-------------------------------------------------
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 March 30, 2003
[ ] 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) 239-8000
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 _______
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes ___X____ No _______
Common shares outstanding at May 08, 2003 - 168,959,602
------------------------------------------------
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
- Condensed consolidated statements of operations 3
- Condensed consolidated balance sheets 4
- Condensed consolidated statements of cash flows 5
- Notes to the consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 31
Item 4. Controls and Procedures 33
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8 - K 33
Signatures 34
Certifications 35
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(unaudited)
Three months ended
------------------------------
Mar 30, Mar 31,
2003 2002
Net revenues
Networking $ 55,386 $ 46,852
Non-networking - 4,590
------------- --------------
Total 55,386 51,442
Cost of revenues 21,885 20,543
------------- --------------
Gross profit 33,501 30,899
Other costs and expenses:
Research and development 30,948 36,234
Marketing, general and administrative 12,616 17,111
Amortization of deferred stock compensation:
Research and development 399 921
Marketing, general and administrative 13 66
Restructuring costs 6,644 -
------------- --------------
Loss from operations (17,119) (23,433)
Interest and other income, net 548 1,421
Gain on investments 531 2,445
------------- --------------
Loss before recovery of income taxes (16,040) (19,567)
Recovery of income taxes (4,525) (5,887)
------------- --------------
Net loss $ (11,515) $ (13,680)
============= ==============
Net loss per common share - basic and diluted $ (0.07) $ (0.08)
============= ==============
Shares used in per share calculation - basic and diluted 171,402 169,513
See notes to the consolidated financial statements.
3
PMC-Sierra, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
Mar 30, Dec 29,
2003 2002
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 139,360 $ 70,504
Short-term investments 261,693 340,826
Restricted cash 5,287 5,329
Accounts receivable, net of allowance for doubtful
accounts of $2,812 ($2,781 in 2001) 15,697 16,621
Inventories 23,820 26,420
Deferred tax assets 1,080 1,083
Prepaid expenses and other current assets 13,814 15,499
Short-term deposits for wafer fabrication capacity 17,213 -
--------------- ---------------
Total current assets 477,964 476,282
Investment in bonds and notes 146,325 148,894
Other investments and assets 20,000 21,978
Deposits for wafer fabrication capacity 4,779 21,992
Property and equipment, net 44,459 51,189
Goodwill and other intangible assets, net 8,097 8,381
--------------- ---------------
$ 701,624 $ 728,716
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 19,081 $ 24,697
Accrued liabilities 49,183 53,530
Income taxes payable 17,251 21,553
Accrued restructuring costs 127,364 129,499
Deferred income 16,200 17,982
--------------- ---------------
Total current liabilities 229,079 247,261
Convertible subordinated notes 275,000 275,000
Deferred tax liabilities 1,886 2,764
PMC special shares convertible into 3,146 (2002 - 3,196)
shares of common stock 4,968 5,052
Stockholders' equity
Common stock and additional paid in capital, par value $.001:
900,000 shares authorized; 168,489 shares issued and
outstanding (2002 - 167,400) 838,678 834,265
Deferred stock compensation (746) (1,158)
Accumulated other comprehensive income 2,681 3,939
Accumulated deficit (649,922) (638,407)
--------------- ---------------
Total stockholders' equity 190,691 198,639
--------------- ---------------
$ 701,624 $ 728,716
=============== ===============
See notes to the consolidated financial statements.
4
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
------------------------------
Mar 30, Mar 31,
2003 2002
Cash flows from operating activities:
Net loss $ (11,515) $ (13,680)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 8,023 10,744
Amortization of other intangibles 284 285
Amortization of deferred stock compensation 412 987
Amortization of debt issuance costs 391 391
Gain on sale of investments and other assets (518) (2,445)
Changes in operating assets and liabilities:
Accounts receivable 924 450
Inventories 2,600 2,661
Prepaid expenses and other current assets 1,685 (5,005)
Accounts payable and accrued liabilities (9,963) 1,139
Income taxes payable (4,302) (5,003)
Accrued restructuring costs (2,135) (10,044)
Deferred income (1,782) (1,828)
-------------- --------------
Net cash used in operating activities (15,896) (21,348)
-------------- --------------
Cash flows from investing activities:
Change in restricted cash 42 -
Purchases of short-term investments (67,045) (5,439)
Proceeds from sales and maturities of short-term investments 135,590 47,416
Purchases of long-term bonds and notes (29,073) (38,803)
Proceeds from sales and maturities of long-term bonds and notes 42,240 -
Purchases of other investments (700) (492)
Proceeds from sales of other investments 676 4,274
Purchases of property and equipment (1,307) (531)
-------------- --------------
Net cash provided by investing activities 80,423 6,425
-------------- --------------
Cash flows from financing activities:
Repayment of capital leases and long-term debt - (108)
Proceeds from issuance of common stock 4,329 5,049
-------------- --------------
Net cash provided by financing activities 4,329 4,941
-------------- --------------
Net increase (decrease) in cash and cash equivalents 68,856 (9,982)
Cash and cash equivalents, beginning of the period 70,504 152,120
-------------- --------------
Cash and cash equivalents, end of the period $ 139,360 $ 142,138
============== ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 5,156 $ 5,414
See notes to the consolidated financial statements.
5
PMC-Sierra, Inc.
NOTES TO THE 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-speed broadband communications and storage
semiconductors and MIPS-based processors for service provider, enterprise,
storage, and wireless networking equipment. The Company offers worldwide
technical and sales support through a network of offices in North America,
Europe and Asia.
Basis of presentation. The accompanying Consolidated 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 that 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 10-K for the year ended December 29, 2002. The results of operations for
the interim periods are not necessarily indicative of results to be expected in
future periods.
Estimates. The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Estimates
are used for, but not limited to, the accounting for doubtful accounts,
inventory reserves, depreciation and amortization, asset impairments, sales
returns, warranty costs, income taxes, restructuring costs and other special
charges, and contingencies. Actual results could differ from these estimates.
