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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 April 1, 2001
[ ] 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
3975 Freedom Circle
Santa Clara, CA 95054
(408) 369-1176
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 May 1, 2001 - 164,069,025
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INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- Condensed consolidated statements of operations 3
- Condensed consolidated balance sheets 4
- Condensed consolidated statements of cash flows 5
- Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 27
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 30
Item 6. Exhibits and Reports on Form 8 - K 30
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
------------------------------
Apr 1, Mar 26,
2001 2000
Net revenues
Networking $ 116,146 $ 109,312
Non-networking 3,749 5,054
-------------- --------------
Total 119,895 114,366
Cost of revenues 37,927 26,172
-------------- --------------
Gross profit 81,968 88,194
Other costs and expenses:
Research and development 57,468 32,258
Marketing, general and administrative 25,093 18,125
Amortization of deferred stock compensation:
Research and development 27,900 3,679
Marketing, general and administrative 519 371
Amortization of goodwill 17,811 459
Costs of merger - 7,902
Restructuring costs 19,900 -
-------------- --------------
Income (loss) from operations (66,723) 25,400
Other income, net 4,867 3,915
Gain on sale of investments 401 4,117
-------------- --------------
Income (loss) before provision for income taxes (61,455) 33,432
Provision for income taxes 2,071 15,917
-------------- --------------
Net income (loss) $ (63,526) $ 17,515
============== ==============
Net income (loss) per common share - basic $ (0.38) $ 0.11
Net income (loss) per common share - diluted $ (0.38) $ 0.10
Shares used in per share calculation - basic 166,786 157,798
Shares used in per share calculation - diluted 166,786 177,658
See notes to consolidated financial statements.
PMC-Sierra, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Apr 1, Dec 31,
2001 2000
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 318,704 $ 256,198
Short-term investments 24,901 118,918
Accounts receivable, net 40,807 93,852
Inventories, net 63,727 54,913
Deferred income taxes 13,947 13,947
Prepaid expenses and other current assets 19,894 26,910
Short-term deposits for wafer fabrication capacity 4,266 6,265
-------------- --------------
Total current assets 486,246 571,003
Property and equipment, net 126,745 127,534
Goodwill and other intangible assets, net 307,780 326,150
Investments and other assets 49,936 84,667
Deposits for wafer fabrication capacity 21,991 16,736
-------------- --------------
$ 992,698 $ 1,126,090
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 22,035 $ 60,978
Accrued liabilities 35,062 39,724
Accrued restructuring costs 15,553 -
Deferred income 56,289 64,055
Income taxes payable 26,017 63,491
Current portion of obligations under capital leases and long-term debt 1,491 1,769
-------------- --------------
Total current liabilities 156,447 230,017
Deferred income taxes 23,027 37,824
Non-current obligations under capital leases and long-term debt 313 564
PMC special shares convertible into 3,687 (2000 - 3,746) shares
of common stock 6,284 6,367
Stockholders' equity
Capital stock and additional paid in capital, par value $.001;
900,000 shares authorized; 163,794 shares issued and
outstanding (2000 - 162,284) 804,730 796,229
Deferred stock compensation (11,502) (43,128)
Accumulated other comprehensive income 11,271 32,563
Retained earnings 2,128 65,654
-------------- --------------
Total stockholders' equity 806,627 851,318
-------------- --------------
$ 992,698 $ 1,126,090
============== ==============
See notes to consolidated financial statements.
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
-------------------------------------
Apr 1, Mar 26,
2001 2000
Cash flows from operating activities:
Net income (loss) $ (63,526) $ 17,515
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property and equipment 13,239 6,793
Amortization of goodwill and other intangibles 18,370 992
Amortization of deferred stock compensation 28,419 4,050
Equity in income of investee - (725)
Gain on sale of investments (401) (4,117)
Loss on disposal of property and equipment 137 -
Restructuring costs 19,900 -
Changes in operating assets and liabilities
Accounts receivable 53,045 (12,259)
Inventories (8,814) (5,269)
Prepaid expenses and other current assets 7,016 (1,024)
Accounts payable and accrued liabilities (43,605) 22,008
Accrued restructuring costs (359) -
Deferred income (7,766) 8,058
Income taxes payable (37,474) (12,566)
----------------- ------------------
Net cash provided by (used in) operating activities (21,819) 23,456
----------------- ------------------
Cash flows from investing activities:
Purchases of short-term investments (23,453) (1,794)
Proceeds from sales and maturities of short-term investments 117,470 106,636
Purchases of property and equipment (16,575) (15,984)
Purchase of investments (957) (401)
Proceeds from sale of investments - 4,167
Investment in wafer fabrication deposits (5,188) -
Proceeds from refund of wafer fabrication deposits 1,932 4,000
Acquisition of businesses, net of cash acquired - (29)
----------------- ------------------
Net cash provided by investing activities 73,229 96,595
----------------- ------------------
Cash flows from financing activities:
Repayment of notes payable and long-term debt (100) (2,524)
Principal payments under capital lease obligations (429) (648)
Proceeds from issuance of common stock 11,625 59,112
----------------- ------------------
Net cash provided by financing activities 11,096 55,940
----------------- ------------------
Net increase in cash and cash equivalents 62,506 175,991
Cash and cash equivalents, beginning of the period 256,198 101,514
----------------- ------------------
Cash and cash equivalents, end of the period $ 318,704 $ 277,505
================= ==================
See notes to 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") designs,
develops, markets and supports high-performance semiconductor networking
solutions. Our products are used in the high-speed transmission and networking
systems, which are being used to restructure the global telecommunications and
data communications infrastructure.
