business outside the United States to
a greater extent than most companies because, in addition to selling our
products in a number of countries, a significant portion of our research and
development and manufacturing are conducted outside of the United States.
PMC's geographic expansion, acquisitions and growth rate could hinder its
ability to coordinate design and sales activities. If PMC is unable to develop
systems and communication processes to support its expanding geographic
diversity, it may suffer product development delays or strained customer
relationships.
We may lose our ability to design or produce products, could face
additional unforeseen costs or could lose access to key customers if
any of the nations in which we conduct business impose trade barriers
or new communications standards
We may have difficulty obtaining export licenses for certain technology produced
for us outside the United States. If a foreign country imposes new taxes,
tariffs, quotas, and other trade barriers and restrictions or the United States
and a foreign country develop hostilities or change diplomatic and trade
relationships, we may not be able to continue manufacturing or sub-assembly of
our products in that country and may have fewer sales in that country. We may
also have fewer sales in a country that imposes new communications standards or
technologies. This could inhibit our ability to meet our customers' demand for
our products and lower our revenues.
If foreign exchange rates fluctuate significantly, our profitability
may decline
We are exposed to foreign currency rate fluctuations because a significant part
of our development, test, marketing and administrative costs are denominated in
Canadian dollars, and our selling costs are denominated in a variety of
currencies around the world. In addition, a number of the countries in which we
have sales offices have a history of imposing exchange rate controls. This could
make it difficult to withdraw the foreign currency denominated assets we hold in
these countries.
We may have difficulty collecting receivables from customers based in
foreign countries, which could adversely affect our earnings
We sell our products to customers around the world. Payment cycle norms in these
countries may not be consistent with our standard payment terms. Thus, we may
have greater difficulty collecting receivables on time from customers in these
countries. This could impact our financial performance, particularly on our
balance sheet.
In addition, we may be faced with greater difficulty in collecting outstanding
balances due to the shear distances between our collection facilities and our
customers, and we may be unable to enforce receivable collection in foreign
nations due to their business legal systems. If one or more of our foreign
customers do not pay their outstanding receivable, we may be forced to write-off
the account. This could have a material impact on our earnings.
The loss of personnel could preclude us from designing new products
To succeed, we must retain and hire technical personnel highly skilled at the
design and test functions used to develop high speed networking products and
related software. The competition for such employees is intense. We, along with
our peers, customers and other companies in the communications industry, are
facing intense competition for those employees from our peers and an increasing
number of startup companies which are emerging with potentially lucrative
employee ownership arrangements.
We do not have employment agreements in place with our key personnel. We issue
common stock options that are subject to vesting as employee incentives. These
options, however, are effective as retention incentives only if they have
economic value.
If we cannot protect our proprietary technology, we may not be able to prevent
competitors from copying our technology and selling similar products, which
would harm our revenues
To compete effectively, we must protect our proprietary information. We rely on
a combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and licensing arrangements to protect our
intellectual property rights. We hold several patents and have a number of
pending patent applications.
We might not succeed in attaining patents from any of our pending applications.
Even if we are awarded patents, they may not provide any meaningful protection
or commercial advantage to us, as they may not be of sufficient scope or
strength, or may not be issued in all countries where our products can be sold.
In addition, our competitors may be able to design around our patents.
We develop, manufacture and sell our products in Asian and other countries that
may not protect our products or intellectual property rights to the same extent
as the laws of the United States. This makes piracy of our technology and
products more likely. Steps we take to protect our proprietary information may
not be adequate to prevent theft of our technology. We may not be able to
prevent our competitors from independently developing technologies that are
similar to or better than ours.
Our products employ technology that may infringe on the proprietary rights of
third parties, which may expose us to litigation and prevent us from selling our
products
Vigorous protection and pursuit of intellectual property rights or positions
characterize the semiconductor industry. This often results in expensive and
lengthy litigation. We, as well as our customers or suppliers, may be accused of
infringing on patents or other intellectual property rights owned by third
parties. This has happened in the past. An adverse result in any litigation
could force us to pay substantial damages, stop manufacturing, using and selling
the infringing products, spend significant resources to develop non-infringing
technology, discontinue using certain processes or obtain licenses to the
infringing technology. In addition, we may not be able to develop non-infringing
technology, nor might we be able to find appropriate licenses on reasonable
terms.
Patent disputes in the semiconductor industry are often settled through
cross-licensing arrangements. Because we currently do not have a substantial
portfolio of patents compared to our larger competitors, we may not be able to
settle an alleged patent infringement claim through a cross-licensing
arrangement. We are therefore more exposed to third party claims than some of
our larger competitors and customers.