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:
Mar 30, Dec 29,
(in thousands) 2003 2002
- ------------------------------------------------------------------------
Work-in-progress $ 8,674 $ 11,409
Finished goods 15,146 15,011
- ------------------------------------------------------------------------
$ 23,820 $ 26,420
===============================
6
Product warranties. The Company provides a one-year limited warranty on most of
its standard products and accrues for the cost of this warranty at the time of
shipment. The Company estimates its warranty costs based on historical failure
rates and related repair or replacement costs. The change in the Company's
accrued warranty obligations from December 31, 2002 to March 30, 2003 is as
follows:
(in thousands)
- -------------------------------------------------------------------------------
Beginning balance $ 2,399
Accrual for new warranties issued 274
Reduction for payments (in cash or in kind) (198)
Adjustments related to changes in estimate of warranty accrual 34
- -------------------------------------------------------------------------------
$ 2,509
===========
Stock based compensation. The Company accounts for stock-based compensation in
accordance with the intrinsic value method prescribed by APB Opinion No. 25 (APB
25), "Accounting for Stock Issued to Employees". Under APB 25, compensation is
measured as the amount by which the market price of the underlying stock exceeds
the exercise price of the option on the date of grant; this compensation is
amortized over the vesting period.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123 for awards granted or modified after December 31,
1994 as if the Company had accounted for its stock-based awards to employees
under the fair value method of SFAS 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock-based awards to employees have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated using the
multiple option approach, recognizing forfeitures as they occur, assuming no
expected dividends and using the following weighted average assumptions:
Options ESPP
-------------------------- --------------------------
March 30, March 31, March 30, March 31,
2003 2002 2003 2002
- -------------------------------------------------------------------------------
Expected life (years) 2.9 2.7 1.1 0.6
Expected volatility 101% 101% 107% 119%
Risk-free interest rate 1.9% 2.8% 1.5% 2.9%
The weighted-average estimated fair values of employee stock options granted
during the first three months of 2003 and 2002 were $2.98 and $8.65 per share,
respectively.
7
If the computed fair values for the first three months of 2003 and 2002 had been
amortized to expense over the vesting period of the awards as prescribed by SFAS
123, net loss and net loss per share would have been:
Three Months Ended
------------------------------
Mar 30, Mar 31,
(in thousands, except per share amounts) 2003 2002
- ------------------------------------------------------------------------------------------------
Net loss, as reported $ (11,515) $ (13,680)
Adjustments:
Additional stock-based employee compensation expense
under fair value based method for all awards (22,532) (30,914)
------------------------------
Net loss, adjusted $ (34,047) $ (44,594)
============ ============
Basic and diluted net loss per share, as reported $ (0.07) $ (0.08)
============ ============
Basic and diluted net loss per share, adjusted $ (0.20) $ (0.26)
============ ============
Recently issued accounting standards.
In April 2003 the Financial Accounting Standards Board (FASB) issued Statement
No. 149 (SFAS No. 149), "Amendment of SFAS No. 133 on Derivative Instruments and
Hedging Activities". The Statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133. In particular,
it (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in SFAS No.
133, (2) clarifies when a derivative contains a financing component, (3) amends
the definition of an underlying (as defined within SFAS No. 149) to conform it
to the language used in FASB Interpretation No. 45, "Guarantor Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" and (4) amends certain other existing pronouncements.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designated after June
30, 2003.
The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003
should continue to be applied in accordance with their respective effective
dates. In addition, certain provisions relating to forward purchases or sales of
when-issued securities or other securities that do not yet exist should be
applied to existing contracts as well as new contracts entered into after June
30, 2003. SFAS No. 149 should be applied prospectively.
The Company will adopt the provisions of SFAS No. 149 for any contracts entered
into after June 30, 2003 and are not affected by Implementation Issues that
would require earlier adoption. PMC does not expect that the adoption of this
Statement will have a material impact on its results of operations and financial
position.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities", an Interpretation of ARB No. 51. FIN 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. PMC is currently evaluating FIN 46 but does not
expect that the adoption of FIN 46 will have a material effect on the Company's
results of operations, financial condition or disclosures.
8
In December 2002, the FASB issued Statement of Financial Accounting Standard No.
148 (SFAS 148), "Accounting for Stock-Based Compensation - Transition and
Disclosure". SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. SFAS 148 also requires prominent disclosure in the "Summary of
Significant Accounting Policies" of both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted SFAS 148 for
the 2002 fiscal year end. Adoption of this statement affected the location of
the Company's disclosure within the Consolidated Financial Statements, but will
not impact the Company's results of operation or financial position unless the
Company changes to the fair value method of accounting for stock-based employee
compensation.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees that are
issued or modified after December 31, 2002. The Company has adopted the
requirements of FIN 45, which have not had a material impact on the Company's
results of operations or financial position.
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard No. 146 (SFAS 146), "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 requires that the
liability for a cost associated with an exit or disposal activity be recognized
at its fair value when the liability is incurred. Under previous guidance, a
liability for certain exit costs was recognized at the date that management
committed to an exit plan. In January 2003, the Company announced a further
restructuring plan, the costs of which have been accounted for in accordance
with SFAS 146.
NOTE 2. Restructuring and Other Costs
Restructuring - January 16, 2003
On January 16, 2003, the Company implemented a corporate restructuring to reduce
operating expenses. The restructuring plan included the termination of
approximately 175 employees and the closure of design centers in Maryland,
Ireland and India. PMC recorded a restructuring charge of $6.6 million for
workforce reduction and facility lease costs in the first quarter. The Company
will record further restructuring charges in connection with this plan in the
second and third quarters of 2003 as such liabilities are incurred.
The following summarizes the activity in the January 2003 restructuring
liability during the three-month period ended March 30, 2003:
9
Restructuring
Total Charge Cash Liability at
(in thousands) January 16, 2003 Payments March 30, 2003
- ----------------------------------------------------------------------------
Workforce reduction $ 6,384 $ (2,154) $ 4,230
Facility lease
settlement costs 260 (59) 201
- ----------------------------------------------------------------------------
Total $ 6,644 $ (2,213) $ 4,431
=====================================================
Restructuring - October 18, 2001
PMC implemented a restructuring plan in the fourth quarter of 2001 to reduce its
operating cost structure. This restructuring plan included the termination of
341 employees, the consolidation of additional excess facilities, and the
curtailment of additional research and development projects. As a result, the
Company recorded a restructuring charge of $175.3 million in the fourth quarter
of 2001.
The following summarizes the activity in the October 2001 restructuring
liability during the first quarter:
Restructuring Restructuring
Liability at Cash Liability at
(in thousands) December 31, 2002 Payments March 30, 2003
- --------------------------------------------------------------------------------
Facility lease and
contract settlement costs $ 129,499 $ (6,566) $ 122,933
==================================================
The Company has completed the restructuring activities contemplated in the
October 2001 plan, but has not yet disposed of all its surplus leased
facilities.
NOTE 3. Segment Information
The Company has two operating segments: networking and non-networking products.