Basis of presentation. 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 provide a fair
statement of results for the interim periods presented. These financial
statements should be read in conjunction with the consolidated financial
statements and related notes thereto in the Company's Annual Report on Form 10K
for the year ended December 31, 2000. The results of operations for the interim
periods 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) Apr 1, Dec 31,
2001 2000
(unaudited)
Work-in-progress $ 26,596 $ 31,035
Finished goods 37,131 23,878
-------------- --------------
$ 63,727 $ 54,913
============== ==============
Recently issued accounting standards. In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard No. 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging Activities",
which establishes accounting and reporting standards for derivative instruments
and hedging activities. SFAS 133 requires the recognition of all derivatives on
the Company's consolidated balance sheet at fair value. The Company adopted the
new Statement effective January 1, 2001. The initial adoption of SFAS 133 did
not have a material effect on the Company's financial statements.
NOTE 2. Restructuring and Other Costs
Restructuring Balance at
(in thousands) Costs Utilized Apr 1, 2001
-------------- -------------- --------------
Workforce reduction $ 9,367 - $ 9,367
Excess facility costs 4,719 (359) 4,360
Contract settlement costs 1,826 - 1,826
Write-down of property and
equipment 3,988 (3,988) -
-------------- -------------- --------------
Total $ 19,900 $ (4,347) $ 15,553
============== ============== ==============
In the first quarter of 2001, PMC announced a restructuring plan in response to
the decline in demand for its networking products and consequently recorded a
restructuring charge of $19.9 million. Restructuring activities involved the
curtailment of certain research and development projects through workforce
reduction and facility consolidation.
Workforce reduction charges include the cost of severance and related benefits
of approximately 230 employees affected by the restructuring activities. Excess
facility costs represent lease termination payments and related costs. Contract
settlement costs include penalties incurred due to the Company's withdrawal from
certain purchase contracts. Certain leasehold improvements and equipment
determined to be impaired as a result of the restructuring activities and were
written down to estimated fair market value, net of disposal costs.
The Company expects to substantially complete the restructuring activities
contemplated in the plan by December 31, 2001.
Other charges
During the first quarter of 2001, PMC recorded a provision for inventory
write-downs of $2.1 million due to cancellation of certain of its customers'
programs. This charge was included in cost of sales.
NOTE 3. 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 net revenues and gross profits from operations of the two segments.
Three months ended
-------------------------------
(in thousands) Apr 1, Mar 26,
2001 2000
(unaudited)
Net revenues
Networking $ 116,146 $ 109,312
Non-networking 3,749 5,054
--------------- ---------------
Total $ 119,895 $ 114,366
=============== ===============
Gross profit
Networking $ 80,337 $ 85,946
Non-networking 1,631 2,248
--------------- ---------------
Total $ 81,968 $ 88,194
=============== ===============
NOTE 4. Other Comprehensive Income
The components of other comprehensive income, net of tax, are as follows:
Three months ended
-------------------------------
(in thousands) Apr 1, Mar 26,
2001 2000
(unaudited)
Net income (loss) $ (63,526) $ 17,515
Other comprehensive income(loss):
Change in net unrealized gains on
investments, net of tax of $14,797
(2000 - nil) (21,292) -
--------------- ---------------
Total other comprehensive income (loss) $ (84,818) $ 17,515
=============== ===============
NOTE 5. Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net income
(loss) per share:
Three months ended
-------------------------------
Apr 1, Mar 26,
(in thousands except per share amounts) 2001 2000
(unaudited)
Numerator:
Net income (loss) $ (63,526) $ 17,515
=============== ===============
Denominator:
Basic weighted average common shares
outstanding (1) 166,786 157,798
Effect of dilutive securities:
Stock options - 19,692
Stock warrants - 168
--------------- ---------------
Diluted weighted average common
shares outstanding $ 166,786 $ 177,658
=============== ===============
Basic net income (loss) per share $ (0.38) $ 0.11
=============== ===============
Diluted net income (loss) per share $ (0.38) $ 0.10
=============== ===============
(1) Exchangeable shares and PMC-Sierra, Ltd. special shares are included in
the calculation of basic net income (loss) per share.
