UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 28, 1997
[ ] 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)
Delaware 94-2925073
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
105-8555 BAXTER PLACE
BURNABY, BRITISH COLUMBIA, V5A 4V7
CANADA
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (604) 415-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001
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 shorter 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
17, 1998, as reported by the Nasdaq National Market, was approximately
$845,732,084. Shares of Common Stock held by each executive officer and director
and by each person who owns 5% or more of the outstanding voting stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of February 17, 1998, the Registrant had 29,937,325 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1998 Annual Meeting
of Shareholders are incorporated by reference in Items 10, 11, 12
and 13 Part III of this Form 10-K Report.
<PAGE>
PART I
ITEM 1. Business.
General
PMC-Sierra, Inc. ("PMC" or the "Company") designs, develops, markets and
supports high-performance semiconductor system solutions for advanced
communications markets. The Company's products are used in broadband
communications infrastructures and high bandwidth networks. The Company is a
leading supplier of ATM, SONET/SDH, T1/E1 and D3/E3 integrated circuits in the
communications infrastructure and networking markets and also provides fast
ethernet integrated circuits to the networking markets. In August 1996 the
Company announced its decision to exit the personal computer modem chipset
business, to restructure its other non-networking products and focus on its
networking products. All of the Company's modem products were disposed of in
1997. The Company's remaining non-networking products are still being sold but
no development or follow-on products are planned.
The Company was incorporated in the State of California in 1983 and
reincorporated in the State of Delaware in 1997. All references to "PMC" or the
"Company" include the Company's subsidiaries, unless the context requires
otherwise. The Company's principal executive office is located at 105-8555
Baxter Place, Burnaby, B.C., Canada V5A 4V7. The Company's Common Stock trades
on the Nasdaq National Market under the symbol "PMCS."
Industry Background
There are three primary drivers of internetworking equipment demand which are
important to PMC-Sierra's semiconductor business: the Internet, the upgrade of
current corporate data networks and remote access.
The Internet and its increased usage by corporate and residential customers
through Internet Protocol ("IP"), is putting a great strain on the public wide
area network ("WAN") telecommunications infrastructure. This infrastructure
supports a worldwide hybrid network designed for both data and voice
communications. The Internet is driving a new wave of residential data traffic
carried over telephone modems and new high performance digital subscriber lines
("DSL"). The public WAN infrastructure, originally designed for Plain Old
Telephone Service ("POTS"), is now having to merge the increased data traffic
requirements of the corporate world as businesses upgrade their current low
speed Ethernet local area networks ("LANs") to much higher speed Fast Ethernet
and Gigabit Ethernet LANs. In addition, the trends toward mobile computing and
telecommuting are enabling new remote access equipment opportunities for Frame
Relay, Asynchronous Transfer Mode ("ATM") and cellular wireless services. All of
this voice and data traffic is delivered into the public core WAN for
transmission along its high bandwidth fiberoptic pipes.
The resultant total traffic increase far exceeds the bandwidth capacity deployed
in the core WAN. The mismatch between supply and demand of network bandwidth is
driving the design and manufacture of high performance internetworking
equipment. This equipment primarily makes more efficient use of existing network
pipe bandwidth while simultaneously supporting increased bandwidth resulting
from the deployment of more and larger pipes.
These trends are creating the following opportunities for PMC-Sierra's
internetworking semiconductor solutions:
- - A core WAN infrastructure is being developed to interface to existing
fiberoptic backbone pipes through the SONET/SDH transmission protocol.
SONET/SDH is a global transmission hierarchy designed to scale from 51
megabits to upwards of terabit rates. Key equipment being developed by
carrier telecommunication companies includes digital access cross connects
and core SONET/SDH switches.
- - For LAN corporate data networks, existing 10 megabit Ethernet workgroup
hubs are being upgraded to 10/100 megabit Ethernet workgroup switches with
advanced management features. These workgroup switches are in turn being
connected to advanced enterprise Ethernet switches that have the ability to
switch combinations of 100 megabit and 1 gigabit data traffic. A key
requirement of these LANs is the ability to provide for the connection of
this high speed Ethernet traffic into the core WAN backbone.
<PAGE>
- - For Remote Access data opportunities, Frame Relay networks are being
upgraded to carry and aggregate increased levels of traffic. Internet
Service Providers utilize multi-platform Point-of-Presence and Remote
Access Concentrator equipment to aggregate 64 kilobit DS0, n*64 kilobit
Fractional T1, 1.5 megabit T1, 2.0 megabit E1, 45 megabit T3 and 34 megabit
E3 data streams into larger pipes. The High-speed Data Link Control
("HDLC") protocol is essential to connect these low speed Frame Relay
streams into the core WAN backbone.
- - For data, voice and video traffic opportunities which require great
predictability, ATM networks are being created which can scale very
effectively from 1.5 megabits to 2.4 gigabits. ATM networks are very
valuable for edge and core network switching and transmission because they
offer a complete range of network services from direct connections and
guaranteed bandwidth for single protocol and multiprotocol traffic. The
fixed length ATM cell enhances effective connectivity of data, voice or
video traffic into the core WAN backbone.
- - The current Internet infrastructure is dominated by router entry into WAN
backbone fiberoptic pipes. There are certain cost and bandwidth sensitive
IP applications that will not require routing intelligence or ATM quality
of service. For these applications, IP-over-SONET is a new protocol for
more effective mapping of IP traffic into the Internet backbone using
existing WAN backbone pipes. IP-over-SONET is used in fast ethernet and
gigabit ethernet switches, high speed gigabit routers and remote access
concentrators to map IP, Ethernet and Frame Relay packets directly into
large SONET/SDH bandwidth pipes without direct routing or ATM cell
conversion.
- - For residential data opportunities that require greater than current 56
kilobit analog modem speed, new DSL technology enables up to several
megabits of bandwidth for Internet content download. Several versions of
DSL services are becoming available which seek to provide increased speed
in the downstream and upstream directions over current POTS phone wire. New
DSL access multiplexor equipment is being developed to aggregate this
increased residential IP data traffic into the WAN. ATM appears to be the
preferred vehicle for DSL to WAN connection.
- - Wireless voice and data opportunities are being generated by the
deployment of Base Transceiver Stations. These stations convert waves of
radio frequency air traffic into wireline backhaul pipes primarily at 1.5
megabit T1 and 2.0 megabit E1 rates. These backhaul pipes are aggregated
and networked by advanced Base Station Controllers that provide switching
capability and processing intelligence. HDLC and ATM protocols are
important for this equipment as they provide the interface and processing
for these pipes.
- - The Telecommunications Act of 1996 and other legislation have deregulated
the industry worldwide and spurred a rush of new competitive local exchange
carriers ("CLECs") which are competing with the incumbent local exchange
carriers ("ILECs"). In response, telecommunications companies and service
providers are now upgrading their current product offerings and developing
new products. Many traditional phone companies are now attempting to
provide additional data services to increase revenue and profit. Some CLECs
are also seeking an ownership position in "the local loop", the last mile
of copper phone wire to the customer's premise.
All of the above trends are driving a need for the effective convergence of data
and voice traffic from the LAN, customer premises and remote access into the
core WAN fiber backbones. The gateway into the WAN infrastructure is the
add-drop multiplexor ("ADM") which aggregates lower rate IP, Ethernet, ATM and
Frame Relay traffic and provides for more efficient provisioning into core WAN
fiber backbones.
Networking Products
PMC provides internetworking semiconductor devices and related technical service
and support to equipment manufacturers for use in their communications and
networking equipment. The Company's objective is to continue to develop
internetworking "systems on a chip" that enable network systems vendors to get
to market quickly with high performance, cost effective and scalable systems.
<PAGE>
PMC provides internetworking semiconductor solutions that address the industry
trends and span the key internetworking and communications equipment markets.
The Company's product offerings are grouped into four general areas: ATM,
Ethernet switching, Remote Access and SONET/SDH.
PMC provides the industry's largest and broadest array of merchant market ATM
semiconductor devices and believes it is the market leader in ATM physical layer
solutions. The S/UNI product line offers physical layer solutions in a range
from 1.5 megabits to 622 megabits. Single channel and Dual channel port
densities are available. LAN, Edge and WAN core ATM switch feature set options
are available. The company has also produced a line of RCMP ATM layer processors
that handle higher layer ATM protocol such as policing, operations and
management, fault and performance monitoring.
The Company has introduced a new line of Ethernet Switching products which
address 10 and 100 megabit as well as gigabit speeds. The ELAN 8-port 10 megabit
switch-on-a-chip and ELAN 10/100 megabit uplink/switch-on-a-chip products offer
an onboard central processing unit and a full range of firmware capable of
flexible management customization. Most recently the Company announced plans for
a next generation Ethernet switching architecture and connectivity bus design.
The new Exact chipset allows, at speeds reaching 32 gigabits per second,
switched LAN networks to scale from Layer 2 Ethernet bridging to complex Layer 3
routing with packet prioritization features along with added management as
desired.
In the Remote Access arena, the Company has responded to emerging telecom and
datacom opportunities with its line of T1/E1 framers and its newly introduced
line of high density Frame Relay and HDLC controllers. The Company introduced
the world's first 3.3 volt 8-channel T1 framer, the TOCTL, to complement its
already production released TQUAD quad-channel version. The single channel T1XC
combines digital framing technology with high performance analog line interface
technology. To meet European protocol standards, the Company has also introduced
E1 framing equivalents, the E1XC and EQUAD. The Freedm family of HDLC
controllers combine the industry's highest link density of 32 with the highest
channel density of 128 for Internet equipment requiring maximum T1 and E1
aggregation. The recent Quad-JET product introduction provides for effective
mapping between J2, E3 and T3 frame/packet environments and ATM cell
environments. Its four channel density is highly suitable for small access cards
which let ATM edge switches connect to Remote Access concentrator and
multiplexor equipment.
With demand increasing for framers, multiplexors, terminators and mappers,
SONET/SDH remains a core business of the Company. It will be important for the
company to provide new solutions which interface to SONET/SDH fiberoptic
backbone pipes. The Company's newest product introduction is the Spectra-155, a
highly integrated 155 megabit SONET/SDH telecom terminator which also provides
ability to map IP and datacom traffic into T3 45 megabit pipes.
User Interface Products
The Company restructured its product line to exit the modem chipset business and
discontinue development of its graphics, multimedia and custom chipsets. Modem
sales in 1997 were limited to the disposal of existing inventories which was
completed by mid year. Revenues from other user interface products have declined
rapidly and, due to the lack of any follow-on products, are expected to
experience a further significant decline in 1998.
Sales, Marketing and Distribution
The Company's sales and marketing strategy is to achieve design wins by
developing products with superior functionality. The Company maintains close
working relationships with its customers in order to design and develop
solutions which specifically address their needs. Technical support to customers
is provided through field application engineers, technical marketing and factory
systems engineers. The Company believes that providing equipment vendors with
comprehensive product service and support is critical to maintaining a
competitive position in the networking market and is critical to shortening
customers' design cycles. PMC sells its products primarily through independent
manufacturers' representatives and, to a lesser extent, distributors.
International sales were 30%, 53% and 39% of net revenues in 1997, 1996 and
1995, respectively.
<PAGE>
In 1997, the country purchasing the largest percentage of the Company's products
outside of the US was Canada at 10%. Indonesia, Thailand and Korea, which
experienced significant currency and economic fluctuations at the end of 1997,
accounted, in the aggregate, for less than 2% of the Company's revenues. The
higher percentage of international sales in 1996 and 1995 was principally the
result of modem products being sold to customers in the Far East. See "Risk
Factors - International Operations".
SCI Systems, Inc., an electronic manufacturing service provider for a number of
user interface and networking end customers, accounted for 18% of the Company's
1997 sales and less than 10% for 1996 and 1995. In 1997, 1996 and 1995, sales of
user interface products to Apple Computer accounted for 4%, 10% and 24%,
respectively, of the Company's net revenues.
Manufacturing
The Company relies on independent foundries and chip assemblers for the
manufacture of its products. The Company currently receives substantially all of
its wafers in finished form from Chartered Semiconductor Manufacturing Ltd.
("Chartered"), and Taiwan Semiconductor Manufacturing Corporation ("TSMC").
These independent foundries produce the Company's networking products at feature
sizes down to 0.35 micron. The Company believes that by using independent
foundries to fabricate its wafers, it is better able to concentrate its
resources on designing and testing new products and is able to avoid much of the
capital cost associated with owning and operating a fabrication facility.
The Company has wafer supply agreements with its foundry suppliers which include
deposits to secure access to wafer fabrication capacity. One of those supply
agreements was amended in the fourth quarter of 1996 while the other was
rewritten in the fourth quarter of 1996 and amended in the third quarter of
1997. Non-compliance with the terms of the agreements may be cause for
termination of the agreement by either party.
Wafers supplied by outside foundries must meet the Company's incoming quality
and test standards. The Company conducts the majority of its test operations on
advanced mixed signal and digital test equipment in its Burnaby, British
Columbia, Canada facility with the remainder tested by independent companies,
primarily in Asia. Tested wafers are assembled into packages by independent
suppliers, predominantly in Asia.
There are risks associated with outsourcing the manufacture and assembly of the
Company's products. See "Risk Factors - Access to Wafer Fabrication and Other
Manufacturing Capacity. " The Company has placed substantial deposits with its
independent foundry suppliers. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources. "
Research and Development
PMC believes that the continued introduction of new products in its target
markets is essential to its growth. PMC's current research and development
efforts focus on increasing the functionality and integration of its products.
The Company's research and development in the telecommunications infrastructure
and local area networking markets is targeted at increasing the speed at which
its chips operate, integrating multiple channels on single devices, and
broadening the portfolio of products which comply with the varying protocols in
these markets. As a result of the Company's decision to exit from the modem
chipset business, and the associated restructuring of the Company's
non-networking product operations, the Company has discontinued research and
development on any future modem and other non-networking products. The Company
expended $22.9 million, $29.4 million, and $23.4 million on research and
development in fiscal 1997, 1996 and 1995, respectively. The Company also
expensed $7.8 million of in process research and development in 1996 related to
its acquisition of certain assets of Bit, Inc. See "Consolidated Financial
Statements - Note 2"
There can be no assurance that any new products will be successfully developed
or will achieve market acceptance. A failure in any of these areas would have a
material and adverse affect on the Company. See "Risk Factors - Technological
Change."
<PAGE>
Backlog
Sales are made primarily pursuant to standard short-term purchase orders for
delivery of standard products. The quantity actually purchased by the customer,
as well as the shipment schedules, are frequently revised to reflect changes in
the customer's needs. As of December 31, 1997, the Company's backlog of products
scheduled for shipment within six months totaled $36.3 million. A significant
portion of the backlog may be cancelled without penalty at the discretion of the
customer. Accordingly, the Company believes that its backlog at any given time
is not a meaningful indicator of future revenues. The Company's 1996 backlog of
$38.3 million included products now discontinued and was calculated based on
purchase orders expected to ship within twelve months for semi-custom products
and within seven months for other products. The Company believes that the six
month horizon for inclusion in backlog is more appropriate for its changed mix
of business in 1997.
Competition
The semiconductor industry is intensely competitive and is characterized by
rapid technological change and by price erosion. The industry consists of major
domestic and international semiconductor companies, many of which have
substantially greater financial and other resources than the Company. Emerging
companies also provide significant competition in this segment of the
semiconductor market. The Company believes that its ability to compete
successfully in this market depends on a number of factors, including, among
others, the price, quality and performance of the Company's and its competitors'
products, the timing and success of new product introductions by the Company,
its customers and its competitors, the emergence of new standards, the
development of technical innovations, the ability to obtain adequate
manufacturing capacity, the efficiency of production, the rate at which the
Company's customers design the Company's products into their products, the
number and nature of the Company's competitors in a given market, the assertion
of the Company's and its competitors' intellectual property rights and general
market and economic conditions.
The Company's competitors in this market include, among others, Cypress
Semiconductor, Dallas Semiconductor, Galileo Technology, Integrated Device
Technology, Level One Communications, Lucent Technologies, MMC Networks,
Rockwell International, Siemens, Texas Instruments, and Transwitch. The number
of competitors in this market and the technology platforms on which their
products will compete may change in the future. It is likely that over the next
few years additional competitors will enter the market with new products. These
new competitors may have substantially greater financial and other resources
than the Company. Competition among manufacturers of semiconductors like the
Company's products typically occurs at the design stage, where the customer
evaluates alternative design approaches that require integrated circuits.
Because of shortened product life cycles and design-in cycles in certain of the
Company's customers products, the Company's competitors have increasingly
frequent opportunities to achieve design wins in next generation systems. Any
success by the Company's competitors in supplanting the Company's products would
have a material adverse effect on the Company.
Historically, average selling prices ("ASPs") in the semiconductor industry have
decreased over the life of the particular product. The willingness of
prospective customers to design the Company's products into their products
depends to a significant extent upon the ability of the Company to price its
products at a level that is cost effective for such customers. If the Company is
unable to reduce its costs sufficiently to offset declines in ASPs or is unable
to introduce new higher performance products with higher ASPs, the Company would
be materially and adversely affected. Any yield or other production problems,
shortages of supply that increase the Company's manufacturing costs, or failure
to reduce manufacturing costs, would have a material adverse effect on the
Company.