In the past, our customers have been required to obtain licenses from and pay
royalties to third parties for the sale of systems incorporating our
semiconductor devices. Until December of 1997, we indemnified our customers up
to the dollar amount of their purchases of our products found to be infringing
on technology owned by third parties. Customers may also make claims against us
with respect to infringement.
Furthermore, we may initiate claims or litigation against third parties for
infringing our proprietary rights or to establish the validity of our
proprietary rights. This could consume significant resources and divert the
efforts of our technical and management personnel, regardless of the
litigation's outcome.
Securities we issue to fund our operations could dilute your ownership
We may need to raise additional funds through public or private debt or equity
financing to fund our operations. If we raise funds by issuing equity
securities, the percentage ownership of current stockholders will be reduced and
the new equity securities may have priority rights to your investment. We may
not obtain sufficient financing on terms we or you will find favorable. We may
delay, limit or eliminate some or all of our proposed operations if adequate
funds are not available.
Our stock price has been and may continue to be volatile
In the past, our common stock price has fluctuated significantly. This could
continue as our or our competitors announce new products, our and our peers or
customers' results fluctuate, conditions in the networking or semiconductor
industry change or investors change their sentiment toward technology stocks.
In addition, increases in our stock price and expansion of our price-to-earnings
multiple may have made our stock attractive to momentum or day-trading investors
who often shift funds into and out of stocks rapidly, exacerbating price
fluctuations in either direction particularly when viewed on a quarterly basis.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The following discussion regarding our risk management activities contains
"forward-looking statements" that involve risks and uncertainties. Actual
results may differ materially from those projected in the forward-looking
statements.
We are exposed to foreign currency fluctuations through our operations in Canada
and elsewhere. In our effort to hedge this risk, we typically forecast our
operational currency needs, purchase such currency on the open market at the
beginning of an operational period, and classify these funds as a hedge against
operations. We usually limit the operational period to less than 3 months to
avoid undue exposure of our asset position to further foreign currency
fluctuation. While we expect to utilize this method of hedging our foreign
currency risk in the future, we may change our hedging methodology and utilize
foreign exchange contracts that are currently available under our operating line
of credit agreement.
Occasionally, we may not be able to correctly forecast our operational needs. If
our forecasts are overstated or understated during periods of currency
volatility, we could experience unanticipated currency gains or losses. At the
end of the second quarter of 2000, we did not have significant foreign currency
denominated net asset or net liability positions, and we had no outstanding
foreign exchange contracts.
We maintain investment portfolio holdings of various issuers, types, and
maturity dates with various banks and investment banking institutions. We
sometimes hold investments beyond 120 days, and the market value of these
investments on any day during the investment term may vary as a result of market
interest rate fluctuations. We do not hedge this exposure because short-term
fluctuations in interest rates would not likely have a material impact on
interest earnings. We classify our investments as available-for-sale or
held-to-maturity at the time of purchase and re-evaluate this designation as of
each balance sheet date. We had $123.8 million in outstanding short-term
investments at the end of the second quarter of 2000. In the future, we expect
to hold the short-term investments we buy through to maturity.
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE BY STOCKHOLDERS
The Annual Meeting of Stockholders of PMC-Sierra, Inc. was held on June 15, 2000
for the purposes of electing directors of the Company, to approve an amendment
to the Company's Certificate of Incorporation, to change the automatic annual
increase in shares reserved under the 1994 Incentive Stock Plan, to change the
automatic option grants under the 1994 Incentive Stock Plan and to ratify the
appointment of Deloitte & Touche LLP as the Company's independent auditors for
the 1999 fiscal year.
All nominees for directors were elected, all other matters were approved. The
voting on each matter is set forth below:
Election of the Directors of the Company.
Nominee: For Withheld
Robert L. Bailey 125,692,377 775,106
Alexandre Balkanski 125,670,109 797,374
Colin Beaumont 125,685,109 782,374
James V. Diller 124,839,064 1,628,419
Frank L. Marshall 124,798,802 1,668,681
Proposal to approve an amendment to the Company's Certificate of Incorporation
to increase the authorized number of shares of Common Stock by 700,000,000
shares to a total of 900,000,000 shares.
For Against Abstain Broker non-vote
117,769,266 8,602,336 95,881 n/a
Proposal to change the automatic annual increase in shares reserved under the
1994 Incentive Stock Plan and to restrict the Administrator of the 1994
Incentive Stock Plan from reducing the exercise prices of options and stock
purchase rights granted to executive officers and directors.
For Against Abstain Broker non-vote
74,018,456 2,422,522 316,848 n/a
Proposal to change the automatic option grants under the 1994 Incentive Stock
Plan to non-employee directors from 20,000 shares of Common Stock to 40,000
shares upon appointment and from 5,000 shares to 10,000 shares annually
thereafter, provided such non-employee directors are re-elected to the Board of
Directors.