NOTE 6. Subsequent Event
On April 26, 2001, PMC adopted a stockholders' rights plan. Under the rights
plan, the Company will issue a dividend of one right for each share of common
stock of the Company held by stockholders of record as of May 25, 2001. Each
right will initially entitle stockholders to purchase a fractional share of the
Company's preferred stock for $325.00. However, the rights are not immediately
exercisable and will become exercisable only upon the occurrence of certain
events. Upon occurrence of these events, unless redeemed for $0.001 per right,
the rights will become exercisable by holders, other than rights held by a
potential unsolicited third party acquirer, for shares of the Company or for
shares of the third party acquirer having a value of twice the right's
then-current exercise price.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of our
operations should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Quarterly Report. This
discussion contains forward-looking statements that are subject to known and
unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance, achievements and prospects to be
materially different from those expressed or implied by such forward-looking
statements. These risks, uncertainties and other factors include, among others,
those identified under "Factors that You Should Consider Before Investing In
PMC-Sierra" and elsewhere in this Quarterly Report.
These forward-looking statements apply only as of the date of this Quarterly
Report. 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 report might not occur. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks we face as described in this
Quarterly Report and readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Such forward-looking statements include statements as to, among
others:
- - customer networking product needs and order levels;
- - revenues;
- - gross profit;
- - research and development expenses;
- - marketing, general and administrative expenditures;
- - capital resources sufficiency;
- - capital expenditures; and
- - restructuring activities and expenses.
PMC releases earnings at regularly scheduled times after the end of each
reporting period. Typically within one hour of the release, we will hold a
conference call to discuss our performance during the period. We welcome all PMC
stockholders to listen to these calls either by phone or over the Internet by
accessing our website at www.pmc-sierra.com.
Developments in 2001
During the first quarter of 2001, our customers cancelled more orders than they
placed. Our backlog for second quarter delivery at the end of the first quarter
of 2001 was $94 million. Of that amount, $24 million related to our top five
customers. These same customers purchased approximately $50 million of our
networking products in the first quarter of 2001 and $130 million in last year's
fourth quarter. Most of these customers are North American and have substantial
communications component inventories, including significant quantities of our
networking products. We expect that these historically larger customers actually
need the networking products that are included in our second quarter backlog,
but we do not anticipate additional orders from them for second quarter
delivery.
We have over two hundred other European, Asian and North American customers who
account for the remaining $70 million in backlog for second quarter 2001
delivery. These customers purchased, in aggregate, $70 million of our products
in the first quarter of 2001 and $101 million of our products in last year's
fourth quarter. We expect to receive a small amount of additional orders from
this group for second quarter delivery.
Many of our customers are continuing to experience decreased demand for their
products because some service providers have high networking equipment
inventories or have decreased their broadband network capital spending rates. We
expect that this, combined with the significant inventories of our networking
products, will prolong or worsen the decline in our networking revenues into the
third quarter of 2001.
Our gross profit as a percentage of revenues declined significantly in the first
quarter of 2001 and may decline again in the second quarter of 2001 if our
customers' order mix continues to include proportionately more lower margin
networking and non-networking products. Our gross profit as a percentage of
sales will also decline in the second quarter of 2001 because we expect that we
will have to allocate our fixed test capacity costs over reduced production
volumes.
During the first quarter of 2001, we announced a restructuring plan to curtail
certain activities, through workforce reduction and facilities consolidation, in
response to the decline in demand for our networking products. We expect that
this restructuring will allow us to slow the rate of growth, or slightly reduce,
our operating expenses. It is our intention to limit our headcount growth and
associated costs for the foreseeable future. See Note 2 of Item 1 - Financial
Statements and "Restructuring Costs" below.
Results of Operations
First Quarters of 2001 and 2000
Net Revenues ($000,000)
- -----------------------
First Quarter
----------------------------
2001 2000 Change
Networking products $ 116.1 $ 109.3 6%
Non-networking products 3.8 5.1 (25%)
----------------------------
Total net revenues $ 119.9 $ 114.4 5%
============================
Net revenues increased by 5% in the first quarter of 2001 compared to the same
quarter in 2000.
Networking revenue grew 6% as a result of an increase in the volume of our
product sales when comparing the first quarters of 2001 and 2000. However, first
quarter 2001 networking revenue declined 48% from revenue of $223.6 million in
fourth quarter 2000. This decrease in networking revenue resulted from
significantly reduced orders from our customers in response to rising inventory
levels of our products and declining demand for our customers' equipment.
Non-networking revenues declined 25% in the first quarter of 2001 compared to
the first quarter of 2000 due to decreased orders by our principal customer in
this segment. Sales of our non-networking device are expected to decline to zero
by the end of 2001 as our principal customer intends to redesign its product and
it will no longer incorporate our non-networking device.
Gross Profit ($000,000)
- -----------------------
First Quarter
----------------------------
2001 2000 Change
Networking products $ 80.4 $ 85.9 ( 6%)
Non-networking products 1.6 2.3 (30%)
----------------------------
Total gross profit $ 82.0 $ 88.2 ( 7%)
============================
Percentage of net revenues 68% 77%
Total gross profit declined 7% in the first quarter of 2001 compared to the
first quarter of 2000.