Licenses, Patents and Trademarks
The Company has granted Chartered Semiconductor a non-exclusive license to
manufacture and sell integrated circuits licensed for sale by PMC and integrated
circuits designed by Chartered Semiconductor or its parent company. Chartered
Semiconductor also has a worldwide non-exclusive right to manufacture digital
integrated circuits for third parties, unless PMC designed the circuit or
previously supplied the circuit to the customer. Chartered Semiconductor has
also licensed its manufacturing technology to PMC for non-exclusive use outside
Singapore. The license agreement expires in November 1999. Upon termination of
the agreement, the licenses to use the technology continue, but obligations to
update licensed technology terminate.
<PAGE>
The Company has several U.S. patents and a number of pending patent applications
in the U.S. and Europe. In addition to such factors as innovation, technological
expertise and experienced personnel, the Company believes that a strong patent
position is becoming increasingly important to compete effectively in the
industry and has an active program to acquire additional patent protection. The
Company applies for mask work protection on its circuit designs. The Company
attempts to protect its software, trade secrets and other proprietary
information by entering into proprietary information agreements with employees
and other security measures. Although the Company intends to protect its rights
vigorously, there can be no assurance that these measures will be successful.
See "Risk Factors - Patents and Proprietary Rights."
PMC and its logo are registered trademarks and service marks of the Company. The
Company owns other trademarks and service marks not appearing in this Form 10-K
Annual Report. Other trademarks used in this Form 10-K Annual Report are owned
by other entities.
Employees
As of December 31, 1997, the Company had 297 employees, including 136 in
research and development, 56 in production and quality assurance, 68 in
marketing and sales and 37 in administration. None of the Company's employees is
represented by a collective bargaining agreement, nor has the Company ever
experienced any work stoppage.
<PAGE>
RISK FACTORS
THE COMPANY'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE
SUBJECT TO A NUMBER OF RISKS, SOME OF WHICH ARE DESCRIBED BELOW. THE FACT THAT
SOME OF THE RISK FACTORS MAY BE THE SAME OR SIMILAR TO THOSE IN THE COMPANY'S
PAST SEC FILINGS MEANS ONLY THAT THE RISKS ARE PRESENT IN MULTIPLE PERIODS. THE
COMPANY BELIEVES THAT MANY OF THE RISKS DETAILED HERE AND IN THE COMPANY'S OTHER
SEC FILINGS ARE PART OF DOING BUSINESS IN THE FABLESS NETWORKING SEMICONDUCTOR
INDUSTRY AND WILL LIKELY BE PRESENT IN ALL PERIODS REPORTED. THE FACT THAT
CERTAIN RISKS ARE ENDEMIC TO THE INDUSTRY DOES NOT LESSEN THE SIGNIFICANCE OF
THE RISK.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this Report constitute "forward-looking statements" within
the meaning of the federal securities laws. The actual results, performance, or
achievements of the Company may be materially different from those expressed or
implied by such forward-looking statements. Reference to the Company includes
its subsidiary PMC-Sierra Ltd., a Canadian corporation and its other
subsidiaries. The forward-looking statements include projections relating to
trends in markets, revenues, particularly expectations of long-term revenues,
gross margin, and future expenditures on research and development, marketing,
general and administrative expense and the year 2000 issue. The Company
undertakes no obligation to release revisions to forward-looking statements to
reflect subsequent events.
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly and annual operating results may vary due to a number of
factors, including, among others, the timing of new product introductions,
decreased demand or average selling prices for products, market acceptance of
products, demand for products of the Company's customers, the introduction of
products or technologies by the Company's competitors, competitive pressure on
product pricing, the Company's and its customers' inventory levels of the
Company's products, product availability from outside foundries, variations in
manufacturing yields for the Company's products, expenditures for new product
and process development, the acquisition of wafer fabrication and other
manufacturing capacity, and the acquisition of businesses, products or
technologies. At various times in the past, the Company's foundry and other
suppliers have experienced lower than anticipated yields that have adversely
affected production and, consequently, the Company. There can be no assurance
that the Company's existing or future foundry and other suppliers will not
experience irregularities which could have a material adverse effect on the
Company. The Company from time to time may order in advance of anticipated
customer demand from its suppliers in response to anticipated long lead times to
obtain inventory and materials, which might result in excess inventory levels if
expected orders fail to materialize or other factors render the Company's
product or its customer's products less marketable. The Company's ability to
forecast sales of networking chips is limited due to customer uncertainty
regarding future demand for end-user networking equipment and price competition
in the market for networking equipment. Any delay or cancellation of existing
orders, or any decline in projected future orders, by the Company's customers
could have a material adverse effect on the Company. Margins will vary depending
on product mix. In the longer term, the Company may experience declining gross
profits as a percentage of total net revenues if anticipated decreases in
average selling prices of existing networking products are not offset by
commensurate reductions in product costs, or by an offsetting increase in gross
profit contribution from new, higher gross margin, networking products. The
Company is also affected by the state and direction of the electronics industry
and the economy in the United States and other markets the Company serves. The
occurrence of any of the foregoing or other factors could have a material
adverse effect on the Company. Due to these factors, past results may not be
indicative of future results.
<PAGE>
TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by evolving industry
standards, rapid technological change and product obsolescence. Technological
change may be particularly pronounced in the developing markets for
communications semiconductor devices used in high-speed networks. The Company's
future success will be highly dependent upon the timely completion and
introduction of new products at competitive price and performance levels. The
success of new products depends on a number of factors, including proper
definition of such products, successful and timely completion of product
development and introduction to market, correct judgment with respect to product
demand, market acceptance of the Company's and its customers' products,
fabrication yields by the Company's independent foundries and the continued
ability of the Company to offer innovative new products at competitive prices.
Many of these factors are outside the control of the Company. There can be no
assurance that the Company will be able to identify new product opportunities
successfully, develop and bring to market new products, achieve design wins or
be able to respond effectively to new technological changes or product
announcements by others. A failure in any of these areas would have a material
and adverse affect on the Company.
The Company's current strategy is focused on high-speed networking interface
chips. Products for telecommunications and data communications applications are
based on industry standards that are continually evolving. Future transitions in
customer preferences could quickly make the Company's products obsolete. A
material part of the Company's products are in the ATM telecommunications and
networking market, which is in an early stage of development. The emergence and
adoption of new industry standards that compete with ATM or maintenance by the
industry of existing standards in lieu of new standards could render the
Company's ATM products unmarketable or obsolete. The market for ATM equipment
has not developed as rapidly as industry observers have predicted, and
alternative networking technologies such as "fast ethernet" and "gigabit
ethernet" have developed to meet consumer requirements. A substantial portion of
the Company's development efforts are focused on ATM and related products. Net
revenues derived from sales of ATM, T1/E1, DS3/E3 and SONET/SDH based products
amounted to 67% and 33% of the Company's total net revenues in 1997 and 1996,
respectively. As a result of the Company's 1996 restructuring, revenues from
non-networking products have declined significantly over the last several
quarters, making the Company's results depend primarily on networking products.
The Company, through a business combination, acquired in-process research and
development and developed technology relating to ethernet switching in September
1996. During 1997, the Company announced a 100 Mbit/s fast ethernet switch on a
chip and an 8-port, 10 Mbit/s ethernet switch chip. Gigabit Ethernet switching
chips are in development. Ethernet switching is a new product area for the
Company and there can be no assurance that announced products or products in
development will have correctly anticipated the needs of the networking industry
or that they will receive sufficient design wins to achieve commercial success.
Many of the Company's products under development are complex semiconductor
devices that require extensive design and testing before prototypes can be
manufactured. The integration of a number of functions in a single chip or in a
chipset requires the use of advanced semiconductor manufacturing techniques.
This can result in chip redesigns if the initial design does not permit
acceptable manufacturing yields. The Company's products are often designed for
customers who in many instances have not yet fully defined their hardware
products. Design delays or redesigns by these customers could in turn delay
completion or require redesign of the semiconductor devices needed for the final
hardware product. In this regard, many of the relevant standards and protocols
for products based on high speed networking technologies have not been widely
adopted or ratified by the relevant standard-setting bodies. Redesigns or design
delays often are required for both the hardware manufacturer's products and the
Company's chips as industry and customer standards, protocols or design
specifications are determined. Any resulting delay in the production of the
Company's products could have a material adverse effect on the Company.
COMPETITION
The semiconductor industry is intensely competitive and is characterized by
rapid technological change and by price erosion. The industry consists of major
domestic and international semiconductor companies, many of which have
substantially greater financial and other resources than the Company. Emerging
companies also provide significant competition in this segment of the
semiconductor market. The Company believes that its ability to compete
successfully in this market depends on a number of factors, including, among
others, the price, quality and performance of the Company's and its competitors'
products, the timing and success of new product introductions by the Company,
its customers and its competitors, the emergence of new standards, the
development of technical innovations, the ability to obtain adequate
manufacturing capacity, the efficiency of production, the rate at which the
Company's customers design the Company's products into their products, the
number and nature of the Company's competitors in a given market, the assertion
of the Company's and its competitors' intellectual property rights and general
market and economic conditions.
<PAGE>
The Company's competitors in this market include, among others, Cypress
Semiconductor, Dallas Semiconductor, Galileo Technology, Integrated Device
Technology, Level One Communications, Lucent Technologies, MMC Networks,
Rockwell International, Siemens, Texas Instruments, and Transwitch. The number
of competitors in this market and the technology platforms on which their
products will compete may change in the future. It is likely that over the next
few years additional competitors will enter the market with new products. These
new competitors may have substantially greater financial and other resources
than the Company. Competition among manufacturers of semiconductors like the
Company's products typically occurs at the design stage, where the customer
evaluates alternative design approaches that require integrated circuits.
Because of shortened product life cycles and design-in cycles in certain of the
Company's customers products, the Company's competitors have increasingly
frequent opportunities to achieve design wins in next generation systems. Any
success by the Company's competitors in supplanting the Company's products would
have a material adverse effect on the Company.
Historically, average selling prices ("ASPs") in the semiconductor industry have
decreased over the life of the particular product. The willingness of
prospective customers to design the Company's products into their products
depends to a significant extent upon the ability of the Company to price its
products at a level that is cost effective for such customers. If the Company is
unable to reduce its costs sufficiently to offset declines in ASPs or is unable
to introduce new higher performance products with higher ASPs, the Company would
be materially and adversely affected. Any yield or other production problems,
shortages of supply that increase the Company's manufacturing costs, or failure
to reduce manufacturing costs, would have a material adverse effect on the
Company.
ACCESS TO WAFER FABRICATION AND OTHER MANUFACTURING CAPACITY
The Company does not own or operate a wafer fabrication facility, and all of its
semiconductor device requirements are supplied by outside foundries.
Substantially all of the Company's semiconductor products are currently
manufactured by third party foundry suppliers. The Company's foundry suppliers
fabricate products for other companies and produce products of their own design.
The Company's reliance on independent foundries involves a number of risks,
including the absence of adequate capacity, the unavailability of or
interruptions in access to certain process technologies and reduced control over
delivery schedules, manufacturing yields and costs. In the event that these
foundries are unable or unwilling to continue to manufacture the Company's
products in required volumes, the Company will have to identify and qualify
acceptable additional or alternative foundries. This qualification process could
take six months or longer. No assurance can be given that any such source would
become available to the Company or that any such source would be in a position
to satisfy the Company's production requirements on a timely basis, if at all.
Any significant interruption in the supply of semiconductors to the Company
would result in the allocation of products to customers, which in turn could
have a material adverse effect on the Company.
All of the Company's semiconductor products are assembled by sub-assemblers in
Asia. Shortages of raw materials or disruptions in the provision of services by
the Company's assembly houses or other circumstances that would require the
Company to seek additional or alternative sources of supply or assembly could
lead to supply constraints or delays in the delivery of the Company's products.
Such constraints or delays may result in the loss of customers or other adverse
effects on the Company. The Company's reliance on independent assembly houses
involves a number of other risks, including reduced control over delivery
schedules, quality assurances and costs, the possible discontinuance of such
contractors' assembly processes and fluctuations of regional economies. Any
supply or other problems resulting from such risks would have a material adverse
effect on the Company.
<PAGE>
CUSTOMER CONCENTRATION
The Company has no long-term volume purchase commitments from any of its major
customers. The Company has only one customer that accounted for more than 10% of
its 1997 revenues, but depends on a limited number of customers for a major
portion of its revenues.
The reduction, delay or cancellation of orders from one or more significant
customers could have a material and adverse affect on the Company. Due to the
relatively short product life cycles in the telecommunications and data
communications markets, the Company would be materially and adversely affected
if one or more of its significant customers were to select devices manufactured
by one of the Company's competitors for inclusion in future product generations.
There can be no assurance that the Company's current customers will continue to
place orders with the Company, that orders by existing customers will continue
at the levels of previous periods, or that the Company will be able to obtain
orders from new customers. Loss of one or more of the Company's current
customers or a disruption in the Company's sales and distribution channels could
have a material and adverse affect on the Company.
INTERNATIONAL OPERATIONS
In fiscal years 1997, 1996 and 1995, international sales accounted for
approximately 30%, 53% and 39% of the Company's net revenues, respectively. The
Company's networking products must accommodate numerous worldwide communications
standards and sales to US based customers are often for products that they in
turn export worldwide. The Company expects that international sales will
continue to represent a significant portion of the Company's and its customers'
net revenues for the foreseeable future. The majority of the Company's
development, test, marketing and administrative functions occur in Canada. In
addition, substantially all of the Company's products are manufactured,
assembled and tested by independent third parties in Asia. Due to its reliance
on international sales and operations, the Company is subject to the risks of
conducting business outside of the United States. These risks include unexpected
changes in, or impositions of, legislative or regulatory requirements and policy
changes affecting the telecommunications and data communications markets, delays
resulting from difficulty in obtaining export licenses for certain technology,
tariffs, quotas, exchange rates and other trade barriers and restrictions,
longer payment cycles, greater difficulty in accounts receivable collection,
potentially adverse taxes, the burdens of complying with a variety of foreign
laws and other factors beyond the Company's control. The Company is also subject
to general geopolitical risks in connection with its international operations,
such as political, social and economic instability, potential hostilities and
changes in diplomatic and trade relationships. Sales of the Company's networking
products are denominated in U.S. dollars as are costs related to the manufacture
and assembly of products by the Company's Asian suppliers. Costs related to the
majority of the Company's development, test, marketing and administrative
functions are denominated in Canadian dollars. Selling costs are denominated in
a variety of currencies. As a result, the Company is subject to the risks of
currency fluctuations. There can be no assurance that one or more of the
foregoing factors will not have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the continued
services of its key technical personnel, particularly those highly skilled at
the design and test functions involved in the development of high speed
networking products and related software. The competition for such employees is
intense. The Company has no employment agreements in place with these key
personnel. However, the Company from time to time issues shares of Common Stock
or options to purchase Common Stock of the Company subject to vesting. To the
extent shares purchased from or options granted by the Company have economic
value, these securities could create retention incentives. The loss of the
services of one or more of these key personnel, and any difficulties the Company
may experience in hiring qualified replacements, would have a material and
adverse affect on the Company.
<PAGE>
PATENTS AND PROPRIETARY RIGHTS
The Company's ability to compete is affected by its ability to protect its
proprietary information. The Company relies on a combination of patents,
trademarks, copyrights, trade secret laws, confidentiality procedures and
licensing arrangements to protect its intellectual property rights. The Company
currently holds several patents and has a number of pending patent applications.
There can be no assurance that patents will be issued from any of the Company's
pending applications or that any claims allowed will be of sufficient scope or
strength, or be issued in all countries where the Company's products can be
sold, to provide meaningful protection or any commercial advantage to the
Company. In addition, competitors of the Company may be able to design around
the Company's patents. The laws of certain foreign countries in which the
Company's products are or may be developed, manufactured or sold, including
various countries in Asia, may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's technology and
products more likely. There can be no assurance that the steps taken by the
Company to protect its proprietary information will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights or positions, which have resulted in significant
and often protracted and expensive litigation. The Company or its customers or
foundries have in the past, and may from time to time in the future, be notified
of claims that the Company may be infringing patents or other intellectual
property rights owned by third parties. If it is necessary or desirable, the
Company may seek licenses under patents or intellectual property rights. There
can be no assurance that licenses will be available or that the terms of any
offered license will be acceptable to the Company. Failure to obtain a license
from a third party for technology used by the Company could cause the Company to
incur substantial liabilities and to suspend the manufacture of products or the
use by the Company's foundry suppliers requiring the technology. In the past,
the Company's customers have been required to obtain licenses from and pay
royalties to third parties for the sale of systems incorporating the Company's
semiconductor devices. If this occurs in the future, the customers' businesses
may be materially and adversely affected, which in turn would have a material
and adverse affect on the Company. The Company has provided its customers with
indemnity up to the dollar amount of their purchases of any Company products
found to be infringing on technology owned by third parties. Although the
Company discontinued the practice of indemnifying its customers in December of
1997, third party or customer claims may still be made against the Company with
respect to the infringement of the technology of third parties. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation by or against the Company could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation results in a
favorable determination for the Company. In the event of an adverse result in
any such litigation, the Company could be required to pay substantial damages,
cease the manufacture, use and sale of infringing products, spend significant
resources to develop non-infringing technology, discontinue the use of certain
processes or obtain licenses to the infringing technology. There can be no
assurance that the Company would be successful in such development or that such
licenses would be available on reasonable terms, or at all, and any such
development or license could require expenditures by the Company of substantial
time and other resources. Patent disputes in the semiconductor industry have
often been settled through cross-licensing arrangements. Because the Company
currently does not have a substantial portfolio of patents, the Company may not
be able to settle an alleged patent infringement claim through a cross-licensing
arrangement. Any successful third party claim against the Company or its
customers for patent or intellectual property infringement could have a material
adverse effect on the Company.