The networking segment consists of semiconductor devices and related technical
service and support to equipment manufacturers for use in service provider,
enterprise, and storage area networking equipment. The non-networking segment
consists of 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 contained in the Company's Annual
Report on Form 10-K. The Company evaluates performance based on net revenues and
gross profits from operations of the two segments.
10
Three Months Ended
------------------------------------
Mar 30, Mar 31,
(in thousands) 2003 2002
- ---------------------------------------------------------------------
Net revenues
Networking $ 55,386 $ 46,852
Non-networking - 4,590
- ---------------------------------------------------------------------
Total $ 55,386 $ 51,442
====================================
Gross profit
Networking $ 33,501 $ 28,934
Non-networking - 1,965
- ---------------------------------------------------------------------
Total $ 33,501 $ 30,899
====================================
NOTE 4. Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, are as follows:
Three Months Ended
--------------------------------
Mar 30, Mar 31,
(in thousands) 2003 2002
- -------------------------------------------------------------------------------
Net loss $ (11,515) $ (13,680)
Other comprehensive income (loss):
Change in net unrealized gains on investments (1,258) (13,615)
- -------------------------------------------------------------------------------
Total $ (12,773) $ (27,295)
================================
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
---------------------------------
Mar 30, Mar 31,
(in thousands, except per share amounts) 2003 2002
- --------------------------------------------------------------------------------
Numerator:
Net loss $ (11,515) $ (13,680)
=================================
Denominator:
Basic and diluted weighted average
common shares outstanding (1) 171,402 169,513
=================================
Basic and diluted net loss per share $ (0.07) $ (0.08)
=================================
The Company had approximately 2 million options outstanding at March 30, 2003
and 8 million options outstanding at March 31, 2002 that were not included in
diluted net loss per share because they would be anti-dilutive.
11
(1) PMC-Sierra, Ltd. special shares are included in the calculation of basic
weighted average common shares outstanding.
NOTE 6. Voluntary Stock Option Exchange Offer
In August 2002, the Company offered to eligible stock option holders an
opportunity to voluntarily exchange certain stock options outstanding under the
Company's equity-based incentive plans. Under the program, participants were
able to tender for cancellation stock options granted within a specified period
with exercise prices at or above $8.00 per share, in exchange for new options to
be granted at least six months and one day after the cancellation of the
tendered options. Pursuant to the terms and conditions set forth in the
Company's offer, each eligible participant received new options to purchase an
equivalent number of PMC shares for each tendered option with an exercise price
of less than $60.00. For each tendered option with an exercise price of $60.00
or more, each eligible participant received a new option to purchase a number of
PMC shares equal to one share for each four unexercised shares subject to the
tendered option.
On September 26, 2002, the Company cancelled options to purchase approximately
19.3 million shares of common stock with a weighted average exercise price of
$35.98. In exchange for these stock options and pursuant to the terms and
conditions set forth in the Company's offer, the Company granted options to
purchase approximately 16.6 million shares of common stock on March 31, 2003
with an exercise price of $5.95, which was the closing price of the Company's
stock on the grant date.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates", "believes", "plans",
"expects", "future", "intends", "may", "will", "should", "estimates",
"predicts", "potential", "continue", "becoming", "transitioning" and similar
expressions to identify such forward-looking statements.
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. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks we face as described under "Factors That You Should Consider Before
Investing in PMC-Sierra" and elsewhere in this Quarterly Report. Investors 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, our business outlook,
revenues, capital resources sufficiency, capital expenditures, restructuring
activities, and expenses.
Results of Operations
First Quarters of 2003 and 2002
Net Revenues ($000,000)
First Quarter
--------------------------
2003 2002 Change
Networking products $ 55.4 $ 46.8 18%
Non-networking products - 4.6 ( 100%)
--------------------------
Total net revenues $ 55.4 $ 51.4 8%
==========================
Net revenues for the first quarter of 2003 were $55.4 million compared to $51.4
million for the first quarter of 2002. Networking revenues increased $8.6
million while non-networking revenues declined $4.6 million. Our non-networking
product was discontinued in 2002 and this decline in revenue was consistent with
our previously announced business plans.
Our networking revenues increased 18% over the same period a year ago. Higher
unit sales positively impacted revenues by increasing sales $12.1 million, while
reductions in average selling price partially offset this increase by
approximately $3.5 million.
13
Gross Profit ($000,000)
First Quarter
----------------------------
2003 2002 Change
Networking products $ 33.5 $ 28.9 16%
Non-networking products - 2.0 ( 100%)
----------------------------
Total gross profit $ 33.5 $ 30.9 8%
============================
Percentage of net revenues 60% 60%
Total gross profit increased $2.6 million, or 8%, in the first quarter of 2003
compared to the same quarter a year ago.
Networking gross profit for the first quarter of 2003 increased by $4.6 million
from the first quarter of 2002 primarily due to an increase in networking unit
sales.
Networking gross profit as a percentage of networking revenues decreased 1.3%
from 61.8% in the first quarter of 2002 to 60.5% in the first quarter of 2003.
This decrease resulted primarily from:
o generating a greater portion of our sales from higher volume but lower
margin applications, lowering networking gross profit by approximately 7
percentage points ;
o reductions in our direct manufacturing costs increased gross profit by
approximately 6 percentage points;
o reductions in our average selling price reduced gross profit by
approximately 2 percentage points; and
o fixed manufacturing costs were allocated over a higher volume of shipments,
which improved gross profit by approximately 2 percentage points.
Non-networking gross profit for the first quarter of 2003 declined to zero from
$2.0 million in the first quarter of 2002, as we did not sell any non-networking
products during the quarter.
Operating Expenses and Charges ($000,000)
First Quarter
-------------------------
2003 2002 Change
Research and development $ 30.9 $ 36.2 ( 15%)
Percentage of net revenues 56% 70%
Marketing, general and administrative $ 12.6 $ 17.1 ( 26%)
Percentage of net revenues 23% 33%
Amortization of deferred stock compensation:
Research and development $ 0.4 $ 0.9
Marketing, general and administrative 0.0 0.1
-------------------------
$ 0.4 $ 1.0
-------------------------
Percentage of net revenues 1% 2%
Restructuring costs $ 6.6 $ -
14
Research and Development and Marketing, General and
Administrative Expenses:
Our research and development, or R&D, expenses decreased by $5.3 million, or
15%, in the first quarter of 2003 compared to the same quarter a year ago due to
the restructuring program implemented in the first quarter of 2003 and ongoing
cost reduction initiatives. As a result, we reduced our R&D personnel and
related costs by $1.1 million and other R&D expenses by $4.2 million compared to
the first quarter of 2002.