Networking product gross profit decreased 6% in the first quarter of 2001
because our sales mix shifted to lower margin networking products, we allocated
our fixed test capacity costs over reduced production volume, and we wrote down
$2.1 million of inventory as a result of customer product development programs
that were cancelled.
Non-networking gross profit declined 30% in the first quarter of 2001 compared
to the first quarter of 2000 as a result of declining sales volumes.
Operating Expenses and Charges ($000,000)
- -----------------------------------------
First Quarter
----------------------------
2001 2000 Change
Research and development $ 57.5 $ 32.3 78%
Percentage of net revenues 48% 28%
Marketing, general & administrative $ 25.1 $ 18.1 39%
Percentage of net revenues 21% 16%
Amortization of deferred stock compensation:
Research and development $ 27.9 $ 3.7
Marketing, general and administrative 0.5 0.4
----------------------------
Total $ 28.4 $ 4.1
----------------------------
Percentage of net revenues 24% 4%
Amortization of goodwill $ 17.8 $ 0.5
Costs of merger $ - $ 7.9
Restructuring costs $ 19.9 $ -
Research and Development and Marketing, General and Administrative Expenses:
Our research and development, or R&D, expenses of $57.5 million in the first
quarter of 2001 increased 78% over the first quarter of 2000. Our R&D expenses
increased compared to the same period in 2000 because we increased our R&D
personnel headcount through our recruiting efforts and acquisitions we completed
in 2000, and because we incurred greater service and material costs associated
with new product development efforts.
We increased marketing, general and administrative, or MG&A, expenses by 39% in
the first quarter of 2001 compared to the first quarter of 2000. Our MG&A
expenses increased because we invested in infrastructure, expanded our direct
sales force, and increased our MG&A personnel headcount through our recruiting
efforts and acquisitions we completed in 2000.
We increased R&D and MG&A expenditures in line with the increase in our revenues
throughout 2000. In the first quarter of 2001, our relatively fixed R&D and MG&A
expenses grew significantly as a percentage of revenues as a result of a 48%
decline in net revenues from $231.6 million in the fourth quarter of 2000 to
$119.9 million in the first quarter of 2001.
Amortization of Deferred Stock Compensation:
We recorded a non-cash $28.4 million charge for amortization of deferred stock
compensation in the first quarter of 2001 compared to a $4.1 million charge in
the prior year's first quarter. Deferred stock compensation charges increased
because we amortized deferred stock compensation related to the acquisitions we
completed in 2000, and we accelerated the amortization of the deferred stock
compensation for employees terminated as a result of our restructuring.
Amortization of Goodwill:
Non-cash goodwill charges increased to $17.8 million in the first quarter of
2001 from $0.5 million in the first quarter of 2000 as a result of the increase
in goodwill recorded in connection with the acquisitions of Malleable
Technologies, Inc. and Datum Telegraphic, Inc. which were accounted for as
purchases in 2000.
Merger Costs:
We did not incur merger costs in the first quarter of 2001. We incurred $7.9
million in merger costs as a result of the acquisitions of AANetcom, Inc. and
Toucan Technologies Limited in the first quarter of 2000. These charges
consisted primarily of investment banking and other professional fees.
Restructuring Costs:
On March 26, 2001, we announced our plan to restructure our operations in
response to the decline in demand for our networking products. We consequently
recorded a restructuring charge of $19.9 million, which included $9.4 million
relating to costs associated with a reduction in workforce of approximately 230
employees, facility consolidation and contract settlement charges of $6.5
million and asset impairment charges of $4.0 million.
Workforce reduction charges include the cost of severance and related benefits
of employees affected by the above-noted restructuring activities. Excess
facility costs represent lease termination payments and related costs. Contract
settlement costs include penalties incurred due to our withdrawal from certain
purchase contracts. We wrote down certain leasehold improvements and equipment,
which we determined to be impaired as a result of the restructuring activities,
to their estimated fair market value less disposal costs.
Upon conclusion of our restructuring initiatives, we expect to achieve
annualized savings of approximately $34.1 million in cost of sales and operating
expenses. However, these savings may not be achieved or sustained and they may
need to be reevaluated in the future.
We expect to substantially complete the restructuring plan by December 31, 2001.
We expect to pay the majority of the salary continuance benefits to terminated
employees and cash outlays for facilities consolidation and contract settlements
in the second and third quarter of 2001. We expect to begin benefiting from the
cash savings of the restructuring in the third quarter of 2001. We expect to
fund restructuring expenditures from our cash and cash equivalent reserves.
While we currently do not anticipate the need for further significant
restructuring and cost cutting measures, we may be forced to incur further
restructuring charges if we believe that market conditions for our products have
worsened.
Other income, net
Net interest and other income increased to $4.9 million in the first quarter of
2001 from $3.9 million in the first quarter of 2000 due to higher cash balances
available to earn interest.