ACQUISITIONS
The Company's strategy may involve, in part, acquisitions of products,
technologies or businesses from third parties. Identifying and negotiating these
acquisitions may divert substantial management time away from the Company's
operations. An acquisition could absorb substantial cash resources, could
require the Company to incur or assume debt obligations, or could involve the
issuance of additional equity securities of the Company. The issuance of
additional equity securities could dilute, and could represent an interest
senior to the rights of, then outstanding PMC common stock. An acquisition which
is accounted for as a purchase, like the acquisition of the Canadian networking
business in 1994 and the acquisition of certain assets of Bipolar Integrated
Technology, ("Bit") in September 1996, could involve significant one-time
write-offs, and could involve the amortization of goodwill over a number of
years, which would adversely affect earnings in those years. Any acquisition
will require attention from the Company's management to integrate the acquired
entity into the Company's operations, may require the Company to develop
expertise outside its existing businesses and may result in departures of
management of the acquired entity. An acquired entity may have unknown
liabilities, and its business may not achieve the results anticipated at the
time of the acquisition.
<PAGE>
FUTURE CAPITAL NEEDS
The Company must continue to make significant investments in research and
development as well as capital equipment and expansion of facilities for
networking products. The Company's future capital requirements will depend on
many factors, including, among others, product development, investments in
working capital, and acquisitions of complementary businesses, products or
technologies. To the extent that existing resources and future earnings are
insufficient to fund the Company's operations, the Company may need to raise
additional funds through public or private debt or equity financings. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of current stockholders will be reduced and such equity
securities may have rights, preferences or privileges senior to those of the
holders of the Company's Common Stock. No assurance can be given that additional
financing will be available or that, if available, it can be obtained on terms
favorable to the Company and its stockholders. If adequate funds are not
available, the Company may be required to delay, limit or eliminate some or all
of its proposed operations.
VOLATILITY OF STOCK PRICE
Factors such as announcements of the introduction of new products by the Company
or its competitors, quarterly fluctuations in the Company's financial results or
the financial results of other semiconductor companies or of companies in the
personal computer industry, general conditions in the semiconductor industry and
conditions in the worldwide financial markets have, in the past, caused the
price of the Company's Common Stock to fluctuate substantially, and may do so in
the future. In addition, increases in the Company's stock price and expansion of
its price-to-earnings multiple may have made it attractive to so-called momentum
investors. Momentum investors are generally thought to shift funds into and out
of stocks rapidly, exacerbating price fluctuations in either direction. The
price of the Company's stock may also be impacted by investor sentiment toward
technology stocks, in general, which often is unrelated to the operating
performance of a specific company.
YEAR 2000 COMPUTER SYSTEMS ISSUES
The Company is aware of the issues associated with the limitations of the
programming code in many existing computer systems, whereby the computer systems
may not properly recognize date sensitive information as the next millennium
(year 2000) approaches. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail, resulting in
disruptions of the Company's operations. The Company uses commercially available
standard software for its critical operating and financial applications. One
vendor of software used by the Company is still modifying its code to become
year 2000 compliant and anticipates completion in 1998. If the vendor does not
successfully modify its code the Company could be forced to purchase a competing
system that is year 2000 compliant and incur installation and other costs in
order to mitigate the Year 2000 Issue. The installation of a replacement system
for those applications that are currently not year 2000 compliant is not
anticipated to be material to the Company's financial position or results of
operations in any given year.
The Company's suppliers and customers are generally much larger organizations
than the Company with a greater number of suppliers and customers of their own.
The Company believes that many of its suppliers and customers have not completed
their own systems modification to be year 2000 compliant. The failure of
significant suppliers or customers of the Company to become year 2000 compliant
could have material adverse consequences to the Company. Those consequences
could include the inability to receive product in a timely manner or lost sales
opportunities either of which could result in a material decline in the
Company's revenues and profits. In addition, there can be no guarantee that a
conversion by a third party's system on which the Company's systems rely would
be compatible with the Company's systems.
ITEM 2. Properties.
The Company occupies approximately 85,000 square feet of leased office space at
its headquarters in Burnaby, B.C., Canada for its testing, administration, sales
and marketing and design and engineering operations. This facility is leased
through April 2001. The Company has also leased approximately 9,000 square feet
of office space in Beaverton, Oregon through to March 1999. PMC also leases
offices for its staff in California, Massachusetts, North Carolina, Texas,
California, Ontario (Canada), Quebec (Canada), Barbados and England.
ITEM 3. Legal Proceedings.
Not applicable.
ITEM 4. Submission of matters to a vote of Security Holders.
Not applicable.
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Stock Price Information. The Company's Common Stock trades on the Nasdaq
National Market under the symbol PMCS. The following table sets forth, for the
periods indicated, the high and low closing sale prices for the Company's Common
Stock as reported by the Nasdaq National Market:
1996 High Low
First Quarter...................................... $24.75 $11.38
Second Quarter..................................... 20.88 11.00
Third Quarter...................................... 13.75 8.38
Fourth Quarter..................................... 17.50 12.00
1997 High Low
First Quarter...................................... $18.13 $13.88
Second Quarter..................................... 26.38 13.88
Third Quarter...................................... 35.13 24.50
Fourth Quarter..................................... 31.88 22.00
The information provided above is based on the beginning and end of each
calendar quarter.
As of February 17, 1998, there were approximately 456 holders of record of the
Company's Common Stock.
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings, if any, for use in its business and does
not anticipate paying any cash dividends in the foreseeable future. The
Company's current bank credit agreement prohibits the payment of cash dividends.
<PAGE>
<TABLE>
ITEM 6. Selected Financial Data.
Summary Consolidated Financial Data
(in thousands, except for per share data)
<CAPTION>
Year Ended December 31,(1) (2)
------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1997 (3) 1996 (4) 1995 (5) 1994 (6) 1993 (7)
<S> <C> <C> <C> <C> <C>
Net revenues $ 127,166 $ 188,371 $ 188,724 $ 104,764 $ 83,360
----------- ------------ ------------ ------------ -----------
Gross profit 94,101 93,423 91,614 46,960 37,660
Research and development 22,880 29,350 23,428 15,702 15,439
In process research and development - 7,783 - 12,748 -
Marketing, general and administrative 23,663 30,691 30,051 23,683 22,487
Purchase price adjustment - compensation - - 10,624 - -
Restructuring and other charges (1,383) 64,670 - (1,559) 12,669
----------- ------------ ------------ ------------ -----------
Income (loss) from operations 48,941 (39,071) 27,511 (3,614) (12,935)
=========== ============ ============ ============ ===========
Income (loss) from continuing operations 34,258 (48,150) 23,976 (7,916) (12,983)
Loss from discontinued operations - - (22,497) (666) -
----------- ------------ ------------ ------------ -----------
Net income (loss) $ 34,258 $ (48,150) $ 1,479 $ (8,582) $ (12,983)
=========== ============ ============ ============ ===========
Basic net income (loss) per share: (8)
from continuing operations $ 1.10 $ (1.62) $ 0.89 $ (0.36) $ (0.64)
from discontinued operations $ - $ - $ (0.83) $ (0.03) $ -
----------- ------------ ------------ ------------ -----------
Net income (loss) $ 1.10 $ (1.62) $ 0.06 $ (0.39) $ (0.64)
=========== ============ ============ ============ ===========
Diluted net income (loss) per share: (8)
from continuing operations $ 1.05 $ (1.62) $ 0.84 $ (0.36) $ (0.64)
from discontinued operations $ - $ - $ (0.79) $ (0.03) $ -
----------- ------------ ------------ ------------ -----------
Net income (loss) $ 1.05 $ (1.62) $ 0.05 $ (0.39) $ (0.64)
=========== ============ ============ ============ ===========
Shares used to calculate:
Basic net income (loss) per share 31,043 29,719 27,018 22,030 20,222
Diluted net income (loss) per share 32,642 29,719 28,620 22,030 20,222
As of December 31,(1) (2)
------------------------------------------------------------------------------
BALANCE SHEET DATA: 1997 1996 1995 1994 1993
Cash, cash equivalents and short-term investments $ 69,240 $ 42,062 $ 45,937 $ 15,830 $ 21,693
Working capital 58,595 20,438 32,741 23,813 14,803
Total assets 149,378 129,914 184,860 85,959 71,850
Long term debt (including current portion) 13,744 24,637 12,718 9,069 11,872
Shareholders' equity 90,565 48,444 81,000 34,865 40,153
<FN>
(1) The Company's fiscal year ends on the Sunday closest to December 31.
December 31 has been used as the fiscal year end for ease of presentation.
See Note 1 to Consolidated Financial Statements.
(2) For 1995, amounts related to Prometheus previously reported within net
revenues were $19.0 million; gross profit (loss) was ($0.1) million; and
net profits were ($4.6) million. For 1994, net revenues were $3.8 million;
gross profit was $0.3 million; and net loss was ($0.7) million. All
previously reported amounts have been included in "Loss from discontinued
operations". Net revenues, gross profit, research and development, and
marketing, general and administrative expenses have been restated to
exclude amounts relating to Prometheus Products, Inc. Balance sheet data
has been restated to exclude amounts relating to Prometheus.
(3) Results for the year ended December 31, 1997 include a recovery of $1.4
million from the reversal of the excess accrued restructure charge
resulting from the conclusion of the restructuring.
(4) Results for the year ended December 31, 1996 include a restructuring charge
of $69.4 million related to Company's exit from the modem chipset business
and the associated restructuring of its non-networking operations. $4.7
million of this charge was recorded in cost of sales as an inventory write
down, and $64.7 million was recorded as a restructuring cost in operating
expenses. An in process research and development charge of $7.8 million was
recorded in the third quarter for the acquisition of ethernet switching
technology and other assets from Bipolar Integrated Technology. Results of
operations include costs of continuing the development of ethernet
switching products and related activities from the date of the acquisition
on September 3, 1996.
(5) Results for the year ended December 31, 1995 include the loss from
discontinued operations related to Prometheus Products, Inc. of $22.5
million, purchase price adjustment relating to the finalization of the
acquisition of the Company's Canadian networking product operations of
$10.6 million, and gain on sale of shares of SiTel Sierra B.V.
of $6.7 million.
(6) Results for the year ended December 31, 1994 include the operations of the
networking business from the date of acquisition, September 2, 1994, and
include in process research and development of $12.7 million, settlement of
the class action lawsuit of $2.4 million, reversal of restructuring and
other charges of $1.6 million and a loss from discontinued operations of
Prometheus of $0.7 million.
(7) Results for the year ended December 31, 1993 include restructuring and
other charges of $15.6 million. (8) Share and per share information has
been adjusted for the 2 for 1 stock split effective October 5, 1995.
</FN>
</TABLE>
<PAGE>
Quarterly Comparisons
The following tables set forth consolidated statements of operations for each of
the Company's last eight quarters and the percentage of the Company's net
revenues represented by each line item reflected in each consolidated statement
of operations. This quarterly information is unaudited and has been prepared on
the same basis as the annual consolidated financial statements. In management's
opinion, this quarterly information reflects all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
information for the periods presented. The operating results for any quarter are
not necessarily indicative of results for any future period.
<TABLE>
Quarterly Data (Unaudited)
(in thousands, except per share data)
<CAPTION>
Year Ended December 31, 1997 (1) Year Ended December 31, 1996 (2)
----------------------------------------- -------------------------------------------
Fourth Third Second First Fourth Third Second First
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 31,713 $ 27,815 $ 34,064 $ 33,574 $ 36,227 $ 34,726 $ 53,022 $ 64,396
---------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit 24,170 21,757 24,451 23,723 21,679 13,790 27,665 30,289
Research and development 6,395 5,136 5,309 6,040 5,979 7,080 7,885 8,406
In process research and development - - - - - 7,783 - -
Marketing, general and administrative 5,013 5,735 6,614 6,301 5,778 7,406 8,842 8,665
Restructuring and other charges (1,383) - - - - 64,670 - -
---------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations 14,145 10,886 12,528 11,382 9,922 (73,149) 10,938 13,218
========== ======== ========== ========== ========== ========== ========== ==========
Net income (loss) $ 9,556 $ 7,291 $ 8,931 $ 8,480 $ 9,120 $ (73,294) $ 7,198 $ 8,826
========== ======== ========== ========== ========== ========== ========== ==========
Basic net income (loss) per share $ 0.30 $ 0.23 $ 0.29 $ 0.28 $ 0.30 $ (2.46) $ 0.25 $ 0.30
Common shares outstanding (3) 31,334 31,146 30,918 30,774 30,509 29,782 29,355 29,231
Diluted net income (loss) per share $ 0.29 $ 0.22 $ 0.28 $ 0.27 $ 0.29 $ (2.46) $ 0.24 $ 0.29
Common shares outstanding assuming dilution 33,111 33,188 32,374 31,895 31,655 29,782 30,578 30,790
As a Percentage of Net Revenues (Unaudited)
Year Ended December 31, 1997 (1) Year Ended December 31, 1996 (2)
---------------------------------------- ------------------------------------------
Fourth Third Second First Fourth Third Second First
Net revenues 100% 100% 100% 100% 100% 100% 100% 100%
Gross profit 76% 78% 72% 71% 60% 40% 52% 47%
Research and development 20% 18% 16% 18% 17% 20% 15% 13%
In process research and development - - - - - 22% - -
Marketing, general and administrative 16% 21% 19% 19% 16% 21% 17% 14%
Restructuring and other charges (4%) - - - - 186% - -
Income (loss) from operations 45% 39% 37% 34% 27% (211%) 21% 21%
<FN>
(1) Results for the year ended December 31, 1997 include a restructuring charge
recovery of $1.4 million from the reversal of the excess accrued
restructure charge from the conclusion of the restructuring in the fourth
quarter.
(2) Results for the year ended December 31, 1996 include a restructuring charge
of $69.4 million in the third quarter related to the Company's exit from
the modem chipset business and the associated restructuring of its
non-networking operations. $4.7 million of this charge was recorded in cost
of sales as an inventory write down, and $64.7 million was recorded as a
restructuring cost in operating expenses. An in process research and
development charge of $7.8 million was recorded in the third quarter for
the acquisition of ethernet switching technology and other assets from Bit,
Inc. Results of operations include costs of continuing the development of
ethernet switching products and related activities from the date of the
acquisition on September 3, 1996.
(3) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic
net income (loss) per share.
</FN>
</TABLE>
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Description of Forward-looking Statements. This portion of this Annual Report
contains forward-looking statements relating to revenues, gross margins,
expenditures on research and development, and sufficiency of capital resources.
Actual results may differ from those projected in the forward-looking statements
for a number of reasons, including those described in "Risk Factors."
General. PMC designs, develops, markets and supports high-performance silicon
solutions for advanced communications markets. The Company's products are used
in the broadband communications infrastructure and high bandwidth networks. In
the third quarter of 1996, the Company announced its decision to exit from the
personal computer modem chipset business, to restructure its non-networking
operations and to focus on its networking semiconductor businesses. Consistent
with this strategy, the Company acquired, in the third quarter of 1996, ethernet
switching assets, intellectual property and certain other assets from Bipolar
Integrated Technology ("Bit"). In the fourth quarter of 1995, the Company
discontinued operations of Prometheus Products Inc. ("Prometheus").
Results of Operations
Net Revenues ($000,000)
<TABLE>
<CAPTION>
1997 Change 1996 Change 1995
---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Networking products $85.6 36% $62.8 60% $39.2
User interface - other $35.7 (46%) $66.6 (28%) $92.8
User interface - modem $5.9 (90%) $59.0 4% $56.7
----------- ---------- ---------
Total net revenues $127.2 (32%) $188.4 - $188.7
=========== ========== =========
</TABLE>
Net revenues declined 32% in 1997 as a result of the Company's third quarter
1996 strategic decision to exit the modem chipset business, restructure its
other non-networking business and to focus on its networking semiconductor
business.
Networking product revenue grew 36% in 1997 compared to 1996 due to the
continued strong demand for the broadband networking equipment in which the
Company's products are used. Industry analysts expect sales of networking
equipment to increase in the coming year. The Company expects that if such
increase occurs, the Company's revenues from networking products will increase.
Revenue from products classified as User Interface - other, which include
custom, graphic, and other semiconductors declined 46% in 1997 from 1996 levels.