Our marketing, general and administrative, or MG&A, expenses decreased by $4.5
million, or 26%, in the first quarter of 2003 compared to the same quarter a
year ago. As a result of the restructuring and cost reduction programs since
2001, we reduced our MG&A personnel and related costs by $2.1 million and other
MG&A expenses by $2.4 million compared to the first of 2002.
Amortization of Deferred Stock Compensation:
We recorded a non-cash charge of $0.4 million for amortization of deferred stock
compensation in the first quarter of 2003 compared to a $1.0 million charge in
the first quarter of 2002. Deferred stock compensation charges decreased
compared to the same quarter last year due to the accelerated amortization of
deferred stock compensation, which results in a declining amortization expense
over the amortization period.
Restructuring
On January 16, 2003, we implemented a corporate restructuring to reduce
operating expenses. The restructuring plan included the termination of 175
employees and the closure of four product development centers in Maryland,
Ireland and India. We expect to incur total costs of $12-14 million in
connection with this plan and recorded a $6.6 million charge for workforce
reduction and facility lease cost in the first quarter. We made cash payments of
$2.2 million in the first quarter, in connection with this restructuring. We
will record further restructuring charges in connection with this plan in the
second and third quarters of 2003 as we incur such liabilities.
During the first quarter, we paid out $6.6 million in connection with October
2001 restructuring activities. See "Critical Accounting Estimates". We did not
have any changes in estimates relating to our 2001 restructuring activities that
affected the Statements of Operations.
Interest and other income, net
Net interest and other income decreased to $0.5 million in the first quarter of
2003 from $1.4 million in the first quarter of 2002. Interest income decreased
as we earned lower investment yields on lower average cash balances.
Gain on investments
During the first quarter of 2003, we realized a pre-tax gain of approximately
$0.5 million as a result of our disposition of a portion of our public company
investments.
Provision for income taxes
15
We recorded a tax recovery of $4.5 million in the first quarter of 2003 relating
to losses and tax credits generated in Canada, which will result in a recovery
of taxes paid in prior periods. We have provided a valuation allowance on other
deferred tax assets generated in the quarter because of uncertainty regarding
their realization.
Critical Accounting Estimates
General
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect our reported assets, liabilities, revenue
and expenses, and related disclosure of our contingent assets and liabilities.
Our significant accounting policies are outlined in Note 1 to the Consolidated
Financial Statements in our Annual Report on form 10-K for the period ended
December 29, 2002, which also provides commentary on our most critical
accounting estimates. The following estimates were of note during the first
quarter of 2003.
Restructuring charges - Facilities
In calculating the cost to dispose of our excess facilities, we had to estimate
for each location the amount to be paid in lease termination payments, the
future lease and operating costs to be paid until the lease is terminated, and
the amount, if any, of sublease revenues. This required us to estimate the
timing and costs of each lease to be terminated, the amount of operating costs
for the affected facilities, and the timing and rate at which we might be able
to sublease or complete negotiations of a lease termination agreement for each
site. To form our estimates for these costs we performed an assessment of the
affected facilities and considered the current market conditions for each site.
During 2001, we recorded total charges of $155 million for the restructuring of
excess facilities as part of restructuring plans, which was approximately 53% of
the estimated total future operating cost and lease obligation for those sites.
As at March 30, 2003 the remaining restructuring accrual for facilities is 50%
of the estimated total future operating costs and lease obligations for the
remaining sites, which we believe remains sufficient to cover anticipated
settlement costs. However, our assumptions on either the lease termination
payments, operating costs until terminated, or the amounts and timing of
offsetting sublease revenues may turn out to be incorrect and our actual cost
may be materially different from our estimates.
In the first quarter of 2003, we announced a further restructuring of our
operations, which will result in the closing of four of our product development
sites. We recorded in the first quarter our estimate of the costs associated
with closing one of these sites. We will record a charge for the closing of the
other three sites when we cease use of the sites. Our current estimate of costs
for the closing of all four sites is from $4 million to $5 million, which
represents just over 50% of the estimated total future operating costs and lease
obligations for the effected sites.
Business Outlook
16
Forecasting our revenue outlook in the current slow economic climate is
difficult. Currently many of our customers wait until the last possible moment
before ordering products, and then limit their order to an amount that is the
minimum required to produce equipment to meet specified customer demand. Our
quarterly revenues may continue to vary considerably as our customers adjust to
fluctuating demand for products in their markets.
We anticipate that our revenues will increase in the second quarter to $58 - $60
million, or an increase of 5% to 8% from the first quarter of 2003. Our estimate
regarding second quarter revenues is based on orders already shipped at the date
of this report, order backlog scheduled to be shipped during the remainder of
the quarter, and an estimate of new orders we expect to receive and ship before
the end of the quarter. We believe that our forecasted increase in second
quarter revenues will primarily be the result of depletion of excess inventories
of our products at some of our customers and slightly improved demand for
products that are sold for customer application in digital subscriber line (DSL)
markets.
We expect aggregate spending on research and development (R&D) and marketing,
general and administrative (MG&A) expenses to increase slightly in the second
quarter as we expect higher new product development costs as an increased number
of newly developed products are completed. As new products are completed, they
are sent to third parties for creation of mask sets, and manufacture of
prototype and engineering parts for testing. These costs are variable in nature,
depend upon the timing of actual completion of product designs and are charged
to development expense as incurred. We expect to reduce R&D and MG&A spending in
the third quarter of 2003 relative to the second quarter of 2003 as we realize
the full effect of the restructuring program we implemented on January 16, 2003.
As a result of the restructuring program we implemented in January 2003, we
expect to record total restructuring charges of $12-14 million related to
workforce reduction, facility lease costs and related asset impairments. PMC
recorded $6.6 million in such charges in the first quarter and we expect to
record additional charges totaling $6 to $8 million over the next two quarters
as we carry out this restructuring program.
We incur a significant portion of operating costs, primarily salaries and
facilities costs, in Canadian dollars and will continue to do so in the
foreseeable future while substantially all of our revenues are denominated in US
dollars. In the first quarter of 2003, such costs represented approximately 30%
of our operating expenses. We fund our Canadian operations by purchasing
Canadian dollars, and funded the first quarter operating expenses at an exchange
rate $0.656 US per Canadian dollar. Given that the US dollar has and may
continue to decline in value compared to the Canadian dollar, the cost of our
Canadian operations expressed in US dollars may continue to increase in the
future. As of the filing of this report the exchange rate was $ 0.719 US per
Canadian dollar, which will increase our operating costs going forward if
management is not able to otherwise identify and implement other cost savings
opportunities.