Gain on sale of investments
During the first quarter of 2001, we disposed of our investment in a privately
held company and realized a pre-tax gain of approximately $0.4 million.
During the first quarter of 2000, we realized a pre-tax gain of approximately
$4.1 million as a result of our disposition of our remaining investment in
Cypress Semiconductor.
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 Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 requires
the recognition of all derivatives on our consolidated balance sheet at fair
value. We adopted the new Statement effective January 1, 2001. The initial
adoption of SFAS 133 has not had a material effect on our financial statements.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments decreased to $343.6 million at
April 1, 2001 from $375.1 million at the end of 2000.
During the first three months of 2001, we used $21.8 million in cash for
operating activities. The net loss of $63.5 million includes non-cash charges of
$13.2 million for depreciation, $18.4 million for amortization of intangibles,
$28.4 million for amortization of deferred stock compensation, a $19.9 million
restructure reserve charge, and non-cash gains on disposal of investments and
capital assets of $0.3 million.
We also used cash through changes in our operating assets and liabilities. We
increased inventory by $8.8 million, and decreased accounts payable and accrued
liabilities by $43.6 million, deferred income by $7.8 million and income taxes
payable by $37.5 million. We offset some of this cash usage by decreasing our
accounts receivables by $53.0 million. Inventories increased because we are
subject to lengthy lead times from our wafer fabrication facilities, and were
not able to match all of our customers' first quarter order cancellations with
our own inventory order cancellations. Our deferred revenue and accounts
receivable decreased as a result of lower sales in the first quarter. Accounts
payable decreased because of additional expenditure reductions in the latter
half of the first quarter.
Our year to date investing activities include the maturity of and reinvestment
in short-term investments. We also made investments in other companies of $1.0
million, purchased $16.6 million of property and equipment, and increased net
wafer fabrication deposits by $3.3 million.
Our year to date financing activities provided $11.1 million. We used $0.5
million for debt and lease repayments and received $11.6 million of proceeds
from issuing common stock upon exercise of stock options.
Our principal source of liquidity at April 1, 2001 was our cash, cash
equivalents and short-term investments of $343.6 million. We also have a line of
credit with a bank that allows us to borrow up to $25 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, venture investing,
capital expenditure and wafer deposit requirements through the end of 2001. We
expect to spend approximately $22.5 million on new capital additions and to make
additional venture investments as opportunities arise in the balance of 2001.
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.
We are subject to rapid changes in demand for our products due to customer
inventory levels, production schedules, end networking equipment demand
fluctuations and our customer concentration
Our customers may cancel or delay the purchase of our products to
manage their inventory or for various other reasons
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, sizeable and complex supplier
structures, and often engage contract manufacturers to supplement their
manufacturing capacity. This makes forecasting their production requirements
difficult and can lead to an inventory surplus of certain of their suppliers'
components.
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.
Recently, many of our customers indicated that they have accumulated significant
inventories of our chips when compared to their own recently reduced shipment
forecasts and have consequently reduced or delayed the desired shipment date of
their orders. This has materially impacted our revenues, reduced our visibility
of future revenue streams and caused an increase in our inventory levels. We
expect this to continue as our customers consume their inventories of our
products.
If demand for our customers' products changes, including due to a
downturn in the networking industry, our revenues could decline
Several of our customers' clients, particularly Competitive Local Exchange
Carriers and Internet Service Providers, have recently reported lower than
expected demand growth for their services or products, which has resulted in
poor operating results and difficulty accessing the capital needed to build
their networks or survive to profitability. Many of these companies are facing
increased competition and may become insolvent in the near future. This, along
with symptoms of a general economic slowdown in the United States, has affected
the end demand at several of our significant customers, many of whom have
announced large component inventories and declines in expected operating
results.
In response, many of our customers and their contract manufacturers have
undertaken expenditure and inventory reduction initiatives and have canceled or
rescheduled orders with us. These actions may continue in future periods and may
accelerate if conditions worsen for our customers.
In addition, while all of our sales are denominated in US dollars, our
customers' products are sold worldwide. While the current networking equipment
market downturn may be limited to the United States, the networking markets in
the rest of the world could soon follow. Any decline in the world networking
markets could seriously depress our customers' order levels for our products.
This effect could be further exacerbated if fluctuations in currency exchange
rates further decrease the demand for our customers' products.
We rely on a few customers for a major portion of our sales, any one of
which could materially impact our revenues should they change their
ordering pattern
We depend on a limited number of customers for a major portion of our revenues.
Through direct, distributor and subcontractor purchases, Cisco Systems and
Lucent Technologies each accounted for more than 10% of our fiscal 2000
revenues. Both of these companies have recently announced order shortfalls for
their products. We do not have long-term volume purchase commitments from any of
our major customers.
Because our operating expenses are relatively fixed in the short term,
fluctuations in our revenues can cause proportionately greater
fluctuations in our operating results
Many of our research, development, marketing, general and administrative
expenses are fixed from a short term perspective, while our revenues are not.