The Company is supporting these products for its existing customers, but has
decided not to do any follow on products of this type. Further substantial
declines are expected in User Interface-other revenue in the coming year.
The disposal of the Company's modem chipset inventories and the exit from that
business was completed in 1997. No future revenues are expected from that
business.
Net revenues in 1996 remained approximately at the same level as 1995 revenues.
Substantial growth in sales of networking products, and a small increase in
modem chipset product sales, were offset by declines in other user interface
products, which were primarily due to lower sales of graphic chip products. The
small increase in 1996 modem chipset sales over 1995 resulted from increased
unit sales of both V.34 and V.32 modem products in the first half of the year,
while in the second half of the year the Company experienced declining unit
sales and substantially lower prices for modem products.
<PAGE>
Gross Profit ($000,000)
<TABLE>
<CAPTION>
1997 Change 1996 Change 1995
---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Networking products $68.9 48% $46.4 58% $29.3
Percentage of net networking revenues 80% 74% 75%
User interface products $25.2 (46%) $47.0 (25%) $62.3
Percentage of net user interface revenues 61% 37% 42%
Total gross profit $94.1 1% $93.4 2% $91.6
Percentage of net revenues 74% 50% 49%
</TABLE>
Total gross profit increased from 1996 to 1997 as a result of increased sales of
higher gross margin networking products offsetting the decline in gross profit
due to lower revenues from the Company's user interface products and due to
lower wafer costs in 1997 than in the prior year.
User interface gross profit in 1996 was reduced by a $4.7 million inventory
charge related to the Company's decision to exit the modem chipset business.
Gross profits on user interface products in 1997, which includes the gross
profits from modem chipset sales, as well as the gross profits on sales from
other non-networking products, were higher than historical levels due to the
sales and cost of sales of modem chipset inventories. In establishing its
reserve for the write down of its modem chipset inventories, the Company took
into account both the costs of completion and disposal in revaluing the
inventory to the lower of cost or market. The higher amount of gross profit
recognized during the first half of 1997 and included in the 1997 results
represents the amount necessary to cover the relatively higher period expenses
incurred relating to the disposal effort. There was no operating profit
recognized from the sale of modem chipset products.
Total gross profit increased from 1995 to 1996 as a result of increased sales of
higher gross margin networking products as a percentage of total net revenues.
The Company expects that networking gross profits as a percentage of networking
net revenues may experience a decline if anticipated decreases in average
selling prices of existing networking products are not offset by commensurate
reductions in production costs, or by an offsetting increase in gross profit
contribution from new higher gross margin networking products.
Other Costs and Expenses ($000,000)
<TABLE>
<CAPTION>
1997 Change 1996 Change 1995
---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Research and development $22.9 (22%) $29.4 26% $23.4
Percentage of net revenues 18% 16% 12%
In-process research & development - - $7.8 - -
Percentage of net revenues - 4% -
Marketing, general & administrative $23.7 (23%) $30.7 2% $30.1
Percentage of net revenues 19% 16% 16%
Purchase price adjustment-compensation - - - - $10.6
Percentage of net revenues - - 6%
Restructure costs $(1.4) - $64.7 - -
Percentage of net revenues (1%) 34% -
</TABLE>
Research and Development. Research and development expenses decreased in 1997
primarily due to the discontinuance of spending on user interface products,
partially offset by increased spending on networking products. As a percentage
of net revenues, research and development spending on the company's networking
products is higher in all periods than research and development spending on the
Company's user interface products. The increase in research and development
spending in 1996 over 1995 was primarily due to greater spending on the
development of networking products. The Company expects research and development
costs to increase in the future with all spending related to its networking
products.
<PAGE>
In Process Research and Development. In process research and development charges
incurred in 1996 are a result of the acquisition of the ethernet switching and
other assets from Bit.
Marketing, General, and Administrative. Marketing, general and administrative
expenses declined primarily due to the reduction in expenses and personnel
resulting from the third quarter 1996 restructuring of the non-networking
operations. The increase in these expenses as a percentage of net sales reflects
increased spending on networking products and a decline in total net revenues.
Spending on marketing, general and administrative expenses did not change
substantially between 1995 and 1996 as increases related to its networking
products, primarily related to increased staffing, were offset by declines in
these expenses and the headcount of user interface groups due to the
restructuring.
Purchase Price Adjustment. In completing the acquisition of the networking
business in the third quarter of 1995, the Company recorded a $10.6 million
charge relating to the compensation expense associated with the purchase price
adjustment shares reserved for issuance to the employee shareholders of the
acquired business. The $9.1 million balance of the acquisition cost was
allocated to goodwill. (See Note 2 to Consolidated Financial Statements.)
Restructure and Other Costs. 1996 restructure costs are part of a $69.4 million
charge recorded in connection with the Company's decision to exit from the modem
chipset business and the associated restructuring of the Company's other
non-networking product operations. All material aspects of the restructuring
were completed by the end of 1997 when the Company recorded a recovery of $1.4
million from the reversal of the excess accrued restructure charge. (See Note 11
to Consolidated Financial Statements).
Year 2000 Computer Systems Issues. The Company is aware of the issues associated
with the limitations of the programming code in many existing computer systems,
whereby the computer systems may not properly recognize date sensitive
information as the next millennium (year 2000) approaches. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company uses commercially available standard software for
its critical operating and financial applications. One vendor of software used
by the Company is still modifying its code to become year 2000 compliant and
anticipates completion early in 1998. If the vendor does not successfully modify
its code the Company could be forced to purchase a competing system that is year
2000 compliant and incur installation and other costs. The installation of a
replacement system for those applications that are currently not year 2000
compliant is not anticipated to be material to the Company's financial position
or results of operations in any given year.
The Company's suppliers and customers are generally much larger organizations
than the Company with a greater number of suppliers and customers of their own.
The Company believes that many of its suppliers and customers have not completed
their own systems modification to be year 2000 compliant. The failure of
significant suppliers or customers of the Company to become year 2000 compliant
could have material adverse consequences to the Company. Those consequences
could include the inability to receive product in a timely manner or lost sales
opportunities either of which could result in a material decline in the
Company's revenues and profits.
Interest Income, Net ($000,000)
1997 Change 1996 Change 1995
---- ------ ---- ------ ----
Interest income (expense), net $1.0 54% $0.7 37% $0.5
Percentage of net revenues 0.8% 0.4% 0.3%
Interest Income, net. Interest income increased in 1997 and 1996 due to higher
cash balances available to invest and earn interest. Interest expense increased
in 1997 and 1996 due principally to increased debt associated with capital lease
obligations.
Gain on sale of SiTel Sierra. During the fourth quarter of 1995, the Company
sold its interest in SiTel-Sierra, B.V. to National Semiconductor Corporation
for $7.0 million in cash. This transaction resulted in a pre-tax gain of $6.7
million. The Company acquired its shares of SiTel-Sierra, B.V., a joint venture
with TriTech Microelectronics Pte. Ltd. of Singapore, in 1994 in exchange for
the contribution of a license to certain technology owned by the Company and
certain assets of Sierra Semiconductor B.V, the Company's subsidiary.
<PAGE>
Provision for Income Taxes. The 1997 income tax provision reflects taxes
provided for the Company's foreign operations which are primarily in Canada.
U.S. taxes for 1997 were eliminated by tax losses realized from the Company's
1996 restructuring. The 1996 income tax rate reflects the effect of a
nondeductible $7.8 million charge for the purchase of in-process research and
development relating to the Bit acquisition and taxes on foreign operations. The
1996 U.S. tax provision was reduced by the utilization of net operating losses
and tax credit carry forwards. The 1996 modem chipset business restructure
charge of $69.4 million did not result in a tax benefit because of the
uncertainty of future U.S. income as required by Statement of Financial
Accounting Standards No. 109. The 1995 income tax provision reflects the effect
of a nondeductible $10.6 million charge for the purchase price adjustment of the
Company's Canadian networking business
Discontinued Operations. During the fourth quarter of 1995, the Company and its
Board of Directors reached a decision to offer Prometheus for sale and, as a
result, it was reported as a discontinued operation in the Company's
consolidated financial statements. The Company recorded a $17.9 million charge
to discontinued operations to write down the assets and accrue additional
liabilities including a provision for future losses from operations. The effort
to sell Prometheus was not successful and the Company has subsequently completed
the closure of Prometheus. Hardware and technical support functions related to
product warranty support on the installed base of products previously sold were
carried out in 1996 and 1997 with costs recorded against the discontinued
operations provision established in 1995.
Liquidity and Capital Resources. The Company's cash and cash equivalents and
short term investments increased from $42.1 million at the end of 1996 to $69.2
million at the end of 1997. During 1997 the Company's operating activities
provided $39.0 million in cash which included $34.3 million in net income and
$9.2 million in depreciation and amortization as well as the working capital
impact of completing the restructuring. Investing activities included $8.2
million in purchases of new plant and equipment during 1997 and proceeds from
the disposal of assets, most of which were related to the non-networking
business, of $7.6 million. The Company increased its short term investments by
$34.3 million during the year. The Company used a net $14.4 million in cash
during 1997 to decrease its debt and capital lease obligations. Proceeds from
the issuance of common stock, principally under the Company's stock option and
purchase plans, totaled $6.2 million.
As at December 31, 1997, the Company's principal sources of liquidity included
cash and cash equivalents and short-term investments of $69.2 million. In the
fourth quarter of 1996, as a result of the restructure charge, the Company's
line of credit agreement with a bank was renegotiated to allow the Company to
borrow up to $10 million under the line of credit, provided that each borrowing
is fully secured by cash. There were no amounts outstanding under the line of
credit at the end of either 1996 or 1997. The Company cannot sell, transfer,
assign, mortgage, pledge, lease, grant a security interest or encumber any of
its assets without the bank's prior written consent. The completion of the
restructuring in the fourth quarter of 1997 has resulted in the Company being
able to negotiate with a number of banks to obtain a new line of credit. The
Company expects that a less restrictive line will be available in 1998 to
replace the current line of credit which expires March 31, 1998.
The Company has wafer supply agreements with two independent foundries that
together supply substantially all of the Company's products and include deposits
made to secure access to wafer fabrication capacity. One of those supply
agreements was amended in the fourth quarter of 1996 while the other was
rewritten in the fourth quarter of 1996 and amended in the third quarter of
1997. At December 31, 1997 and 1996, the Company had $27.1 million in deposits
with those foundries and was in compliance with its foundry agreements. Although
there are no minimum unit volume requirements, the Company is obligated under
one of the foundry agreements to purchase in future periods a minimum percentage
of its total annual wafer requirements, provided that the foundry is able to
continue to offer competitive technology, pricing, quality and delivery.
Non-compliance with the terms of the agreements may be cause for termination of
the agreement by either party. The Company purchased $13.2 million from its
foundry suppliers during 1997 compared to $46.1 million under agreements in
existence in 1996. Those amounts may or may not be indicative of any future
period since wafers are sold based on current market pricing and the Company's
volume requirements change in relation to sales of its products.
In each year, the Company is able to receive a portion of the deposits provided
to the foundries based on the annual purchases from those foundries as compared
to the target levels in the agreements. Based on 1997 purchases the Company is
expected to receive a $4.0 million refund from one of the foundries in the first
quarter of 1998. If the Company does not receive the balance of its deposits
back during the course of the agreements, then the deposits will be returned to
the Company at the termination of the agreements.
The Company believes that existing sources of liquidity and anticipated funds
from operations will satisfy the Company's projected working capital and capital
expenditure requirements through the end of 1998. The Company expects to
purchase or arrange capital leases for approximately $21 million of new capital
expenditures during 1998. In 1997 actual capital expenditures and capital leases
totaled $12 million. No additional deposits to secure foundry capacity are
expected in 1998.
The Company's future capital requirements will depend on many factors,
including, among others, product development, deposits for additional wafer
fabrication capacity, and acquisitions of complementary businesses, products or
technologies. To the extent that existing resources and funds generated by
future earnings are insufficient to fund the Company's operations, the Company
may need to raise additional funds through public or private debt or equity
financing. If additional funds are raised through the issuance of equity
securities, the percentage ownership of current stockholders will be reduced and
such equity securities may have rights, preferences or privileges senior to
those of the holders of the Company's Common Stock. No assurance can be given
that additional financing will be available or that, if available, it can be
obtained on terms favorable to the Company and its stockholders. If adequate
funds are not available, the Company may be required to delay, limit or
eliminate some or all of its proposed operations which could have a material
adverse impact on the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Disclosures under this item are not required for the current fiscal year.
ITEM 8. Financial Statements and Supplementary Data.
The chart entitled "Quarterly Data (Unaudited)" contained in Item 6 Part II
hereof is hereby incorporated by reference into this Item 8 of Part II of this
Form 10-K.
<PAGE>
PMC-Sierra, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements Included in Item 8:
Page
Report of Deloitte & Touche, Independent Auditors...................... --
Report of Ernst & Young LLP, Independent Auditors...................... --
Consolidated Balance Sheets at December 31, 1997 and 1996.............. --
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1997........................ --
Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 1997.............. --
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1997........................ --
Notes to Consolidated Financial Statements............................. --
Schedules for each of the three years in the period ended
December 31, 1997 included in Item 14 (d):
II Valuation and Qualifying Accounts.................................. --
Schedules not listed above have been omitted because they
are not applicable or are not required, or the information
required to be set forth therein is included in the
financial statements or the notes thereto.
<PAGE>
Report of Deloitte & Touche, Independent Auditors
The Board of Directors and Stockholders of PMC-Sierra, Inc.
We have audited the accompanying consolidated balance sheet of PMC-Sierra, Inc.
as of December 31, 1997 and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended. Our audit also
included the financial statement schedule for the year ended December 31, 1997
listed in the index at Item 14(a). These consolidated financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as at December 31, 1997, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche
DELOITTE & TOUCHE
Vancouver, British Columbia
January 22, 1998
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders of PMC-Sierra, Inc.
(formerly Sierra Semiconductor Corporation)
We have audited the accompanying consolidated balance sheet of PMC-Sierra, Inc.
(formerly Sierra Semiconductor Corporation) as of December 31, 1996 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the two years in the period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
PMC-Sierra, Inc. (formerly Sierra Semiconductor Corporation) as of December 31,
1996 and the consolidated results of its operations and its cash flows for each
of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Jose, California
January 22, 1997
<PAGE>
<TABLE>
PMC-Sierra, Inc.
(Formerly Sierra Semiconductor Corporation)
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
December 31,
---------------------------
1997 1996
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 27,906 $ 35,038
Short-term investments 41,334 7,024
Accounts receivable, net of allowance for doubtful
accounts of $1,070 and $842 in 1997 and 1996, respectively
(including $469 and $3,662 due from related parties in 1997
and 1996, respectively, see Note 9) 15,103 13,907
Inventories 3,199 9,232
Prepaid expenses and other current assets 1,958 3,104
Short-term deposits for wafer fabrication capacity 4,000 -
----------- -----------
Total current assets 93,500 68,305
Property and equipment, net 19,699 16,678
Goodwill and other intangible assets, net of accumulated
amortization of $3,668 ($2,305 in 1996) 8,635 10,188
Investments and other assets 4,424 7,623
Deposits for wafer fabrication capacity 23,120 27,120
----------- -----------
$ 149,378 $ 129,914
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 7,421 $ 9,648
Accrued liabilities 13,751 9,546
Accrued income taxes 8,780 4,050
Accrued restructure costs - 16,754
Current portion of obligations under capital leases and long-term debt 4,652 6,269
Net liabilities of discontinued operations 301 1,600
----------- -----------
Total current liabilities 34,905 47,867
Deferred income taxes 4,023 2,741
Noncurrent obligations under capital leases and long-term debt 9,092 18,368
Commitments and contingencies (Note 6) - -
Special shares convertible into PMC common stock
1,618 shares in 1997 (1,937 shares in 1996) 10,793 12,494
Shareholders' equity:
Preferred stock, par value $0.001; 5,000 shares authorized, - -
none outstanding
Common stock, par value $0.001; 50,000 shares authorized; 30 135,320
29,750 issued and outstanding in 1997 (28,647 in 1996)
Additional paid in captial 143,153 -
Accumulated deficit (52,618) (86,876)
----------- -----------
Total shareholders' equity 90,565 48,444
----------- -----------
$ 149,378 $ 129,914
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PMC-Sierra, Inc.