We expect no net interest income as the yields we earn on our cash, short-term
investments and long-term investments in bonds and notes continue to decline,
while the interest rate associated with our convertible subordinate debt, the
largest component of interest expense, is fixed at 3.75%.
Liquidity & Capital Resources
Our principal source of liquidity at March 30, 2003 was $552.7 million in cash
and investments, which included $406.4 million in cash, cash equivalents and
short-term investments and $146.3 million of long-term investments in bonds and
notes, which mature within 12 and 30 months.
In the first three months of 2003, we used $15.9 million of cash for operating
activities and $1.3 million of cash for purchases of property and equipment. We
generated $4.3 million of cash through financing activities, primarily the
issuance of common stock under our equity-based compensation plans.
17
We have cash commitments made up of the following:
As at March 30, 2003 (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
After
Contractual Obligations Total 2003 2004 2005 2006 2007 2007
Operating Lease Obligations:
Minimum Rental Payments $ 265,985 $ 23,971 $ 31,528 $ 30,677 $ 29,872 $ 31,439 $ 118,498
Estimated Operating Cost Payments 57,686 5,647 7,117 7,025 6,516 6,319 25,062
Long Term Debt:
Principal Repayment 275,000 - - - 275,000 - -
Interest Payments 36,095 5,156 10,313 10,313 10,313 - -
Purchase Obligations 3,850 2,473 1,377 - - - -
------------------------------------------------------------------------------------------
638,616 $ 37,247 $ 50,335 $ 48,015 $ 321,701 $ 37,758 $ 143,560
=========================================================================
Venture Investment Commitments (see below) 37,403
-----------------
Total Contractual Cash Obligations $ 676,019
=================
Approximately $254.4 million of the minimum rental payments and estimated
operating costs identified in the table above relate to operating leases for
vacant and excess office facilities. We are currently negotiating settlements of
these leases and may incur significant related cash expenditures. We expect to
expend a significant portion of the $122.9 million we have accrued for
restructuring costs in settlement of these obligations on completion of
negotiations in the coming two quarters. See Note 2 to the Consolidated
Financial Statements for additional information regarding restructuring and
other costs.
Our long-term debt requires semi-annual interest payments of approximately $5.2
million to holders of our convertible notes. These interest payments are due on
February 15 and August 15 of each year, with the last payment of interest and
$275 million in principal being due on August 15, 2006.
We participate in four professionally managed venture funds that invest in
early-stage private technology companies. From time to time these funds request
additional capital for private placements. We have committed to invest an
additional $37.4 million into these funds, which may be requested by the fund
managers at any time over the next seven years.
We have a line of credit with a bank that allows us to borrow up to $5.3 million
provided we maintain eligible investments with the bank in an amount equal to
our drawings. At March 30, 2003 we had committed all of this facility under
letters of credit as security for office leases.
We believe that existing sources of liquidity will satisfy our restructuring
obligations and our projected operating, working capital, venture investing,
debt interest, capital expenditure and wafer deposit requirements through the
end of 2003. We expect to spend $7.6 million on new capital additions during the
remainder of 2003.
Recently issued accounting standards
In April 2003 the Financial Accounting Standards Board (FASB) issued Statement
No. 149 (SFAS No. 149), "Amendment of SFAS No. 133 on Derivative Instruments and
Hedging Activities". The Statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133. In particular,
it (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in SFAS No.
133, (2) clarifies when a derivative contains a financing component, (3) amends
the definition of an underlying (as defined within SFAS 149) to conform it to
the language used in FASB Interpretation No. 45, "Guarantor Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" and (4) amends certain other existing pronouncements.
18
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designated after June
30, 2003.
The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003
should continue to be applied in accordance with their respective effective
dates. In addition, certain provisions relating to forward purchases or sales of
when-issued securities or other securities that do not yet exist should be
applied to existing contracts as well as new contracts entered into after June
30, 2003. SFAS No. 149 should be applied prospectively.
We will adopt the provisions of SFAS No. 149 for any contracts entered into
after June 30, 2003. PMC is not affected by Implementation Issues that would
require earlier adoption. We do not expect the adoption of this Statement will
have a material impact on our results of operations and financial position.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities", an Interpretation of ARB No. 51". FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. We are currently evaluating FIN 46 but do not
expect that the adoption of FIN 46 will have a material effect on the Company's
results of operations, financial condition or disclosures.
In December 2002, the FASB issued Statement of Financial Accounting Standard No.
148 (SFAS 148), "Accounting for Stock-Based Compensation - Transition and
Disclosure". SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. SFAS 148 also requires prominent disclosure in the "Summary of
Significant Accounting Policies" of both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. PMC adopted SFAS 148 for its 2002
fiscal year end. Adoption of this statement affected the location of our
disclosure within the Consolidated Financial Statements, but will not impact our
results of operation or financial position unless we change to the fair value
method of accounting for stock-based employee compensation.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees that are
issued or modified after December 31, 2002. We adopted the requirements of FIN
45, which did not had a material impact on our results of operations or
financial position.
In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146
(SFAS 146), "Accounting for Costs Associated with Exit or Disposal Activities".
SFAS 146 requires that the liability for a cost associated with an exit or
disposal activity be recognized at its fair value when the liability is
incurred. Under previous guidance, a liability for certain exit costs was
recognized at the date that management committed to an exit plan. In January
2003, we announced a further restructuring plan, the costs of which have been
accounted for in accordance with SFAS 146.
19
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 securities 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, fluctuations in demand for networking
equipment and our customer concentration.
As a result of these factors, we have very limited revenue visibility and the
rate by which revenues are booked and shipped within the same reporting period
is typically volatile. In addition, our net bookings can vary sharply up and
down within a quarter.
Our revenues may decline as our customers face unpredictable and
volatile demand for their products.
Our customers have reported that demand for their products remains weak and may
fluctuate from current levels depending on their customers' specific needs.
Several of our customers' clients have lowered their forecasts for capital
expenditures as they carefully manage cash usage and expense levels, purchasing
equipment which may generate a financial return on a shorter time horizon. The
equipment to which they shift may not incorporate, or may incorporate fewer, of
our products.
In response to the actual and anticipated declines in networking equipment
demand, many of our customers and their contract manufacturers have undertaken
initiatives to significantly reduce expenditures and excess component
inventories. Many platforms in which our products are designed have been
cancelled as our customers cancel or restructure product development initiatives
or as venture-financed startup companies fail. Our revenues may be materially
and adversely impacted in future quarters if these conditions continue or
worsen.