Thus, if our revenues fluctuate, our profit will fluctuate at a greater
percentage than our revenues.
PMC's rapid growth and subsequent restructuring has strained our resources
Until the fourth quarter of 2000, PMC experienced a period of rapid growth,
which placed and will continue to place a significant strain on our resources.
During 2000, we acquired eight companies, increased our employee headcount to
1,728 from 660 at the end of 1999, expanded our operations and facilities, and
increased the responsibilities of management. In the first quarter of 2001, in
response to a decline in demand for our products, we restructured our operations
and trimmed our payroll by approximately 230 employees. This process absorbed a
high percentage of management time that had to be diverted from other areas of
our operations.
While we expect our revenue to decline in the near term, we may return to
historical growth levels over the long term. If this revenue swing occurs, our
management, manufacturing, product development, financial, information systems
and other resources may be strained. In addition, our systems, procedures,
controls and existing space may not be adequate to support growth in our
operations.
We rely on a continuous power supply to conduct our operations, and California's
current energy crisis could disrupt our operations and increase our expenses.
Our sales headquarters and a significant proportion of our research and
development and production facilities reside in California. California is in the
midst of an energy crisis that could disrupt our operations and increase our
expenses. In the event of an acute power shortage, that is, when power reserves
for the State of California fall below 1.5%, California has on some occasions
implemented, and may in the future continue to implement, rolling blackouts
throughout California.
We currently do not have backup generators or alternate sources of power in the
event of a blackout. If blackouts interrupt our power supply, we would be
temporarily unable to continue operations at our facilities. Any such
interruption in our ability to continue operations at our facilities could delay
the introduction of new products, frustrate our sales efforts, damage our
reputation, harm our ability to retain existing customers and to obtain new
customers, and could result in lost revenue, any of which could substantially
harm our business and results of operations.
Furthermore, the deregulation of the energy industry instituted in 1996 by the
California government has caused power prices to increase. Under deregulation,
utilities were encouraged to sell their plants, which traditionally had produced
most of California's power, to independent energy companies that were expected
to compete aggressively on price. Instead, due in part to a shortage of supply,
wholesale prices have skyrocketed over the past year. If wholesale prices
continue to increase, our operating expenses will likely increase.
We are exposed to the credit risk of some of our customers and we may have
difficulty collecting receivables from customers based in foreign countries
Many of our customers outsource the manufacturing of their products to contract
manufacturers and the inventory management of our product through our major
distributor. Many of these entities have built large inventories of our products
and generally represent greater credit risk than our networking equipment
customers.
The bulk of the revenues for several of our customers come from companies that
have recently reported lower than expected demand growth for their services or
products, such as Competitive Local Exchange Carriers and Internet Service
Providers. This has materially and adversely affected some of our customers,
some of which may become insolvent in the near future.
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. In addition, we may be faced with greater difficulty in collecting
outstanding balances due to the sheer 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 customers delays payment or does not pay their outstanding
receivable, our balance sheet may be materially impacted or we may be forced to
write-off the account.
Our business strategy contemplates acquisition of other companies or
technologies, which could adversely affect our operating performance
While we currently are not contemplating new acquisitions, we closed eight
acquisitions in fiscal 2000. 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. Until the year 2000, we had 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 has not yet achieved revenues from some of its recent acquisitions
Some of the products we acquired through acquisitions in fiscal 2000 have been
incorporated into customer equipment designs that have yet to generate
significant revenue. These or any follow-on products may not achieve commercial
success. These acquisitions may not generate future revenues or earnings.
The timing of revenues from newly designed products is often uncertain. In the
past, we have had to redesign products that we acquired when buying other
businesses, resulting in increased expenses and delayed revenues. This may occur
in the future as we commercialize the new products resulting from recent
acquisitions.
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
We are experiencing significantly greater competition from many different market
participants as the market in which we participate matures. In addition, we are
expanding into markets that have established incumbents that have substantial
financial and technological resources. We expect fiercer competition than that
which we have traditionally faced as some of these incumbents derive a majority
of their earnings from these markets.
All of our competitors pose the following threats to PMC:
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 the product life and design-in cycles in many of our
customers' products.
Increasing competition in our industry will make it more difficult to
earn design wins in our customer's equipment
Major domestic and international semiconductor companies, such as Intel, IBM,
Agere Systems [formerly Lucent Technologies] and Motorola, 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 us. Emerging companies also provide significant competition in our
segment of the semiconductor market, while our peers are becoming mature,
successful and sophisticated.
Our competitors include Agere Systems, Applied Micro Circuits Corporation,
Broadcom, Conexant Systems, Cypress Semiconductor, Dallas Semiconductor, Exar
Corporation, Integrated Device Technology, IBM, Infineon, Intel, Marvell
Technology Group, Motorola, Multilink Technology Corporation, Nortel Networks,
Texas Instruments, Transwitch and Vitesse Semiconductor.
Aggressive price competition in some of the markets in which we participate has
made competition for design wins more difficult. In addition, the increased
focus on price competition will continue to place pressure on our gross margins.