(Formerly Sierra Semiconductor Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Net revenues (1) $ 127,166 $ 188,371 $ 188,724
Cost of revenues 33,065 94,948 97,110
------------ ------------ -----------
Gross profit 94,101 93,423 91,614
Other costs and expenses:
Research and development 22,880 29,350 23,428
Marketing, general and administrative 23,663 30,691 30,051
In process research and development - 7,783 -
Purchase price adjustment - compensation - - 10,624
Restructure and other costs (1,383) 64,670 -
------------ ------------ -----------
Income (loss) from operations 48,941 (39,071) 27,511
Interest income, net 1,044 679 497
Gain on sale of SiTel Sierra - - 6,700
------------ ------------ -----------
Income (loss) before provision for income taxes 49,985 (38,392) 34,708
Provision for income taxes 15,727 9,758 10,732
------------ ------------ -----------
Income (loss) from continuing operations 34,258 (48,150) 23,976
------------ ------------ -----------
Loss from discontinued operations - - (4,591)
Loss on disposal of discontinued operations - - (17,906)
------------ ------------ -----------
Loss from discontinued operations - - (22,497)
------------ ------------ -----------
Net income (loss) $ 34,258 $ (48,150) $ 1,479
============ ============ ===========
Basic net income (loss) per share:
from continuing operations $ 1.10 $ (1.62) $ 0.89
from discontinued operations - - (0.83)
------------ ------------ -----------
Net income (loss) $ 1.10 $ (1.62) $ 0.06
============ ============ ===========
Diluted net income (loss) per share:
from continuing operations $ 1.05 $ (1.62) $ 0.84
from discontinued operations - - (0.79)
------------ ------------ -----------
Net income (loss) $ 1.05 $ (1.62) $ 0.05
============ ============ ===========
Shares used to calculate:
Basic net income (loss) per share 31,043 29,719 27,018
Diluted net income (loss) per share 32,642 29,719 28,620
See notes to consolidated financial statements.
</TABLE>
(1) Including $9,221, $25,520 and $46,074 from related parties in 1997, 1996 and
1995 respectively. See Note 9.
<PAGE>
<TABLE>
PMC-Sierra, Inc.
(Formerly Sierra Semiconductor Corporation)
Consolidated Statement of Shareholders' Equity
(in thousands)
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Shareholders' Total
-------------------- -------------------- Paid in Accumulated Notes Shareholders'
Shares Amount Shares Amount Capital Deficit Receivable Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 11 $ 234 20,913 $ 74,897 $ - $ (40,204) $ (62) $ 34,865
Conversion of convertible
preferred stock into
common shares (11) (235) 25 235 - - - -
Issuance of common shares
under stock benefit plans - - 793 3,520 - - - 3,520
Accretion of redeemable
convertible preferred stock - 1 - - - (1) - -
Sale of common shares, net
of issuance costs of $1,484 - - 1,150 19,216 - - - 19,216
Conversion of special shares
into common shares - - 3,722 19,906 - - - 19,906
Tax benefit of stock option
transactions - - - 1,984 - - - 1,984
Payment of shareholders' notes
receivable - - - - - - 30 30
Net income - - - - - 1,479 - 1,479
--------- ----------- -------- ----------- ---------- ----------- ----------- -----------
Balances at December 31, 1995 - - 26,603 119,758 - (38,726) (32) 81,000
Issuance of common shares
under stock benefit plans - - 604 3,072 - - - 3,072
Issuance of common stock to
capitalize PMC-Portland and
acquire assets of Bit, Inc. - - 804 6,788 - - - 6,788
Adjustment to prior year common
stock issuance costs - - - 38 - - - 38
Conversion of special shares
into common shares - - 636 3,036 - - - 3,036
Tax benefit of stock option
transactions - - - 2,628 - - - 2,628
Payment of shareholders' notes
receivable - - - - - - 32 32
Net loss - - - - - (48,150) - (48,150)
--------- ----------- -------- ----------- ---------- ----------- ----------- -----------
Balances at December 31, 1996 - - 28,647 135,320 - (86,876) - 48,444
Conversion of special shares
into common shares - - 319 6,162 - - - 6,162
Issuance of common shares
under stock benefit plans - - 784 1,701 - - - 1,701
Reclassification on
reincorporation - - - (143,153) 143,153 - - -
Net income - - - - - 34,258 - 34,258
--------- ----------- -------- ----------- ---------- ----------- ----------- -----------
Balances at December 31, 1997 - $ - 29,750 $ 30 $ 143,153 $ (52,618) $ - $ 90,565
========= =========== ======== =========== ========== =========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PMC-Sierra, Inc.
(Formerly Sierra Semiconductor Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in cash and cash equivalents
(in thousands)
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 34,258 $ (48,150) $ 1,479
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 9,150 10,922 8,888
Loss on disposal of equipment 258 - -
Acquisition of in process technology and development
from purchase of net assets of Bit, Inc. - 7,783 -
Compensation expense from purchase price adjustment
of PMC-Sierra Ltd. acquisition - - 10,624
Loss on discontinued operations of Prometheus Products, Inc. - - 17,906
Loss (recovery) related to restructure reserve (Note 11):
Accounts receivable - 5,047 -
Inventory 1,371 23,000 -
Prepaid expenses - 1,061 -
Impairment of long-lived assets (942) 16,425 -
Impairment of goodwill of Holland operations - 2,459 -
Accruals for restructure related costs:
Severance and related costs 376 6,985 -
Purchase commitments and other accruals (2,340) 9,002 -
Excess facilities costs (496) 3,411 -
Costs for closure of European subsidiaries 648 1,980 -
Changes in assets and liabilities
Accounts receivable (1,196) 20,023 (16,855)
Inventories 4,662 (17,389) (3,772)
Prepaid expenses and other 1,146 (711) (11,390)
Accounts payable and accrued liabilities 8,380 (15,109) 17,801
Accrued restructuring costs (14,942) (4,624) -
Net assets/liabilities associated with discontinued operations (1,299) (2,496) (4,733)
---------------------------------------------------
Net cash provided by operating activities 39,034 19,619 19,948
---------------------------------------------------
Cash flows from investing activities:
Proceeds from sales/maturities of short-term investments 24,877 15,984 3,188
Purchases of short-term investments (59,187) (19,004) (3,984)
Investments in other companies (3,000) (3,162) (1,430)
Decrease in investments and other - - 150
Purchase of Bit, Inc. assets, net of cash acquired - 71 -
Proceeds from sale of equipment and capacity assets 7,631 - -
Purchases of plant and equipment (8,221) (4,000) (10,909)
---------------------------------------------------
Net cash used in investing activities (37,900) (10,111) (12,985)
---------------------------------------------------
Cash flows from financing activities:
Proceeds from payments of notes receivable - 32 30
Proceeds from issuance of long-term debt - 353 2,592
Repayment of notes payable and long-term debt (2,640) (17,588) (1,794)
Proceeds from sale/leaseback of captial equipment 1,107 - -
Principal payments under capital lease obligations (12,895) (2,310) (1,217)
Proceeds from issuance of common stock 6,162 3,110 22,737
---------------------------------------------------
Net cash provided by (used in) financing activities (8,266) (16,403) 22,348
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents (7,132) (6,895) 29,311
Cash and cash equivalents, beginning of the year 35,038 41,933 12,622
---------------------------------------------------
Cash and cash equivalents, end of the year $ 27,906 $ 35,038 $ 41,933
===================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PMC SIERRA, INC.
(Formerly Sierra Semiconductor Corporation)
Consolidated Statement of Cash Flows
(in thousands)
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,954 $ 1,278 $ 926
Cash paid for income taxes 7,227 11,820 1,851
Supplemental disclosures of noncash investing and financing activities:
Conversion of convertible preferred stock into common stock - - 235
Capital lease obligations incurred for purchase of property and equipment 3,536 16,145 4,069
Issuance of PMC special shares to be exchanged for common shares - - 18,935
Conversion of PMC special shares into common stock 1,701 3,036 19,906
Short-term debt obligations incurred for wafer fabrication capital deposits - - 30,240
Cancellation of short-term debt obligations incurred for
wafer fabrication capacity - (15,120) -
During the years ended December 31, 1997, 1996 and 1995, the Company retired
assets with an original cost of $11,091, $10,377, and $2,851, respectively,
and related accumulated depreciation of $10,270, $9,858, and $2,839,
respectively.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
NOTE 1. Summary of Significant Accounting Policies
Name Change and Delaware Reincorporation. The Company changed its name from
Sierra Semiconductor Corporation to PMC-Sierra, Inc. on June 13, 1997 and
reincorporated in Delaware on July 10, 1997.
Basis of presentation. The accompanying consolidated financial statements
include the accounts of PMC-Sierra, Inc. (formerly Sierra Semiconductor
Corporation) ("the Company" or "PMC") and its wholly owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated from
the consolidated financial statements. The Company's fiscal year ends on the
Sunday closest to December 31. For ease of presentation, December 31 has been
utilized as the fiscal year end for all financial statement captions. Fiscal
years 1997, 1996 and 1995 each consisted of 52 weeks.
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets, liabilities, revenues and
expenses as of the dates and for the periods presented. Actual results may
differ from those estimates.
Cash, cash equivalents and short-term investments. Cash equivalents are defined
as highly liquid debt instruments with original maturities at date of
acquisition of 90 days or less that have insignificant interest rate risk.
Short-term investments are defined as money market instruments with original
maturities greater than 90 days, but less than one year. The Company maintains
its cash, cash equivalents and short-term investments in various financial
instruments with various banks and investment banking institutions. The
diversification of risk is consistent with Company policy to preserve the
principal and maintain liquidity.
Under Financial Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" (SFAS 115), management classifies investments as
available-for-sale or held-to-maturity at the time of purchase and re-evaluates
such designation as of each balance sheet date. Investments classified as
held-to-maturity securities are stated at amortized cost with corresponding
premiums or discounts amortized against interest income over the life of the
investment.
Marketable equity and debt securities not classified as held-to-maturity are
classified as available-for-sale and reported at fair value. Unrealized gains or
losses on available-for-sale securities have not been included in equity as such
amounts are immaterial. Realized gains and losses judged to be
other-than-temporary on available-for-sale securities are included in interest
income. The cost of securities sold is based on the specific identification
method.
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
Investments at December 31, 1997 mature through February 1998 and are classified
as follows (in thousands):
<TABLE>
<CAPTION>
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Held-to-maturity investments
Daily demand investments $ 22,501 $ - $ - $ 22,501
Commercial paper 44,345 66 - 44,411
------------ ------------ ------------- ------------
Total Investments $ 66,846 $ 66 $ - $ 66,912
============ ============ ============= ============
Total included in cash and cash equivalents $ 25,512 $ 2 $ - $ 25,514
Total included in short-term investments 41,334 64 - 41,398
------------ ------------ ------------- ------------
Total Investments $ 66,846 $ 66 $ - $ 66,912
============ ============ ============= ============
</TABLE>
Investments at December 31, 1996 matured through February 1997 and were
classified as follows (in thousands):
<TABLE>
<CAPTION>
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Held-to-maturity investments
Banker's acceptances $ 1,711 $ - $ - $ 1,711
Commercial paper 21,470 2 - 21,472
------------ ------------ ------------- ------------
Total Investments $ 23,181 $ 2 $ - $ 23,183
============ ============ ============= ============
Total included in cash and cash equivalents $ 16,157 $ 1 $ - $ 16,158
Total included in short-term investments 7,024 1 - 7,025
------------ ------------ ------------- ------------
Total Investments $ 23,181 $ 2 $ - $ 23,183
============ ============ ============= ============
</TABLE>
Proceeds from sales and realized gains or losses on sales of available-for-sale
securities for all years presented were immaterial.
Inventories. Inventories are stated at the lower of cost (first-in, first out)
or market (estimated net realizable value).
The components of inventories are as follows (in thousands):
December 31,
------------------------------
1997 1996
Work-in-progress $ 2,316 $ 3,335
Finished goods 883 5,897
-------------- ------------
$ 3,199 $ 9,232
============== ============
Property and equipment, net. Depreciation and amortization of property and
equipment are provided on the straight-line method over the estimated useful
lives of the assets, ranging from two to five years, or the applicable lease
term, whichever is shorter. The carrying value of property and equipment is
reviewed periodically for any permanent impairment in value.
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
The components of property and equipment are as follows (in thousands):
December 31,
------------------------------
1997 1996
Machinery and equipment $ 31,353 $ 39,854
Leasehold improvements 2,006 1,117
Furniture and fixtures 1,666 1,890
-------------- --------------
Total cost 35,025 42,861
Accumulated depreciation (15,326) (26,183)
-------------- --------------
$ 19,699 $ 16,678
============== ==============
Goodwill and other intangible assets. Goodwill associated with acquisitions is
being amortized on a straight-line basis over ten years and is carried at a net
book value of $7.0 million and $7.9 million at December 31, 1997 and 1996,
respectively. Purchased technology is being amortized on a straight-line basis
over seven years. Among other considerations, to assess impairment, the Company
periodically estimates undiscounted future cash flows to determine that they
exceed the unamortized balance of the related intangible asset.
Deposits for wafer fabrication capacity. The Company has wafer supply agreements
with two independent foundries that together supply substantially all of the
Company's products and include deposits made to secure access to wafer
fabrication capacity. One of those supply agreements was amended in the fourth
quarter of 1996 while the other was rewritten in the fourth quarter of 1996 and
amended in the third quarter of 1997. At December 31, 1997, the Company had
$27.1 million in deposits with those foundries and was in compliance with its
foundry agreements. Although there are no minimum unit volume requirements, the
Company is obligated under one of the foundry agreements to purchase in future
periods a minimum percentage of its total annual wafer requirements, provided
that the foundry is able to continue to offer competitive technology, pricing,
quality and delivery. Non-compliance with the terms of the agreements may be
cause for termination of the agreement by either party. The Company purchased
$13.2 million from its foundry suppliers during 1997 compared to $46.1 million
under agreements in existence in 1996. Those amounts may or may not be
indicative of any future period since wafers are sold based on current market
pricing and the Company's volume requirements change in relation to sales of its
products.
In each year, the Company is able to receive a portion of the deposits provided
to the foundries based on the annual purchases from those foundries as compared
to the target levels in the agreements. Based on 1997 purchases, the Company
expects to receive a $4.0 million refund from one of the foundries in the first
quarter of 1998. If the Company does not receive the balance of its deposits
back during the course of the agreements, then the deposits will be returned to
the Company at the termination of the agreements.
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
Accrued liabilities. The components of accrued liabilities are as follows (in
thousands):
December 31,
------------------------------
1997 1996
Accrued compensation and benefits $ 4,590 $ 3,846
Accrued royalties 521 1,628
Other accrued liabilities 8,640 4,072
-------------- --------------
$ 13,751 $ 9,546
============== ==============
Foreign currency translation. For all foreign operations, the U.S. dollar is the
functional currency. Assets and liabilities are remeasured at the year-end
exchange rates. Statements of operations are remeasured at the average exchange
rates during the year. Gains and losses from foreign currency remeasurement are
included in interest income and other, net.
The Company may enter into foreign currency forward exchange contracts (forward
contracts) to reduce the impact of currency fluctuations on monetary asset and
liability positions of its foreign subsidiaries. At December 31, 1997 and 1996,
the Company had no outstanding forward contracts.
Concentration of credit risk. The Company believes that the concentration of
credit risk in its trade receivables with respect to the high-technology
industry is substantially mitigated by the Company's credit evaluation process,
large number of customers, relatively short collection terms, and the
geographical dispersion of sales. The Company generally does not require
collateral.
Revenue recognition. Net revenues are stated net of discounts and allowances.
Revenue is recognized at the time of shipment to the customer. In addition,
reserves are provided currently for estimated product returns and price
protection that may occur under Company programs. At December 31, 1997 and 1996,
this reserve was approximately $2 million. In conjunction with the 1996
restructure reserve, the Company accrued $5 million which included a provision
for price protection and product returns. Such reserves were not material at
December 31, 1995.
Interest income, net. The components of interest income, net are as follows (in
thousands):
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
Interest income $ 3,146 $ 1,840 $ 1,244
Interest expense (1,949) (1,278) (892)
Other (153) 117 145
--------------- -------------- --------------
$ 1,044 $ 679 $ 497
=============== ============== ==============
Net income (loss) per common share. In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.128,
"Earnings per Share" (SFAS 128), which established new standards for computing
and presenting earnings per share effective for fiscal years ending after
December 15, 1997. With SFAS 128, primary earnings per share is replaced by
basic earnings per share which is computed by dividing income available to
common shareholders by the weighted average number of shares outstanding for the
period. In addition, SFAS 128 requires the presentation of diluted earnings per
share which includes the potential dilution that could occur if common stock
equivalents or other potentially dilutive securities were exercised or converted
into common stock. Common stock equivalent shares are excluded from the
computation if their effect is anti-dilutive, except pursuant to the Securities
and Exchange Commission Staff Accounting Bulletins. The PMC-Sierra Ltd. Special
Shares have been included in the calculation of basic net income (loss) per
share.
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
Income Taxes. Taxes are reported under Statement of Financial Accounting
Standards No. 109 and, accordingly, deferred income taxes are recognized using
the liability method, whereby tax rates are applied to cumulative temporary
differences based on when and how they are expected to affect the tax return.
Deferred tax assets and liabilities are adjusted for tax rate changes.
Stock Compensation. Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation," (SFAS 123) permits, but does not
require, companies to recognize compensation expense for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation expense for
stock options granted to employees is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant or
modification over the amount an employee must pay to acquire the stock.
As prescribed by SFAS 123, Note 7 to the Consolidated Financial Statements
contains a summary of the proforma effects to reported net income and earnings
per share for 1997, 1996 and 1995, had the Company elected to recognize
compensation expense based on the fair value of the options granted at the grant
date. The effects of applying SFAS 123 proforma disclosures may not be likely to
be representative of the effects on reported net income for future years.