Our customers' actions have reduced our visibility of future revenue streams. As
most of our costs are fixed in the short term, a further reduction in demand for
our products may cause a further decline in our gross and net margins.
While we believe that our customers and their contract manufacturers are
consuming a portion of their inventory of PMC products, we believe that those
inventories, as well as the weakened demand that our customers are experiencing
for their products, may continue to depress our revenues and profit margins in
future quarters (see "Business Outlook" above). We cannot accurately predict
when demand for our products will strengthen or how quickly our customers will
consume their inventories of our products.
20
We may fail to meet our demand forecasts if our customers cancel or
delay the purchase of our 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 for additional manufacturing capacity. This
makes forecasting their production requirements difficult and can lead to an
inventory surplus of certain of their components.
Our customers often shift buying patterns as they manage inventory levels,
decide to use competing products, are acquired or divested, market different
products, or change production schedules. Customers are more frequently
requesting shipment of our products at less than our normal lead times. We may
be unable to deliver products to customers when they require them if we
incorrectly estimate future demand, and this may lead to higher fluctuations in
shipments of our products.
In addition, we believe that uncertainty in our customers' end markets and our
customers' increased focus on cash management has caused our customers to delay
product orders and reduce delivery lead-time expectations. We expect this will
increase the proportion of our revenues in future periods that will be from
orders placed and fulfilled within the same period. This will decrease our
ability to accurately forecast and may lead to greater fluctuations in operating
results.
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
Hewlett Packard each accounted for more than 10% of our first quarter 2003
revenues. Both of these customers have announced expected declines in their
future revenues for some of their products that could reduce the quantities of
our products that they will buy.
We do not have long-term volume purchase commitments from any of our major
customers. Accordingly, our future operating results will continue to depend on
the success of our largest customers and on our ability to sell existing and new
products to these customers in significant quantities. The loss of a key
customer, or a reduction in our sales to any key customer or our inability to
attract new significant customers could materially and adversely affect our
business, financial condition or results of operations.
If demand for our products declines, we may have to add to our
inventory reserve, which would lead to a further decline in our
operating profits.
We have a reserve against excess inventory based on our revenue expectations
through the next four quarters. If future demand for our products does not meet
our expectations, we may need to take an additional write-down of inventory.
We anticipate lower margins on 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.
21
OEMs are becoming more price conscious than in the past as a result of the
industry downturn, and as semiconductors sourced from third party suppliers
comprise a greater portion of the total materials cost in OEM equipment. We have
also experienced more aggressive price competition from competitors that wish to
enter into the market segments in which we participate. These circumstances may
make some of our products less competitive and we may be forced to decrease our
prices significantly to win a design. We may lose design opportunities or may
experience overall declines in gross margins as a result of increased price
competition.
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.
Design wins do not translate into near-term revenues and the timing of revenues
from newly designed products is often uncertain.
We have announced a number of new products and design wins for existing and new
products. While some industry analysts may use design wins as a metric for
future revenues, many design wins do not generate revenues, as customer projects
are cancelled or are not adopted by their end customers. In the event a design
win generates revenue, the amount of revenue will vary greatly from one design
win to another. Most revenue-generating design wins take greater than two years
to generate meaningful revenue.
Our revenue expectations may include growing sales of newer semiconductors based
on early adoption of those products by customers. These expectations would not
be achieved if early sales of new system level products by our customers do not
increase over time. We may experience this more with design wins from early
stage companies, who tend to focus on leading-edge technologies that may be
adopted less rapidly in the current environment by telecommunications service
providers.
Our restructurings have curtailed our resources and may have insufficiently
addressed market conditions.
On January 16th, 2003, we implemented plans to restructure our operations
through a workforce reduction of 175 employees and the shutdown of four of our
product development sites. We recorded a charge of $6.6 million in the first
quarter of 2003, and estimate that we will record a further cost for this
restructuring plan of $6 to $8 million over the second and third quarters of
2003.
We reduced the work force and consolidated or closed excess facilities in an
effort to bring our expenses into line with our reduced revenue expectations.
However, if our revenues do not increase, we expect to continue to incur net
losses.
While management uses all available information to estimate these restructuring
costs, particularly facilities costs, our estimates may prove to be inadequate.
If our actual sublease revenues or exiting negotiations differ from our original
assumptions, we may have to record additional charges, which could materially
affect our results of operations, financial position and cash flow.
22
Restructuring plans require significant management resources to execute and we
may fail to achieve our targeted goals and our expected annualized savings. We
may have incorrectly anticipated the demand for our products, we may be forced
to restructure further or may incur further operating charges due to poor
business conditions and some of our product development initiatives may be
delayed due to the reduction in our development resources.
Our revenues may decline if our customers use our competitors' products instead
of ours, suffer further reductions in demand for their products or are acquired
or sold.
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, such as the wireless infrastructure and generic
microprocessor markets, which have established incumbents with 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 us:
As our customers design next generation systems and select the chips
for those new systems, our competitors have an opportunity to convince
our customers to use their products, which may cause our revenues to
decline.
We typically face competition at the design stage, where customers evaluate
alternative design approaches requiring integrated circuits. Our competitors may
have more opportunities to supplant our products in next generation systems
because of the shortening product life and design-in cycles in many of our
customers' products.
In addition, as a result of the industry downturn, and as semiconductors sourced
from third party suppliers comprise a greater portion of the total materials
cost in OEM equipment, OEMs are becoming more price conscious than in the past.
We have also experienced increased price aggressiveness from some competitors
that wish to enter into the market segments in which we participate. These
circumstances may make some of our products price-uncompetitive or force us to
match low prices. We may lose design opportunities or may experience overall
declines in gross margins as a result of increased price competition.
We are facing additional competition from companies who have excess capacity and
who are able to offer our OEM customers similar products to ours. Excess
capacity, in tandem with the significant decrease in demand for OEM equipment,
has created downward pricing pressure on our products.
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 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.
Increasing competition in our industry will make it more difficult to
achieve design wins.
We face significant competition from three major fronts. First, we compete
against established peer-group semiconductor companies that focus on the
communications semiconductor business. These companies include Agere Systems,
Applied Micro Circuits Corporation, Broadcom, Exar Corporation, Conexant
Systems, Marvell Technology Group, Multilink Technology Corporation, Silicon
Image, Transwitch and Vitesse Semiconductor. These companies are well financed,
have significant communications semiconductor technology assets, have
established sales channels, and are dependent on the market in which we
participate for the bulk of their revenues.