For Against Abstain Broker non-vote
119,396,550 6,735,028 335,904 n/a
Proposal to ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the 2000 fiscal year.
For Against Abstain Broker non-vote
126,221,359 103,896 141,999 n/a
Item 5. DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 900,000,000 shares of
Common Stock, par value $0.001, and 5,000,000 shares of Preferred Stock, par
value $0.001.
The following summary of certain provisions of the Common Stock and Preferred
Stock does not purport to be complete though the Company believes it contains
all the material provisions, and is subject to, and qualified in its entirety
by, the provisions of the Company's Certificate of Incorporation and by the
provisions of applicable law.
Common Stock
The Company's Common Stock is registered under Section 12(g) of the Exchange
Act. Subject to preferences that may be applicable to any outstanding Preferred
Stock which may be issued in the future, the holders of Common Stock are
entitled to receive ratably such non-cumulative dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
available to the Common Stock. The holders of Common Stock are entitled to one
vote per share on all matters to be voted upon by the stockholders, except that
stockholders may, in accordance with Section 214 of the Delaware General
Corporation Law, cumulate their votes in the election of directors. In the event
of liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to liquidation preferences, if any, of Preferred Stock
which may be issued in the future. All outstanding shares of Common Stock are
fully paid and non-assessable.
Preferred Stock
Pursuant to the Company's Certificate of Incorporation, the Board of Directors
of the Company has the authority to issue up to 5,000,000 shares of Preferred
Stock in one or more series, to fix the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Stock, and to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
stockholders. Such issued Preferred Stock could adversely effect the voting
power and other rights of the holders of Common Stock. The issuance of Preferred
Stock may also have the effect of delaying, deferring or preventing a change in
control of the Company. At present, there are no outstanding shares of Preferred
Stock.
Rights of Holders of Special Shares of PMC-Sierra, Ltd.
The Special Shares of PMC-Sierra, Ltd. are redeemable for Common Stock of the
Company. Special Shares do not have voting rights in the Company, but in all
other respects they represent the economic and functional equivalent of the
Common Stock of the Company for which they can be redeemed. Under applicable
law, each class of Special Shares will have class voting rights in certain
circumstances with respect to transactions that affect the rights of the class
and for certain extraordinary corporate transactions. Two kinds of Special
Shares are outstanding: A Special Shares and B Special Shares.
Delaware Law
Section 203 of the Delaware General Corporation Law, from which the Company has
not opted out in its Certificate of Incorporation, restricts certain "business
combinations" with "interested stockholders" for three years following the date
that a person or entity becomes an interested stockholder, unless the Company's
Board of Directors approves the business combination and/or certain other
requirements are met.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
- 3.1E Certificate of Amendment to Certificate of
Incorporation of PMC-Sierra, Inc. filed on July 11, 2000
- 10.36 Building Lease Agreements between WHTS Freedom
Circle Partners ii, LLC, Landlord, and PMC-Sierra, Inc.,
Tenant, with amendment dated April 7, 2000 and addition
dated July 20, 2000.
- 10.37 Agreement and Plan of Reorganization by and among
PMC-Sierra, Inc., Penn Acquisition Corp. and Quantum Effect
Devices, Inc. dated July 11, 2000. (1)
- 11.1 Calculation of earnings per share (2)
- 27 Financial Data Schedule
- -----------------------------
1 Incorporated by reference to Annex A of Registrant's Amended Registration
Statement on Form S-4 dated July 26, 2000.
2 Refer to Note 5 of the financial statements included in Item I of Part I of
this Quarterly Report.
(b) Reports on Form 8-K -
- A Current Report on Form 8-K was filed on April 12, 2000
to disclose the completion of the Company's acquisition of
Extreme Packet Devices Inc.
- A Current Report on Form 8-K was filed on June 20, 2000 to
disclose that PMC had signed a definitive agreement to
purchase Malleable Technologies, Inc.
- A Current Report on Form 8-K was filed on June 30, 2000 to
disclose that PMC had signed a definitive agreement to
purchase Datum Telegraphic Inc.
- A Current Report on Form 8-K was filed on July 12, 2000 to
disclose the completion of the company's acquisition of
Malleable Technologies, Inc.
- A Current Report on Form 8-K was filed on July 25, 2000 to
disclose that PMC had signed a definitive agreement to
purchase Quantum Effect Devices, Inc.
- A Current Report on Form 8-K was filed on July 31, 2000 to
disclose the completion of the company's acquisition of
Datum Telegraphic Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC-SIERRA, INC.
(Registrant)
Date: August 8, 2000 /S/ John W. Sullivan
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John W. Sullivan
Vice President, Finance
(duly authorized officer)
Chief Financial Officer
(principal accounting officer)