NOTE 2. Acquisitions, Divestitures and Investments in Other Companies
Bipolar Integrated Technology, Inc.
During the third quarter of 1996, the Company acquired the ethernet switching
assets, intellectual property, and certain other assets of Bipolar Integrated
Technology, Inc. ("Bit") in exchange for shares of PMC common stock and other
consideration. The aggregate value of this transaction was approximately $8.1
million, which includes acquisition costs incurred by the Company. The assets of
Bit were acquired in exchange for 804,407 shares of PMC common stock with a
value of approximately $6.8 million (based on the market value on the issuance
date of PMC common stock issued subject to restrictions on transfer),
approximately $0.5 million of net liabilities assumed by the Company's
subsidiary, the value of options to purchase common stock of the Company,
forgiveness of principal and interest on loans provided by the Company, and
cash. The acquisition resulted in a $7.8 million charge for the purchase of
in-process research and development. The remaining $0.3 million of technology
assets have been capitalized as long term assets which will be amortized over
seven years. Results of operations include the costs of continuing the
development of products and related activities acquired from Bit after the
closure of the acquisition on September 3, 1996. The proforma effect of
combining the Bit transaction with the Company's operations in 1995 and prior to
the acquisition in 1996 are not reported separately because they are not
considered to be material.
I.C. Works, Inc.
In order to secure additional access to wafer fabrication capacity, in 1996 the
Company acquired $3 million of preferred stock of I.C. Works Inc. ("ICW"), a
foundry located in San Jose, California. Under the arrangement with ICW, the
Company also provided semiconductor manufacturing equipment to ICW, which it
financed through capital leases. In 1996, as a result of the restructuring of
non-networking operations, the Company identified that it would not be able to
benefit from the arrangement with ICW and included a $6.9 million provision for
impairment of these assets in the restructuring charge.
In 1997, the Company advanced an additional $3 million to ICW and subsequently,
ICW sold substantially all of its assets, including the manufacturing assets
contributed by the Company. On settlement of its arrangement with ICW, the
Company received proceeds of $4.8 million, resulting in the requirement for an
additional provision for impairment of $3.5 million. This additional provision
was included in the overall recovery from disposal of excess fixed assets and
assets related to capacity commitments of $942,000 (see note 11) recorded on
completion of the restructuring.
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
SiTel Sierra B.V.
During the fourth quarter of 1995, the Company sold its interest in SiTel-Sierra
B.V. to National Semiconductor Corporation. Proceeds from the sale of this
investment of $7 million in cash were received during the first quarter of 1996.
This transaction resulted in a pre-tax gain of $6.7 million.
Sierra Wireless, Inc.
On July 7, 1993, the Company and MPR Teltech Ltd. ("MPR") of British Columbia,
Canada announced an investment in a new company called Sierra Wireless Inc.
(Sierra Wireless). MPR contributed technology licenses in exchange for Sierra
Wireless's non-voting preferred stock. In 1993, the Company invested
approximately $2.5 million of cash in exchange for shares of Sierra Wireless's
non-voting preferred stock. This initial investment was expensed in 1993 as
Sierra Wireless was still in its development stage. In 1996, 1995, and 1994, the
Company invested an additional approximately $0.2, $1.4, and $2.5 million,
respectively, in Sierra Wireless. These investments were capitalized and are
being accounted for as an investment in equity shares recorded on the cost
basis, since Sierra Wireless is now an operating company. Sierra Wireless has
developed and is marketing portable computer modems and modem sub-systems built
to Cellular Digital Packet Data (CDPD) performance specifications.
Prometheus Products, Inc.
Prometheus Products, Inc. ("Prometheus") was acquired in 1994 in exchange for
the elimination of accounts receivable owed by Prometheus to the Company, a
guaranteed cash payment to the shareholders of Prometheus and future cash
payments contingent upon future sales and profits for Prometheus. In 1995, the
Company decided to dispose of Prometheus and in 1997, the Company has
substantially completed the wind-up (See Note 3).
PMC-Sierra
On September 2, 1994, the Company acquired voting control of PMC-Sierra, Ltd.
(formerly PMC-Sierra, Inc.) ("LTD") of Burnaby, British Columbia, Canada. LTD
supplies broadband transmission and networking chip set products for ATM,
SONET/SDH and T1/E1 applications. LTD was established in July 1992 by the
Company, which invested approximately $4.9 million of cash in exchange for LTD's
non-voting preferred stock representing approximately 61% of LTD's securities on
a fully diluted basis; MPR Teltech Ltd., a Canadian corporation which
contributed assets and technology licenses in exchange for non-voting preferred
stock; a venture capital investor, which purchased non-voting preferred stock
for cash; and LTD's employees, who purchased voting common stock.
The Company acquired voting control of LTD through a recapitalization of LTD. In
the recapitalization, the Company exchanged its LTD non-voting preferred stock
for LTD's voting Ordinary A Shares and LTD's other shareholders exchanged their
preferred stock and common stock for LTD A Special Shares. Each LTD A Special
Share is currently convertible at the holder's option for two shares of the
Company's Common Stock. The Company reserved 5,000,000 shares of its Common
Stock for issuance in connection with requests to redeem LTD Special Shares then
outstanding or issuable upon exercise. The acquisition of voting control through
LTD's recapitalization was accounted for as a purchase of the interests of the
other shareholders in LTD.
Under the terms of the recapitalization agreement, in the third quarter of 1995
the Company adjusted the 1994 purchase price paid to the other LTD shareholders.
Accordingly, the minority shareholders received additional consideration through
the right to acquire an additional 1,294,722 shares of Common Stock in exchange
for LTD B Special Shares. The issuance of these shares is reflected in the
Company's accompanying financial statements as a special charge to income of
$10.6 million relating to compensation expense in 1995 and an increase in
goodwill of $9.1 million.
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
The Special Shares of LTD will be classified outside of shareholders' equity
until such shares are exchanged for PMC Common Stock.
Before the recapitalization, the Company held only non-voting preferred stock in
LTD, and accordingly LTD's assets, liabilities and operating results were not
consolidated with those of the Company. From the date of the recapitalization,
LTD's balance sheet and operating results have been consolidated in the
Company's financial statements.
NOTE 3. Discontinued Operations
On December 28, 1995, the Company's Board of Directors approved a plan to sell
or discontinue the operations of Prometheus. The Company purchased Prometheus in
the third quarter of 1994, and has operated it as a separate business unit.
Accordingly, Prometheus has been treated as a discontinued operation and the
Company's results of continuing operations have been reclassified to remove
Prometheus' previously reported results. Revenues of Prometheus were $19,018,000
in 1995. The loss from discontinued operations for the year ended December 31,
1995 is net of an income tax benefit of $742,000. The components of net current
liabilities (in 000's) of discontinued operations at December 31, 1997 and 1996
are detailed in the table below.
December 31,
-----------------------
1997 1996
Accrued liabilities $ (301) $ (753)
Guaranteed royalties - (847)
----------- -----------
Net current liabilities of discontinued operations $ (301) $ (1,600)
=========== ===========
The Company contracted with an investment banking firm in the first quarter of
1996 to engage in efforts to sell Prometheus. The effort to sell Prometheus did
not result in a sale and the Company ceased most of its operations in 1996. All
costs and operating results of Prometheus for 1997 and 1996 have been recorded
against the provision for discontinued operations established in the fourth
quarter of 1995.
NOTE 4. Line of Credit
At December 31, 1997, the Company had available a revolving line of credit with
a bank under which the Company may borrow up to $10 million with interest at the
bank's certificate of deposit rate plus 3% (annual rate of 8.0% at December 31,
1997). Drawings on the line require a 100% pledge of certificates of deposit. At
December 31, 1997 and December 31, 1996, there were no amounts outstanding under
the line of credit. The revolving line of credit expires on March 31, 1998.
NOTE 5. Obligations Under Capital Leases and Long Term Debt
The Company leases furniture and equipment under long-term capital leases, which
have been accounted for as installment purchases. Accordingly, capitalized costs
of approximately $19,965,000 and $22,737,000, respectively, at December 31, 1997
and 1996 and accumulated amortization of approximately $10,774,000 and
$4,710,000, respectively, are included in property and equipment.
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
Future minimum lease payments at December 31, 1997 under capital leases are as
follows (in thousands):
Year ended December 31 :
1998 $ 5,484
1999 4,194
2000 3,378
2001 1,163
2002 -
--------------
Total minimum lease payments 14,219
Less amount representing interest (1,281)
--------------
Present value of future net minimum lease payments $ 12,938
==============
Long-term debt and obligations under capital leases are as follows (in
thousands):
December 31,
----------------------
1997 1996
Obligations under capital leases with interest ranging
from 7.71% to 21.48% $ 12,938 $ 19,347
Secured equipment loans, payable in 48 monthly
installments with interest ranging from 7.71% to 9.23% - 3,567
Various unsecured notes, payable in various
installments with interest rates ranging from 0% to 9% 806 1,004
Bank term debt, payable in 37 monthly installments
commencing on December 1, 1994, interest rate at prime
+ 1.75% (10% per annum at December 31, 1996) - 719
---------- ----------
13,744 24,637
Less current portion (4,652) (6,269)
---------- ----------
$ 9,092 $ 18,368
========== ==========
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
Maturities of unsecured notes at December 31, 1997 are as follows (in
thousands):
Year ended December 31:
1998 $ 101
1999 101
2000 101
2001 101
2002 101
Thereafter 301
--------------
$ 806
==============
Fair value of financial instruments. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange.
The aggregate fair value of the Company's long-term debt and obligations under
capital leases at December 31, 1997 and 1996 approximates their carrying value.
NOTE 6. Commitments and Contingencies
Operating leases. The Company leases its facilities under operating lease
agreements, which expire at various dates through April 2006. Total rent expense
for the years ended December 31, 1997, 1996, and 1995 was $1.3 million, $2.1
million, and $2.3 million, respectively.
Minimum rental commitments under these leases are as follows:
Year ended December 31:
1998 $ 1,365
1999 1,328
2000 1,129
2001 1,125
2002 1,080
Thereafter 3,350
--------------
$ 9,377
==============
Supply agreements. The Company's supply agreement with Chartered Semiconductor
("Chartered") expires on November 17, 1999, but certain provisions have been
superceded by a wafer capacity agreement which expires in December 2000 whereby
Chartered is obligated to supply the Company with a predetermined number of
wafers per quarter. Taiwan Semiconductor Manufacturing Corporation ("TSMC") is
obligated to provide certain quantities of wafers per year under an agreement
which terminates on December 31, 2000. Neither of the agreements have minimum
unit volume requirements but the Company is obligated under one of the
agreements to purchase in future periods a minimum percentage of its total
annual wafer requirements, provided that the foundry is able to continue to
offer competitive technology, pricing, quality and delivery.
Contingencies. In the normal course of business, the Company receives and makes
inquiries with regard to possible patent infringement. Where deemed advisable,
the Company may seek or extend licenses or negotiate settlements. Outcomes of
such negotiations may not be determinable at any point in time; however,
management does not believe that such licenses or settlements will, individually
or in the aggregate, have a material adverse effect on the Company's financial
position, results of operations or liquidity.
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
Risks and Uncertainties. Technological change - the markets for the Company's
products are characterized by evolving industry standards, rapid technological
change and product obsolescence. The carrying value of the Company's products in
inventory may be materially impaired in the future should these changes occur
more quickly than the Company anticipated. Wafer capacity agreements - as
discussed above, the Company has entered into various agreements to secure
future wafer capacity. Should the Company need more capacity or if there is a
decline in demand for the Company's products thereby reducing the need for this
contracted capacity, estimates related to the carrying value of deposits could
materially change.
NOTE 7. Shareholders' Equity
Authorized. On July 10, 1997, the Company was reincorporated into the State of
Delaware from the State of California. Prior to the reincorporation, the Company
had authorized capital of 55,405,916 shares, 50,000,000 of which were designated
"Common Stock", 5,000,000 of which were designated "Preferred Stock", and
405,916 of which were designated "Series D Preferred Stock". All authorized
shares had no par value. After the reincorporation, the Company had an
authorized capital of 55,000,000 shares, 50,000,000 of which were designated
"Common Stock", $0.001 par value, and 5,000,000 of which are designated
"Preferred Stock", $0.001 par value. The excess of the amount recorded as
capital stock over the par value of capital stock on reincorporation has been
recorded as additional paid in capital at December 31, 1997. The issued and
outstanding shares immediately before and after the reincorporation remained the
same. The reincorporation included no other significant changes with respect to
shares outstanding, reserved shares and various applicable options, rights and
warrants.
Common Stock. At December 31, 1997 and 1996, the Company maintained a reserve of
1,618,000 and 1,937,000 shares, respectively, of common stock to be issued to
holders of LTD Special Shares and options to purchase LTD Special Shares. The
holders of the Special Shares have the right to exchange one A Special Share for
two shares of the Company's common stock, and one B Special Share for 0.54612
share of the Company's common stock. Upon exchange, amounts will be transferred
from the LTD Special Shares account to the Company's common stock on the
consolidated balance sheet.
During 1996, the Company issued a warrant to purchase 25,000 shares of common
stock at $9.25 per share to an investment banking firm in settlement for
services previously expensed. The warrant expires in August 2000.
The Company has adopted a 1987 Incentive Stock Plan, a 1994 Incentive Stock Plan
and its wholly owned subsidiary, PMC-Sierra, Inc. (Portland) has adopted a 1996
Stock Option Plan covering grants of options to purchase the Company's Common
Stock (the "Plans"). Under the Plans, Incentive Stock Options may be granted to
employees and Non Statutory Options may be granted to employees, directors and
consultants, to purchase shares of the Company's Common Stock at not less than
100% and 85%, respectively, of the fair value of the stock on the date granted.
The options generally expire within five to ten years and vest over four years.
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
Option activity under the option plans was as follows:
<TABLE>
<CAPTION>
Weighted Average
Options Available Number of Exercise Price
For Issuance Shares Per Share
<S> <C> <C> <C>
Outstanding at December 31, 1994 1,250,852 2,514,304 $4.41
Authorized 1,600,000 - -
Granted (weighted average fair value of
$5.99 per share) (1,094,800) 1,094,800 $14.16
Exercised - (588,742) $4.56
Expired (809,038) - -
Canceled 305,211 (305,211) $6.21
----------- -----------
Outstanding at December 31, 1995
(1,037,181 options exercisable at a
weighted average price of $5.43). 1,252,225 2,715,151 $8.13
Authorized 1,250,000 - -
Granted (weighted average fair value of
$6.79 per share) (1,403,574) 1,403,574 $14.11
Exercised - (503,825) $4.74
Expired (85,980) - -
Canceled 515,878 (515,878) $12.73
----------- -----------
Outstanding at December 31, 1996
(1,252,874 options exercisable at a
weighted average price of $7.44) 1,528,549 3,099,022 $10.63
Authorized 500,000 - -
Granted (weighted average fair value of
$7.97 per share) (1,426,450) 1,426,450 $17.48
Exercised - (693,450) $7.22
Expired (36,112) - -
Canceled 484,216 (484,216) $14.96
----------- -----------
Outstanding at December 31, 1997 1,050,203 3,347,806 $13.62
=========== ===========
</TABLE>
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
The following table summarizes information concerning options outstanding for
the combined option plans at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ----------- --------- ----------- --------
<C> <C> <C> <C> <C> <C> <C>
$ 0.89 - $ 5.88 618,808 5.92 $ 4.30 596,952 $ 4.33
$ 8.63 - $12.00 629,775 8.25 $10.16 389,076 $ 9.94
$12.13 - $14.25 520,813 9.05 $14.08 6,611 $12.78
$14.38 - $21.25 1,283,264 8.62 $16.22 312,902 $16.92
$22.25 - $32.75 295,146 9.41 $28.36 18,632 $24.55
------------ -----------
$ 0.89 - $32.75 3,347,806 8.19 $13.62 1,324,173 $ 9.28
============ ===========
</TABLE>
Employee Stock Purchase Plan In 1991, the Company adopted an Employee Stock
Purchase Plan (ESPP) under Section 423 of the Internal Revenue Code and reserved
1,060,000 shares of common stock for issuance under the Plan. Under this Plan,
qualified employees may authorize payroll deductions of up to 10% of their
compensation (as defined) to purchase common stock at 85% of the lower of fair
market value at the beginning or end of the related subscription period. During
1997, 1996 and 1995, respectively, there were 105,149, 79,863 and 164,126 shares
issued under the Plan at weighted-average prices of $10.40, $8.38 and $3.99 per
share. The weighted-average fair value of the 1997, 1996 and 1995 awards was
$6.96, $3.78 and $1.47 per share, respectively. As of December 31, 1997, there
were 145,054 shares of common stock available for issuance under the purchase
plan.
Stock-based compensation In accordance with the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company applies APB
Opinion 25 and related interpretations in accounting for its stock-based awards.
Accordingly, the Company does not generally recognize compensation expense for
employee stock arrangements, which are granted with exercise prices equal to the
fair market value at the date of grant.