Over the next few years, we expect additional competitors, some of which may
also 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. These companies, individually
or collectively, could represent future competition for many design wins, and
subsequent product sales.
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, represent
strong competition for many design wins, and subsequent product sales. Larger
competitors in our market have recently acquired or announced plans to acquire
both publicly traded and privately held companies with advanced technologies.
These acquisitions could enhance the ability of larger competitors to obtain new
business that PMC might have otherwise won.
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 or more 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.
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 or customer specifications. 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.
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. As
employee incentives, we issue common stock options that generally have exercise
prices at the market value at the time of grant and that are subject to vesting.
Recently, our stock price has declined substantially. The stock options we grant
to employees are effective as retention incentives only if they have economic
value.
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 in the
period in which the acquisition is closed. In addition, we may capitalize a
significant goodwill or other intangible assets that would be amortized over
their expected period of benefit. The resulting amortization expense could
seriously impact operating results for many years. PMC may enter into additional
purchase acquisitions in the future.
We have accounted for a number of our recent mergers as pooling of interests.
If, after completion of these mergers, events occur that cause the merger 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
company's accounts.
If the market does not accept the recently developed specifications and
protocols on which our new products are based, we may not be able to sustain or
increase our revenues
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 cannot 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 continued 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.
A significant portion of PMC's revenues relate to sales of our MIPS-based
processors. If MIPS Technologies develops future generations of its technology,
we may not be able to obtain a license on reasonable terms.
MIPS Technologies has introduced, and will likely continue to introduce, new
generations of its microprocessor technology architecture containing
improvements that are not covered by the technology we are currently licensing
from MIPS Technologies. A significant part of our success could depend on our
ability to develop products that incorporate those improvements. We may not be
able to license the technology for any new improvements from MIPS Technologies
on commercially reasonable terms or at all. If we cannot obtain required
licenses from MIPS Technologies, we could encounter delays in product
development while we attempt to develop similar technology, or we may not be
able to develop, manufacture and sell products incorporating this technology.
In addition, our current microprocessor products and planned future products are
based upon the microprocessor technology we license from MIPS Technologies. If
we fail to comply with any of the terms of its license agreement, MIPS
Technologies could terminate our rights, preventing us from marketing our
current and planned microprocessor 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.
In addition, our networking products range widely in terms of the margins they
generate. A change in product sales mix could impact our operating results
materially.
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
We currently do not have the ability to accurately predict what products our
customers will need in the future. Anticipating demand is difficult because our
customers face volatile pricing and demand for their end-user networking
equipment and because we supply a large number of products to a variety of
customers and contract manufacturers who have many equipment programs for which
they purchase PMC products. If we do not accurately predict what mix of products
our customers may order, we may not be able to meet our customers' demand in a
timely manner and may be left with unwanted inventory.
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. Additionally, since our products use a wide range of process
technologies, we may not be able to secure the specific wafer capacity for the
specific mix of products we demand. 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.
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.
We rely on limited sources of wafer fabrication, the loss of which
could delay and limit our product shipments
We do not own or operate a wafer fabrication facility. Three 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 that 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 our products 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 our products are designed.
We depend on third parties in Asia for assembly of our semiconductor
products that 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 that, 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 that 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 is conducted outside of the United States.
The geographic diversity of our business operations could hinder our ability to
coordinate design and sales activities. If we are unable to develop systems and
communication processes to support our geographic diversity, we 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 are defendants in several outstanding legal proceedings about which we are
unable to assess our exposure and which could become significant liabilities
upon judgment.
We are defendants in a number of legal proceedings that we believe will have
immaterial consequences or are unable to assess our level of exposure. These
proceedings could create a material charge to our operating results in the
future if our exposure increases or if our ability to assess our exposure
becomes clearer.
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 we or our competitors announce new products, our customers' results
fluctuate, conditions in the networking or semiconductor industry change or
investors change their sentiment toward technology stocks.
In addition, fluctuations in our stock price and our price-to-earnings multiple
may have made our stock attractive to momentum, hedge 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.
Short-term Investments:
We maintain a short-term investment portfolio of various holdings, types and
maturities of less than one year. To minimize credit risk the short term
investments are diversified and generally consist of either Commercial Paper,
rated P-1 by Moody's and A-1 or higher by Standard and Poor's, or Auction Rate
Preferred's with a rating of Aaa/AAA. These securities are generally classified
as held to maturity and accordingly are recorded on the balance sheet at cost.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted because of a rise in interest rates, while
floating rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income may fall short
of expectations because of changes in interest rates or we may suffer losses in
principal if we were to sell securities which have declined in market value
because of changes in interest rates.
Our investments are made in accordance with an investment policy approved by our
Board of Directors. Under this policy, all short term investments must be made
in investment grade securities with original maturities of less than one year at
the time of acquisition.
We do not attempt to reduce or eliminate our exposure to interest rate risk
through the use of derivative financial instruments due to the short-term nature
of the investments.