23
Other competitors include major domestic and international semiconductor
companies, such as Agilent, Cypress Semiconductor, Intel, IBM, Infineon,
Integrated Device Technology, Maxim Integrated Products, Motorola, Nortel
Networks, and Texas Instruments. These companies are concentrating an increasing
amount of their substantial financial and other resources on the markets in
which we participate. This represents a serious competitive threat to us.
Emerging venture-backed companies also provide significant competition in our
segment of the semiconductor market. These companies tend to focus on specific
portions of our broad range of products and in the aggregate, represent a
significant threat to our product lines. In addition, these companies could
introduce disruptive technologies that may make our technologies and products
obsolete.
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. 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 evolving industry standards
and customer specifications, which may prevent or delay future revenue
growth.
We sell products to a market whose characteristics include 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 many of the products we develop do not reach full production
sales volumes for a number of years, we may incorrectly anticipate
market demand and develop products that achieve little or no market
acceptance.
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. Our
products often must 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.
Our strategy includes broadening our business into the Enterprise, Storage and
Consumer markets. We may not be successful in achieving significant sales in
these new markets.
The Enterprise, Storage and Consumer markets are already serviced by incumbent
suppliers who have established relationships with customers. We may be
unsuccessful in displacing these suppliers, or having our products designed into
products for different market needs. In order to compete against incumbents, we
may need to lower our prices to win new business, which could lower our gross
margin. We may incur increased research, development and sales costs to address
these new markets.
24
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. The US dollar has and may continue to devalue
compared to the Canadian dollar. While we have adopted a foreign currency risk
management policy, which is intended to reduce the effects of short-term
fluctuations, our policy may not be effective and it does not address long-term
fluctuations.
In addition, while all of our sales are denominated in US dollars, our
customers' products are sold worldwide. Any further decline in the world
networking markets could seriously depress our customers' order levels for our
products. This effect could be exacerbated if fluctuations in currency exchange
rates decrease the demand for our customers' products.
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 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.
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 employ contract manufacturers to produce their products
and manage their inventories. Many of these contract manufacturers represent
greater credit risk than our networking equipment customers, who generally do
not guarantee our credit receivables related to their contract manufacturers.
25
In addition, international debt rating agencies have significantly downgraded
the bond ratings on a number of our larger customers, which had traditionally
been considered financially stable. Should these companies enter into bankruptcy
proceedings or breach their debt covenants, our significant accounts receivables
with these companies could be jeopardized.
The complexity of our products could result in unforeseen delays or expenses and
in undetected defects or bugs, which could adversely affect the market
acceptance of new products and damage our reputation with current or prospective
customers.
Although we, and our customers and our suppliers rigorously test our products,
our highly complex products regularly contain defects or bugs. We have in the
past experienced, and may in the future experience, these defects and bugs. If
any of our products contain defects or bugs, or have reliability, quality or
compatibility problems that are significant to our customers, our reputation may
be damaged and customers may be reluctant to buy our products. This could
materially and adversely affect our ability to retain existing customers or
attract new customers. In addition, these defects or bugs could interrupt or
delay sales to our customers.
We may have to invest significant capital and other resources to alleviate
problems with our products. If any of these problems are not found until after
we have commenced commercial production of a new product, we may be required to
incur additional development costs and product recall, repair or replacement
costs. These problems may also result in claims against us by our customers or
others. In addition, these problems may divert our technical and other resources
from other development efforts. Moreover, we would likely lose, or experience a
delay in, market acceptance of the affected product or products, and we could
lose credibility with our current and prospective customers.
We may be unsuccessful in transitioning the design of our new products to new
manufacturing processes.
Many of our new products are designed to take advantage of new manufacturing
processes offering smaller manufacturing geometries as they become available, as
the smaller geometry products can provide a product with improved features such
as lower power requirements, more functionality and lower cost. We believe that
the transition of our products to smaller geometries is critical for us to
remain competitive. We could experience difficulties in migrating to future
geometries or manufacturing processes, which would result in the delay of the
production of our products. Our products may become obsolete during these
delays, or allow competitors' parts to be chosen by customers during the design
process.
Our business strategy contemplates acquisition of other companies or
technologies, which could adversely affect our operating performance.
Acquiring products, technologies or businesses from third parties is 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.
26
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.
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 acquisitions.
We participate in funds that invest in early-stage private technology companies
to gain access to emerging technologies. These companies possess unproven
technologies and our investments may or may not yield positive returns. We
currently have commitments to invest $37.4 million in such funds. In addition to
consuming significant amounts of cash, these investments are risky because the
technologies that these companies are developing may not reach
commercialization. We may record an impairment charge to our operating results
should we determine that these funds have incurred a non-temporary decline in
value.
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 needed to develop high-speed networking products and
related software. We do not have employment agreements in place with many of 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. The stock options we grant to employees are effective as
retention incentives only if they have economic value.
Our recent restructurings have significantly reduced the number of our technical
employees. We may experience customer dissatisfaction as a result of delayed or
cancelled product development initiatives.
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, our customers are focusing more on cash preservation and tighter
inventory management, 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 our products. Our customers are frequently requesting
shipment of our products earlier than our normal lead times. 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 or we may be left with
unwanted inventory.
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.
27
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
in Asia supply greater than 90% 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 revenues. We have less control over delivery schedules, assembly
processes, quality assurances and costs than competitors that do not outsource
these tasks.
Severe acute respiratory syndrome, or SARS, may disrupt our wafer fabrication or
assembly manufacturers located in Asia which could adversely impact our ability
to ship orders, reducing our revenues in that quarter
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.
From time to time, we become defendants in legal proceedings about which we are
unable to assess our exposure and which could become significant liabilities
upon judgment.
28
We become defendants in legal proceedings from time to time. Companies in our
industry have been subject to claims related to patent infringement and product
liability, as well as contract and personal claims. We may not be able to
accurately assess the risk related to these suits, and we may be unable to
accurately assess our level of exposure. These proceedings may result in
material charges to our operating results in the future if our exposure is
material and 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, and 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. Customers may also make claims against us with respect to
infringement.
29
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.
We have significantly increased our debt level as a result of the sale of
convertible subordinated notes.
On August 6, 2001, we raised $275 million through the issuance of convertible
subordinated notes. As a result, our interest payment obligations have increased
substantially. The degree to which we are leveraged could materially and
adversely affect our ability to obtain financing for working capital,
acquisitions or other purposes and could make us more vulnerable to industry
downturns and competitive pressures. Our ability to meet our debt service
obligations will be dependent upon our future performance, which will be subject
to financial, business and other factors affecting our operations, many of which
are beyond our control. On August 15, 2006, we are obliged to repay the full
remaining principal amount of the notes that have not been converted into our
common stock.