Proforma 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 option valuation model was developed for use in estimating the
fair value of traded options which 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:
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
Options ESPP
-------------------------- -------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
Expected life (years) 2.6 2.2 2.5 1.4 0.5 0.5
Expected volatility 0.7 0.8 0.6 0.8 0.8 0.6
Risk-free interest rate 6.0% 5.7% 6.5% 5.9% 5.3% 5.9%
If the computed fair values of 1997, 1996 and 1995 awards had been amortized to
expense over the vesting period of the awards as prescribed by SFAS 123, net
income (loss) and net income (loss) per share would have been:
(in thousands except per share amounts):
1997 1996 1995
---- ---- ----
Net income (loss) $ 29,639 $ (54,006) $ 89
Basic net income (loss) per share $ 0.95 $ (1.82) $ -
Diluted net income (loss) per share $ 0.92 $ (1.82) $ -
The proforma disclosures above include the effect of SFAS 128 relating to the
calculation of earnings per share and Technical Bulletin 97-1, which clarified
the application of SFAS 123 to the estimation of fair value of awards under ESPP
plans with a multiple year look-back feature.
Because SFAS 123 is applicable only to awards granted or modified subsequent to
December 31, 1994, the pro forma effect is not indicative of future proforma
adjustments, when the calculation will apply to all applicable stock options.
NOTE 8. Income Taxes
The income tax provisions, calculated under Statement of Financial Accounting
Standard No. 109 ("SFAS 109") consist of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $ (1,289) $ 2,109 $ 3,167
State - 42 315
Foreign 13,934 8,844 5,621
-------------- ------------- -------------
12,645 10,995 9,103
Deferred:
Federal 1,671 (1,799) -
Foreign 1,411 562 887
-------------- ------------- -------------
3,082 (1,237) 887
Provision for income taxes 15,727 9,758 9,990
Benefit allocated to loss from discontinued operations - - 742
-------------- ------------- -------------
Provision attributable to continuing operations $ 15,727 $ 9,758 $ 10,732
============== ============= =============
</TABLE>
1997 deferred tax assets include a tax benefit of $2,097,000 related to employee
stock option benefits which, when benefited, will reduce current tax liabilities
and be credited to common stock. Actual 1996 current tax liabilities have been
decreased by $2,628,000 due to employee stock option related tax benefits, which
were credited to common stock.
A reconciliation between the Company's effective tax rate and the U.S. statutory
rate (35% in 1997, 1996 and 1995) is as follows (in thousands):
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate $ 17,495 $ (14,522) $ 12,148
Net operating losses (utilized) not utilized (4,508) 11,257 (7,079)
In-process research and development costs
relating to Bit acquisition - 2,724 -
Non-deductible charges arising from acquisition
of PMC-Sierra, Ltd. - - 3,710
Incremental taxes on foreign earnings 2,258 9,406 1,988
Other 482 893 (35)
-------------- --------------- ---------------
Provision for income taxes $ 15,727 $ 9,758 $ 10,732
============== =============== ===============
</TABLE>
Pretax income (loss) from foreign operations was $37,391,000 in 1997,
$23,044,000 in 1996 and $14,298,000 in 1995.
At December 31, 1997, the Company has federal foreign tax credits of $1,002,000
that expire in 1999 and 2000, if not utilized. The Company has $57,478,000
(including $6,409,000 from Bit) of federal net operating losses which will
expire by the year 2012. Utilization of the Bit net operating losses is subject
to substantial limitation due to ownership change limitations provided by the
Internal Revenue Code of 1986. The Company has state research and investment
credit carryforwards of $1,881,000 that expire beginning in 2002.
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
December 31,
------------------------------
1997 1996
Deferred tax assets:
Net operating loss carryforwards $ 21,206 $ 2,416
Credit carryforwards 2,436 2,436
Inventory valuation 229 4,638
Restructuring and other charges 5,984 27,662
Employee stock option benefits 2,097 -
-------------- --------------
Total deferred tax assets 31,952 37,152
Valuation allowance (31,952) (35,353)
-------------- --------------
Total net deferred tax assets - 1,799
-------------- --------------
Deferred tax liabilities:
Depreciation (3,554) (2,143)
Capitalized technology (469) (598)
-------------- --------------
Total deferred tax liabilities (4,023) (2,741)
-------------- --------------
Total net deferred taxes $ (4,023) $ (942)
============== ==============
During 1997, the valuation allowance decreased by approximately $3,401,000 as a
result of utilization of net operating losses. During 1996, the valuation
allowance increased by approximately $26,424,000.
<PAGE>
NOTE 9. Related Parties
The Company sold $4,730,000, $18,936,000, and $46,074,000 of products in 1997,
1996 and 1995, respectively, to Apple Computer ("Apple"), a company who's former
officer is a director of the Company. Outstanding amounts receivable from Apple
were $425,000 and $1,733,000 at December 31, 1997 and 1996, respectively.
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
The Company also sold $2,555,000 and $6,584,000 of products in 1997 and 1996, to
Cisco Systems, Inc. ("Cisco"), a company who's former officer is a director of
the Company. Outstanding accounts receivable from Cisco were $14,185 and
$1,929,000 as at December 31, 1997 and 1996 respectively.
During 1997, a former officer of Northern Telecom Limited ("Nortel") joined as a
director of the Company. The Company sold $1,936,000 of products to Nortel in
1997 and outstanding accounts receivable from Nortel were $30,300 as at December
31, 1997.
NOTE 10. Segment Information
The Company operates in one industry segment, which is the development,
production and sale of high performance semiconductor solutions for the advanced
communications markets.
The Company markets products internationally. The following table presents a
summary of sales by geographical region.
Year ended December 31,
----------------------------------------------
1997 1996 1995
North America $ 101,744 $ 105,310 $ 126,314
Europe and Middle East 11,430 23,684 23,877
Asia 13,693 59,377 38,533
Other 299 - -
--------------- -------------- --------------
$ 127,166 $ 188,371 $ 188,724
=============== ============== ==============
SCI Systems, Inc. an electronic manufacturing service provider for a number of
user interface and networking end customers, accounted for 18% of the Company's
1997 sales and less than 10% for 1996 and 1995. In 1997, 1996 and 1995, sales of
user interface products to Apple Computer accounted for 4%, 10% and 24%,
respectively, of the Company's net revenues.
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
The Company conducts operations in the United States, Canada and other
geographical segments. Net revenues, income (loss) from operations and
identifiable assets applicable to operations by geographic segments were as
follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Net revenues:
United States $ 41,654 $ 125,493 $ 149,326
Canada 85,512 62,878 39,398
--------------- -------------- --------------
Total net revenues $ 127,166 $ 188,371 $ 188,724
=============== ============== ==============
Income (loss) from operations:
United States $ 8,388 $ (63,976) $ 10,382
Canada 40,553 24,905 17,129
--------------- -------------- --------------
Total income (loss) from operations $ 48,941 $ (39,071) $ 27,511
=============== ============== ==============
Identifiable assets:
United States $ 41,962 $ 53,989
Canada 93,904 57,510
Other 13,512 18,415
--------------- --------------
Total assets $ 149,378 $ 129,914
=============== ==============
</TABLE>
NOTE 11. Restructuring
On September 29, 1996, the Company recorded charges of $69,370,000 in connection
with the Company's decision to exit from the modem chipset business and the
associated restructuring of the Company's non-networking product operations. The
charges were recorded in cost of sales as an inventory write down ($4,700,000)
and as restructure costs in operating expenses ($64,670,000). In 1997, the
company recorded a recovery of $1,383,000 from the reversal of the excess
accrued restructuring charge related to the completion of the restructuring.
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
The elements of the restructuring charge are as follows (in thousands):
<TABLE>
<CAPTION>
Shortfall
Accrued Recovery (excess)
Restructuring restructuring (Additional in accrued
charge Sept. Write-down Actual reserve Dec.31 write down) Actual restructuring
29, 1996 of assets expenditures 1996 of assets expenditures reserve
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Write down of
inventories to net
realizable value $ 23,000 $(23,000) $ - $ - $(1,371) $ - $ 1,371
Employee termination
benefits 6,985 - (2,411) 4,574 - (4,950) 376
Loss on supplier
commitments and write
off of prepaid 9,908 (905) (409) 8,594 - (6,254) (2,340)
Write down of excess
fixed assets and
assets related to
capacity commitments 16,580 (16,580) - - 942 - (942)
Provision for price
protection and
product returns 5,047 (5,047) - - - - -
Excess facility costs 3,411 - (408) 3,003 - (2,507) (496)
Write down of
goodwill related to
Company's B.V.
subsidiary in Holland 2,459 (2,459) - - - - -
Severance and closure
costs related to
Europe 1,980 - (1,397) 583 - (1,231) 648
------------ ----------- ------------ ------------ ----------- ------------ -------------
$ 69,370 $(47,991) $(4,625) $16,754 $ (429) $ (14,942) $ (1,383)
============ =========== ============ ============ =========== ============ =============
</TABLE>
As part of this restructuring, the Company ceased manufacturing its modem
chipset products in September 1996 and completed the shutdown of the
non-networking operations in San Jose by the middle of 1997. As a result of its
decision to exit the modem chipset business, the Company identified incremental
impairments in the carrying value of its non-networking inventory resulting in a
$23,000,000 write down of inventories to net realizable value. In 1997, an
additional write down of $1,371,000 was required on disposal of the remaining
inventory. The write down has been included in the excess accrued restructure
reserve recorded in 1997.
Termination benefits for approximately 245 employees associated with the
Company's non-networking operations were paid to employees as they reached their
termination dates, between November 1996 and July 1997. As of December 31, 1996,
118 had reached their termination dates and had left the Company. In 1996, the
Company charged $6,985,000 in costs relating to employee termination benefits
and incurred expenditures of $2,411,000. In 1997, the Company incurred
expenditures of $4,950,000 completing the payment of employee termination
benefits and the shortfall in the accrual of $376,000 is included in the excess
accrued restructure reserve recorded in 1997.
In 1996, the Company recorded charges of $9,908,000 including a write down of
$905,000 and expenditures of $409,000 arising from losses on supplier
commitments and write off of prepaid expenses. In 1997, the Company settled the
remaining supplier commitments and other charges related to the restructuring
through expenditures of $6,254,000 and an excess accrual of $2,340,000 was
included in the recovery recorded in 1997.
In connection with its decision in 1996 to discontinue non-networking
operations, the Company evaluated the ongoing value of the fixed assets and
assets related to capacity commitments associated with these operations. Based
on this evaluation, the Company identified approximately $2.1 million of
non-networking property and equipment that will continue to be utilized in the
Company's networking operations. The remaining non-networking assets with a
carrying amount of approximately $11.6 million were determined to be impaired
and were written down by approximately $9.7 million to their estimated fair
market value. In addition, the Company recorded an impairment in value of
approximately $6.9 million in certain leased assets related to IC Works Inc. In
1997, on disposal of these assets, the Company realized overall proceeds of
$942,000 in excess of the written down value. The excess was included in the
recovery recorded in the current year.
<PAGE>
PMC-Sierra , Inc.
(formerly Sierra Semiconductor Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, 1995
In 1996, the Company charged $3,411,000 relating to excess facility costs
primarily consisting of amounts to be incurred by the Company under a seven year
non-cancelable operating lease expiring in 2003. In 1996, the Company incurred
expenditures of $408,000 related to the charge. In 1997, the Company
successfully cancelled the lease resulting in expenditures of $2,507,000 and an
adjustment of $496,000 to the excess accrued restructure reserve recovery in the
current year.
The Company's operations in Europe were closed as a result of the 1996 decision
to exit the modem chipset business. The charges related to the shutdown of the
European subsidiaries, including severance payments and excess facilities costs,
totalled $1,980,000, with expenditures in 1996 totalling $1,397,000.
Additionally, the restructuring charge included a write down of the remaining
goodwill of $2,459,000 for the Company's Holland operation. In 1997, the Company
competed it's closure of the European operations and incurred expenditures of
$1,231,000 resulting in an under accrual of $648,000 which was included in the
recovery recorded in the current year.
In conjunction with the decision to exit the modem chipset business, the Company
is subject to incremental pricing pressure and potential returns of modem
chipset products. In 1996 a non cash charge of $5,047,000 was recorded as a
write down of related assets to provide for the potential impact of price
protection and product returns.
In 1997, expenditures associated with the restructuring charge were
approximately $14.9 million which were funded by the Company's cash flow from
operations. (1996 - $4.6 million).
NOTE 12. Earnings (loss) per share.
The following table sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Numerator:
Net Income (loss) $ 34,258 $ (48,150) $ 1,479
--------------- -------------- ------------
Denominator:
Basic weighted average common shares outstanding 31,043 29,719 27,018
Effect of dilutive securities:
Stock options 1,585 - 1,602
Stock warrants 14 - -
--------------- -------------- ------------
Diluted weighted average common shares outstanding 32,642 29,719 28,620
=============== ============== ============
--------------- -------------- ------------
Basic net income (loss) per share $ 1.10 $ (1.62) $ 0.06
=============== ============== ============
--------------- -------------- ------------
Diluted net income (loss) per share $ 1.05 $ (1.62) $ 0.05
=============== ============== ============
<FN>
(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic
net income per share.
Share information has been adjusted for a 2 to 1 stock split effective October
5, 1995.
</FN>
</TABLE>
<PAGE>
NOTE 13. Recent Pronouncements.
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" (SFAS 130), which is required to be adopted for
fiscal years beginning on or after December 15, 1997. SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
Reclassification of financial statements for earlier periods presented is
required. The impact of SFAS 130 on the Company's financial statements is not
expected to be material and will be adopted in 1998.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (SFAS
131), which is required to be adopted for fiscal years beginning on or after
December 15, 1997. SFAS 131 establishes new standards for the reporting of
segmented information in annual financial statements and requires the reporting
of certain selected segmented information on interim reports to shareholders.
The impact of SFAS 131 on the Company's financial statements is not expected to
be material and will be adopted in 1998.
<PAGE>
PART III
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
ITEM 10. Directors and Executive Officers of the Registrant
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement for its 1998 Annual
Meeting of Shareholders ("Proxy Statement"). The following sets forth
information regarding executive officers of the Company as of February 28, 1998.
Name Age Position
---- --- --------
Robert L. Bailey 40 President and Chief Executive Officer
Greg Aasen 42 Chief Operating Officer
John W. Sullivan 51 Vice President, Finance and Chief Financial Officer
Officers serve at the discretion of the Board of Directors. There are no family
relationships between any of the directors or officers of the Company.
Mr. Bailey has served as President, Chief Executive Officer and Director of the
Company since July, 1997. In prior years, Mr. Bailey acted as President and
Chief Executive Officer of PMC-Sierra, Ltd. Mr. Bailey was also employed by
AT&T-Microelectronics from August 1989 to November 1993 where he served as Vice
President of Integrated Microperipheral Products. Mr. Bailey became a director
of the Company in October 1996.
Mr. Aasen has served as Chief Operating Officer of the Company since February
1997. Mr. Aasen is a founder of PMC-Sierra, Ltd. and served as its Chief
Operating Officer and Secretary since its formation in June 1992. He has served
as a director of PMC-Sierra, Ltd. since August 1994. Prior to joining PMC-Sierra
Ltd., Mr. Aasen was a General Manager of PMC, a division of MPR Teltech, Ltd.
Mr. Sullivan joined the Company in April 1997 as Vice President, Finance and
Chief Financial Officer. Prior to joining the Company, he was employed by
Semitool Inc., a semiconductor equipment manufacturer, as VP Finance from 1993
to 1997. Prior to his employment with Semitool Inc., Mr. Sullivan was employed
by United Dominion Industries and Arthur Young & Company.
ITEM 11. Executive Compensation.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Consolidated Financial Statements
---------------------------------
The financial statements (including the notes thereto) listed in
the accompanying index to financial statements and financial
statement schedules are filed within this Annual Report on Form
10-K.
2. Financial Statement Schedules
-----------------------------
The financial statement schedule listed on page 22 in the
accompanying index to financial statements and financial statement
schedule is filed within this Annual Report on Form 10-K.
3. Exhibits
--------
The exhibits listed under Item 14(c) are filed as part of this Form
10-K Annual Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company in the quarter
ended December 31, 1997.
(c) Exhibits pursuant to Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit Description Page
Number Number
<S> <C> <C> <C>
2.1 Exchange Agreement dated September 2, 1994 between the Company and Ltd. (C)
2.2 Amended and Restated Shareholders' Agreement dated September 2, 1994 (C)
among the Shareholders of PMC-Sierra, Inc.
2.3 Amendment to Exchange Agreement effective August 9, 1995 (F)
2.4 Agreement and Plan of Merger between Delaware PMC Sierra, Inc., a (I)
Delaware Corporation and PMC-Sierra, Inc., a California Corporation
3.1 Certificate of Incorporation (M)
3.1A Certificate of Amendment to the Certificate of Incorporation --
filed June 13, 1997
3.1B Certificate of Amendment to the Certificate of Incorporation --
filed July 11, 1997
3.2 Bylaws, as amended --
4.1 Specimen of Common Stock Certificate (L)
4.3 Terms of PMC-Sierra, Inc. Special Shares (D)
4.4 Silicon Valley Bank Business Loan Agreement and Promissory Note, each (G)
dated November 29, 1990 and Security Agreement
dated February 22, 1990
4.4B Amendment dated December 29, 1996 to the Silicon Valley Bank Business (K)
Loan Agreement and Promissory Note, dated November 29, 1990 and
Security Agreement dated February 22, 1990.