Based on a sensitivity analysis performed on the financial instruments held at
April 1, 2001 that are sensitive to changes in interest rates, the fair value of
our short-term investment portfolio would not be significantly impacted by an
immediate hypothetical parallel shift in the yield curve of plus or minus 50,
100 or 150 basis points.
Other Investments:
Other investments at April 1, 2001 include a minority investment in Sierra
Wireless Inc., a publicly traded company. This investment is subject to certain
resale restrictions. One half of the investment will be released from these
restrictions in May 2002 and is recorded on our Balance Sheet at cost. The
second half will be release from its resale restrictions in May 2001 and has
been classified as available for sale. Consequently, the latter securities are
recorded on the balance sheet at fair value with unrealized gains or losses
reported as a separate component of accumulated other comprehensive income, net
of tax.
We also hold an investment of approximately 85,000 shares of Intel Corporation,
which we acquired in the first quarter of 2001 on the sale of our interest in a
private corporation. We may not trade these unregistered shares until the first
quarter of 2002.
Our investments in Sierra Wireless and Intel shares are subject to considerable
market price volatility and are additionally risky due to resale restrictions.
We may lose some or all of our investment in these shares.
Our other investments also include numerous investments in privately held
companies which are carried on our Balance Sheet at cost. Our investments in
private companies are inherently risky as they typically consist of investments
in companies that are still in the start-up or development stages. The market
for the technologies or products that they have under development is typically
in the early stages, and may never materialize. Accordingly, we could lose our
entire investment in these companies.
Foreign Currency
We generate a significant portion of our revenues from sales to customers
located outside of the United States including Canada, Europe and the Middle
East and Asia. We are subject to risks typical of an international business
including, but not limited to, differing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions
and foreign exchange rate volatility. Accordingly, our future results could be
materially adversely affected by changes in these or other factors.
Our sales and corresponding receivables are made primarily in United States
dollars. Through our operations in Canada and elsewhere outside of the United
States, we incur research and development, customer support costs and
administrative expenses in Canadian and other local currencies. We are exposed,
in the normal course of business, to foreign currency risks on these
expenditures. In our effort to manage such risks, we have adopted a foreign
currency risk management policy intended to reduce the effects of potential
short-term fluctuations on the results of operations stemming from our exposure
to these risks. As part of this risk management, we typically forecast our
operational currency needs, purchase such currency on the open market at the
beginning of an operational period, and hold these funds as a hedge against
currency fluctuations. We usually limit the operational period to 3 months or
less. While we expect to utilize this method of managing our foreign currency
risk in the future, we may change our foreign currency risk management
methodology and utilize foreign exchange contracts that are currently available
under our operating line of credit agreement.
The purpose of our foreign currency risk management policy is to reduce the
effect of exchange rate fluctuations on our results of operations. Therefore,
while our foreign currency risk management policy may reduce our exposure to
losses resulting from unfavorable changes in currency exchange rates, it also
reduces or eliminates our ability to profit from favorable changes in currency
exchange rates.
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 first quarter of 2001, we did not have significant foreign currency
denominated net asset or net liability positions, and we had no outstanding
foreign exchange contracts.
Part II - Other Information
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Shareholders' rights plan
On April 26, 2001, PMC adopted a stockholders' rights plan. Under the rights
plan, the Company will issue a dividend of one right for each share of common
stock of the Company held by stockholders of record as of May 25, 2001. Each
right will initially entitle stockholders to purchase a fractional share of the
Company's preferred stock for $325.00. However, the rights are not immediately
exercisable and will become exercisable only upon the occurrence of certain
events. Upon occurrence of these events, unless redeemed for $0.001 per right,
the rights will become exercisable by holders, other than rights held by a
potential unsolicited third party acquirer, for shares of the Company or for
shares of the third party acquirer having a value of twice the right's
then-current exercise price.
For further details please see the Current Report on Form 8-K filed on April 30,
2001, attached hereto as an exhibit under Item 6(b).
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
- 3.1 Restated Certificate of Incorporation
- 3.2 Bylaws, as amended
- 4.6 Preferred Stock Rights Agreement, dated as of April
26, 2001, between PMC-Sierra, Inc. and American
Stock Transfer and Trust Company.2
- 11.1 Calculation of earnings per share 3
(b) Reports on Form 8-K -
- A Current Report on Form 8-K was filed on April 30, 2001
to disclose that the Board of Directors of registrant
approved the adoption of a Preferred Stock Rights
Agreement.
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: May 16, 2001 /S/ John W. Sullivan
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John W. Sullivan
Vice President, Finance (duly authorized officer)
Principal Accounting Officer
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1 Incorporated by reference from Exhibit 3.2 filed with the Registrant's Form
8-A on May 14, 2001.
2 Incorporated by reference from Exhibit 4.6 filed with the Registrant's Form
8-A on May 14, 2001.
3 Refer to Note 5 of the financial statements included in Item I of Part I of
this Quarterly Report.