Securities we issue to fund our operations could dilute your ownership.
We may decide 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 that are favorable to you or us. 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. In particular,
our stock price declined significantly in the context of announcements made by
us and other semiconductor suppliers of reduced revenue expectations and of a
general slowdown in the markets we serve. Given these general economic
conditions and the reduced demand for our products that we have experienced, we
expect that our stock price will continue to be volatile.
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.
Securities class action litigation has often been instituted against a company
following periods of volatility and decline in the market price of their
securities. If instituted against us, regardless of the outcome, such litigation
could result in substantial costs and diversion of our management's attention
and resources and have a material adverse effect on our business, financial
condition and operating results. We could be required to pay substantial
damages, including punitive damages, if we were to lose such a lawsuit.
Provisions in our charter documents and Delaware law and our adoption of a
stockholder rights plan may delay or prevent acquisition of us, which could
decrease the value of our common stock.
30
Our certificate of incorporation and bylaws and Delaware law contain provisions
that could make it harder for a third party to acquire us without the consent of
our board of directors. Delaware law also imposes some restrictions on mergers
and other business combinations between us and any holder of 15% or more of our
outstanding common stock. In addition, our board of directors has the right to
issue preferred stock without stockholder approval, which could be used to
dilute the stock ownership of a potential hostile acquirer. Although we believe
these provisions of our certificate of incorporation and bylaws and Delaware law
and our stockholder rights plan will provide for an opportunity to receive a
higher bid by requiring potential acquirers to negotiate with our board of
directors, these provisions apply even if the offer may be considered beneficial
by some stockholders.
Our board of directors adopted a stockholder rights plan, pursuant to which we
declared and paid a dividend of one right for each share of common stock held by
stockholders of record as of May 25, 2001. Unless redeemed by us prior to the
time the rights are exercised, upon the occurrence of certain events, the rights
will entitle the holders to receive upon exercise thereof shares of our
preferred stock, or shares of an acquiring entity, having a value equal to twice
the then-current exercise price of the right. The issuance of the rights could
have the effect of delaying or preventing a change in control of us.
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.
Cash Equivalents, Short-term Investments and Investments in Bonds
and Notes:
We regularly maintain a short and long term investment portfolio of various
types of government and corporate bonds and notes. Our investments are made in
accordance with an investment policy approved by our Board of Directors.
Maturities of these instruments are less than 30 months with the majority being
within one year. To minimize credit risk, we diversify our investments and
select minimum ratings of P-1 or A by Moody's, or A-1 or A by Standard and
Poor's, or equivalent.
We classify these securities as held-to-maturity or available-for-sale depending
on our investment intention. Held-to-maturity investments are held at amortized
cost, while available-for-sale investments are held at fair market value.
Available-for-sale securities represented less than 18% of our investment
portfolio as of March 30, 2003.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate and credit rating 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. In addition, the value of all types of
securities may be impaired if bond rating agencies decrease the credit ratings
of the entities which issue those securities. 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 that have declined in market value because of changes in interest
rates or a decrease in credit ratings.
We do not attempt to reduce or eliminate our exposure to changes in interest
rates or credit ratings through the use of derivative financial instruments.
31
Based on a sensitivity analysis performed on the financial instruments held at
March 30, 2003 that are sensitive to changes in interest rates, the impact to
the fair value of our investment portfolio by an immediate hypothetical parallel
shift in the yield curve of plus or minus 50, 100 or 150 basis points would
result in a decline or increase in portfolio value of approximately $2.4
million, $4.8 million and $7.2 million respectively.
Other Investments:
Other investments at March 30, 2003 include a minority investment of
approximately 1.9 million shares of Sierra Wireless Inc., a publicly traded
company. These 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 income taxes.
Our other investments also include numerous strategic investments in privately
held companies or venture funds that are carried on our balance sheet at cost,
net of write-downs for non-temporary declines in market value. We expect to make
additional investments like these in the future. These investments are
inherently risky, as they typically are comprised of investments in companies
and partnerships 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. We could lose our
entire investment in these companies and partnerships or may incur an additional
expense if we determine that the value of these assets have been impaired.
Foreign Currency:
Our sales and corresponding receivables are made primarily in United States
dollars. We generate a significant portion of our revenues from sales to
customers located outside the United States including Canada, Europe, 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.
Through our operations in Canada and elsewhere outside the United States, we
incur research and development, customer support costs and administrative
expenses in Canadian and other foreign 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
our operating results 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. Because we do not engage in foreign
currency exchange rate fluctuation risk management techniques beyond these
periods, our cost structure is subject to long-term changes in foreign exchange
rates.
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.
32
We regularly analyze the sensitivity of our foreign exchange positions to
measure our foreign exchange risk. At March 30, 2003, a 10% shift in foreign
exchange rates would not have materially impacted our other income because our
foreign currency net asset position was immaterial.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our chief executive officer and our chief financial officer evaluated our
"disclosure controls and procedures" (as defined in Rule 13a-14(c) of the
Securities Exchange Act of 1934 (the "Exchange Act") as of a date within 90 days
before the filing date of this quarterly report. They concluded that as of the
evaluation date, our disclosure controls and procedures are effective to ensure
that information we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission rules and
forms.
Changes in internal controls
Subsequent to the date of their evaluation, there were no significant changes in
our internal controls or in other factors that could significantly affect these
controls. There were no significant deficiencies or material weaknesses in our
internal controls so no corrective actions were taken.
Part II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
o 10.1 1991 Employee Stock Purchase Plan, as amended
o 10.2 1994 Incentive Stock Plan, as amended
o 11.1 Calculation of income (loss) per share *1
o 99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
o 99.2 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
(b) Reports on Form 8-K -
- A Current Report on Form 8-K was filed on January 27, 2003 to report
fourth quarter and year end 2002 financial results and to report a corporate
restructuring.
- --------
*1 Refer to Note 5 of the financial statements included in Item I of Part I of
this Quarterly Report.
33
SIGNATURE
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 12, 2003 /S/ Alan F. Krock
------------ -----------------------------------------
Alan F. Krock
Vice President, Finance
Chief Financial Officer and
Principal Accounting Officer
34
CERTIFICATIONS
I, Robert L. Bailey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PMC-Sierra, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 /S/ Robert L. Bailey
------------ ---------------------------------
Robert L. Bailey
President and
Chief Executive Officer
35
I, Alan F. Krock, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PMC-Sierra, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 /S/ Alan F. Krock
------------ --------------------------------
Alan F. Krock
Vice President, Finance
Chief Financial Officer and
Principal Accounting Officer
36