10.1B 1987 Incentive Stock Plan, as amended (B)
10.2 1991 Employee Stock Purchase plan, as amended (A)
10.4 Form of Indemnification Agreement between the Company and its directors (I)
and officers
<PAGE>
Exhibit Description Page
Number Number
10.8 Warrants to Purchase Common Stock (A)
10.8B Warrant Purchase Agreement and Warrants to Purchase Shares of Common (K)
Stock dated August 28, 1996
10.9D Technology License Agreement dated November 18, 1987, as amended (A)
July 17, 1990
10.17 PMC-Sierra, Inc. 1994 Incentive Stock Plan (E)
10.18 Deposit Agreement with Chartered Semiconductor Pte. Ltd.* (H)
10.18B Amendment Agreement (No. 1) to Deposit Agreement with Chartered (K)
Semiconductor Pte. Ltd.*
10.19 Option Agreement among Sierra Semiconductor Corporation, PMC-Sierra, (K)
Inc., and Taiwan Semiconductor Manufacturing Corporation*
10.21 PMC-Sierra Inc. (Portland) 1996 Stock Option Plan --
10.22 Net Building Lease (PMC-Sierra, Ltd.), dated May 15, 1996 (K)
11.1 Calculation of earnings per share (O)
16.1 Letter regarding change in certifying accountant (N)
21.1 Subsidiaries --
23.1 Consent of Ernst & Young LLP, Independent Auditors --
23.2 Consent of Deloitte & Touche, Independent Auditors --
24.1 Power of Attorney --
<FN>
* Confidential treatment has been granted as to a portion of this exhibit.
(A) Incorporated by reference from the same-numbered exhibit filed with
the Registrant's Registration Statement on Form S-1 (No. 33-39406).
(B) Incorporated by reference from the same-numbered exhibit filed with
the Registrant's Form 10-K Annual Report for the fiscal year ended
January 3, 1993.
(C) Incorporated by reference from the same-numbered exhibit filed with
the Registrant's Current Report on Form 8-K, filed on September 16,
1994, as amended.
(D) Incorporated by reference from exhibit 4 of the Schedule 13-D filed on
November 2, 1994 by GTE Corporation.
(E) Incorporated by reference from the same numbered exhibit filed with
the Registrant's Form 10-K Annual report for the fiscal year ended
January 2, 1994.
(F) Incorporated by reference from exhibit 2.1 filed with Registrant's
Current Report on Form 8-K, filed on September 6, 1995, as amended on
October 6, 1995.
(G) Incorporated by reference from the same numbered exhibit filed with
the Registrant's Registration Statement on Form S-1 (No. 33-39406).
(H) Incorporated by reference from the same numbered exhibit filed with
the Registrant's Form 10-K Annual Report for the fiscal year ended
December 31, 1995.
(I) Incorporated by reference from the same numbered exhibit filed with
Registrant's Form 10-Q for the quarter ended June 30, 1997.
(J) Incorporated by reference from exhibit 3.1 filed with Registrant's
Form 10-Q for the quarter ended June 30, 1997.
<PAGE>
(K) Incorporated by reference from the same numbered exhibit filed with
the Registrant's Form 10-K Annual Report for the fiscal year ended
December 31, 1996.
(L) Incorporated by reference from exhibit 4.4 filed with Registrant's
Current Report on Form 8-K, filed on August 29, 1997.
(M) Incorporated by reference from exhibit 3.1(1) filed with Registrant's
Current Report on Form 8-K, filed on August 29, 1997.
(N) Incorporated by reference from exhibit 16.1 filed with Registrant's
Current Report on Form 8-K, filed on April 18, 1997.
(O) Refer to Note 12 of the financial statements included in Item 8 of
Part II of this report.
</FN>
</TABLE>
(d) Financial Statement Schedules required by this item are listed on page
22 in the accompanying index to the financial statements.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 20, 1998 /s/ Robert L. Bailey
--------------------------
Robert L. Bailey, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert L. Bailey and John W. Sullivan,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ James V. Diller Chairman of the Board and Director March 20, 1998
- ------------------- --------------
James V. Diller
/s/ Robert L. Bailey Director and Chief Executive Officer March 20, 1998
- -------------------- --------------
Robert L. Bailey
/s/ John W. Sullivan Vice President Finance, Chief Financial Officer March 20, 1998
- -------------------- (and Principal Accounting Officer) --------------
John W. Sullivan
/s/ Michael L. Dionne Director March 20, 1998
- --------------------- --------------
Michael L. Dionne
/s/ Colin Beaumont Director March 20, 1998
- ------------------ --------------
Colin Beaumont
/s/ Frank Marshall Director March 20, 1998
- ------------------ --------------
Frank Marshall
/s/ Alexandre Balkanski Director March 20, 1998
- ----------------------- --------------
Alexandre Balkanski
</TABLE>
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
Allowance for Doubtful Accounts
<CAPTION>
Additions
Balance at charged to Additions
beginning of costs and charged to Balance at
Year year expenses other accounts Write-offs end of year
<C> <C> <C> <C> <C> <C>
1997 $ 842 500 - 272 $ 1,070
1996 $ 1,081 666 - 905 $ 842
1995 $ 1,648 49 - 616 $ 1,081
</TABLE>
<TABLE>
1993 Accrued Restructure Costs
<CAPTION>
Additions
Balance at charged to Additions
beginning of costs and charged to Balance at
Year year expenses other accounts Payments end of year
<C> <C> <C> <C> <C> <C>
1997 $ 373 (373) - - $ -
1996 $ 373 - - - $ 373
1995 $ 1,150 - - 777 $ 373
</TABLE>
<TABLE>
1996 Accrued Restructure Costs
<CAPTION>
Accruals
Additions reclassed from
Balance at (recovery) Additions (to) other
beginning of charged to charged to restructure Balance at
Year year expenses other accounts accounts Payments end of year
<C> <C> <C> <C> <C> <C> <C>
1997 $ 16,754 (1,383) (429) - 14,942 $ -
1996 $ - 28,154 - (6,775) 4,625 $ 16,754
1995 $ - - - - - $ -
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit Description Page
Number Number
3.1A Certificate of Amendment to the Certificate of Incorporation --
filed June 13, 1997
3.1B Certificate of Amendment to the Certificate of Incorporation --
filed July 11, 1997
3.2 Bylaws, as amended --
10.21 PMC-Sierra Inc., (Portland) 1996 Stock Option Plan --
21.1 Subsidiaries --
23.1 Consent of Ernst & Young LLP, Independent Auditors --
23.2 Consent of Deloitte & Touche, Independent Auditors --
24.1 Power of Attorney --
CERTIFICATE OF AMENDMENT TO
CERTIFICATE OF INCORPORATION
OF
PMC-SIERRA, INC.
PMC-Sierra, Inc., a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), hereby certifies that:
1. The name of the Corporation is PMC-Sierra, Inc. The Corporation was
originally incorporated under the same name, and original Certificate of
Incorporation was filed with the Secretary of State of the State of Delaware on
May 2, 1997.
2. Article I of the Certificate of Incorporation of the Corporation shall
be amended and restated in its entirety to read as follows:
"The name of this corporation is Delaware PMC-Sierra, Inc. (the
"Corporation")."
3. This Amendment of the Corporation's Certificate of Incorporation has
been duly adopted by the Corporation's board of directors in accordance with
Section 242 of the General Corporation Law of the State of Delaware, and by the
holders of each class of outstanding stock entitled to vote thereon by written
consent given in accordance with Section 228 of the General Corporation Law of
the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to Certificate of Incorporation to be signed by Glenn C. Jones, its
Senior Vice President of Finance and Chief Financial Officer, on this 12th day
of June, 1997.
PMC-SIERRA, INC.
By:/s/ Glenn C. Jones
------------------------------------------------------------
Glenn C. Jones,
Senior Vice President of Finance and Chief Executive Officer
CERTIFICATE OF AMENDMENT TO
CERTIFICATE OF INCORPORATION OF
DELAWARE PMC-SIERRA, INC.
A Delaware corporation, Delaware PMC-Sierra, Inc., a corporation organized
under the laws of the State of Delaware (the "Corporation"), hereby certifies
that:
1. The name of the Corporation is Delaware PMC-Sierra, Inc. The Corporation
was originally incorporated under the name of PMC-Sierra, Inc., and the original
Certificate of Incorporation was filed with the Secretary of State of Delaware
on May 2, 1997.
2. Article I of the Certificate of Incorporation of the Corporation shall
be amended to read as follows:
"The name of this corporation is PMC-Sierra, Inc. (the "Corporation")."
3. Article IX of the Certificate of Incorporation of the Corporation shall
be amended to read as follows:
"Holders of stock of any class or series of this Corporation shall be
entitled to cumulate their votes for the election of directors pursuant to
Section 214 of the Delaware General Corporation Law."
4. Article XII of the Certificate of Incorporation of the Corporation shall
be amended to read as follows:
"No action shall be taken by the stockholders of the Corporation except
at an annual or special meeting of the stockholders called in
accordance with the Bylaws of the Corporation or by written consent."
5. This Amendment of the Corporation's Amended Certificate of Incorporation
has been duly adopted by the Corporation's board of directors in accordance with
Section 242 of the General Corporation Law of the State of Delaware, and by the
holders of each class of outstanding stock entitled to vote thereon by written
consent given in accordance with Section 228 of the General Corporation Law of
the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to
Certificate of Incorporation to be signed by Glenn C. Jones, its Senior Vice
President of Finance and Chief Financial Officer, on this 10th day of July,
1997.
PMC-SIERRA, INC.
By:/s/ Glenn C. Jones
--------------------------------------------------
Glenn C. Jones
Senior Vice President and Chief Financial Officer
BYLAWS
OF
PMC-SIERRA, INC.
(a Delaware Corporation)
<PAGE>
BYLAWS OF
PMC-SIERRA, INC.
(a Delaware Corporation)
TABLE OF CONTENTS
Page
ARTICLE I
CORPORATE OFFICES.................................................-1-
1.1 REGISTERED OFFICE.......................................-1-
1.2 OTHER OFFICES...........................................-1-
ARTICLE II
MEETINGS OF STOCKHOLDERS..........................................-1-
2.1 PLACE OF MEETINGS.......................................-1-
2.2 ANNUAL MEETING..........................................-1-
2.3 SPECIAL MEETING.........................................-2-
2.4 NOTICE OF STOCKHOLDERS' MEETINGS........................-2-
2.5 NOTIFICATIONS OF NOMINATIONS AND PROPOSED BUSINESS......-2-
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE............-3-
2.7 QUORUM..................................................-3-
2.8 ADJOURNED MEETING; NOTICE...............................-4-
2.9 VOTING..................................................-4-
2.10 WAIVER OF NOTICE........................................-4-
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING..............-5-
2.12 PROXIES.................................................-5-
2.13 ORGANIZATION............................................-5-
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE...................-6-
ARTICLE III
DIRECTORS.........................................................-6-
3.1 POWERS..................................................-6-
3.2 NUMBER OF DIRECTORS.....................................-6-
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS................-6-
3.4 RESIGNATION AND VACANCIES...............................-6-
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE................-7-
3.6 REGULAR MEETINGS........................................-8-
3.7 SPECIAL MEETINGS; NOTICE................................-8-
3.8 QUORUM..................................................-8-
3.9 WAIVER OF NOTICE........................................-9-
3.10 ADJOURNMENT.............................................-9-
3.11 NOTICE OF ADJOURNMENT...................................-9-
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.......-9-
3.13 FEES AND COMPENSATION OF DIRECTORS......................-9-
3.14 APPROVAL OF LOANS TO OFFICERS...........................-9-
<PAGE>
ARTICLE IV
COMMITTEES........................................................-10-
4.1 COMMITTEES OF DIRECTORS.................................-10-
4.2 MEETINGS AND ACTION OF COMMITTEES.......................-11-
4.3 COMMITTEE MINUTES.......................................-11-
ARTICLE V
OFFICERS..........................................................-11-
5.1 OFFICERS................................................-11-
5.2 ELECTION OF OFFICERS....................................-11-
5.3 SUBORDINATE OFFICERS....................................-11-
5.4 REMOVAL AND RESIGNATION OF OFFICERS.....................-13-
5.5 VACANCIES IN OFFICES....................................-13-
5.6 CHAIRMAN OF THE BOARD...................................-13-
5.7 PRESIDENT...............................................-13-
5.8 VICE PRESIDENTS.........................................-13-
5.9 SECRETARY...............................................-14-
5.10 CHIEF FINANCIAL OFFICER.....................................-14-
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS..................................................-15-
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS...............-15-
6.2 INDEMNIFICATION OF OTHERS...............................-16-
6.3 INSURANCE...............................................-16-
ARTICLE VII
RECORDS AND REPORTS...............................................-16-
7.1 MAINTENANCE AND INSPECTION OF RECORDS...................-16-
7.2 INSPECTION BY DIRECTORS.................................-17-
7.3 ANNUAL STATEMENT TO STOCKHOLDERS........................-17-
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS..........-17-
7.5 CERTIFICATION AND INSPECTION OF BYLAWS..................-17-
ARTICLE VIII
GENERAL MATTERS...................................................-17-
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING...-17-
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS...............-18-
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED......-18-
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES........-18-
8.5 SPECIAL DESIGNATION ON CERTIFICATES.....................-19-
8.6 LOST CERTIFICATES.......................................-19-
8.7 TRANSFER AGENTS AND REGISTRARS..........................-20-
8.8 CONSTRUCTION; DEFINITIONS...............................-20-
ARTICLE IX
AMENDMENTS........................................................-20-
<PAGE>
BYLAWS
OF
PMC-SIERRA, INC.
(a Delaware Corporation)
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the Corporation shall be fixed in the
Certificate of Incorporation of the Corporation.
1.2 OTHER OFFICES
The Board of Directors may at any time establish branch or subordinate
offices at any place or places where the Corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place within or outside
the State of Delaware designated by the Board of Directors. In the absence of
any such designation, stockholders' meetings shall be held at the principal
executive office of the Corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date
and at a time designated by the Board of Directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Tuesday of May in each year at 10:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected, and
any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
Board of Directors, or by the Chairman of the Board, or by the President.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings of stockholders shall be sent or otherwise
given in accordance with Section 2.6 of these bylaws not less than ten (10) nor
more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date, and hour of the meeting and (i) in the case of a
special meeting, the general nature of the business to be transacted (no
business other than that specified in the notice may be transacted) or (ii) in
the case of the annual meeting, those matters which the Board of Directors, at
the time of giving the notice, intends to present for action by the stockholders
(but any proper matter may be presented at the meeting for such action). The
notice of any meeting at which directors are to be elected shall include the
name of any nominee or nominees who, at the time of the notice, the Board
intends to present for election.
2.5 NOTIFICATIONS OF NOMINATIONS AND PROPOSED BUSINESS.
Subject to the rights of holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation,
(a) nominations for the election of directors, and
(b) business proposed to be brought before any stockholder
meeting
may be made by the Board of Directors or proxy committee appointed by the Board
of Directors or by any stockholder entitled to vote in the election of directors
generally if such nomination or business proposed is otherwise proper business
before such meeting. However, any such stockholder may nominate one or more
persons for election as directors at a meeting or propose business to be brought
before a meeting, or both, only if such stockholder has given timely notice in
proper written form of his intent to make such nomination or nominations or to
propose such business. To be timely, such stockholder's notice must be delivered
to or mailed and received by the Secretary of the Corporation not less than
thirty-five (35) days nor more than sixty (60) days prior to the meeting;
provided, however, that in the event that less than forty-five (45) days notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. To be in proper form, a stockholder's notice to the Secretary shall set
forth:
(i) the name and address of the stockholder who
intends to make the nominations or propose the business and,
as the case may be, of the person or persons to be nominated
or of the business to be proposed;
<PAGE>
(ii) a representation that the stockholder is a
holder of record of stock of the Corporation entitled to
vote at such meeting and, if applicable, intends to appear
in person or by proxy at the meeting to nominate the person
or persons specified in the notice;
(iii) if applicable, a description of all
arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder;
(iv) such other information regarding each nominee or
each matter of business to be proposed by such stockholder
as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and
Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or
intended to be proposed by the Board of Directors; and
(v) if applicable, the consent of each nominee to
serve as director of the Corporation if so elected.
The Chairman of the meeting shall refuse to acknowledge the nomination
of any person or the proposal of any business not made in compliance with the
foregoing procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the Corporation or given by the stockholder to the
Corporation for the purpose of notice. Notice shall be deemed to have been given
at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the Secretary, assistant secretary or any
transfer agent of the Corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stock holders for the
transaction of business except as otherwise provided by statute or by the
Certificate of Incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in
<PAGE>
person or represented by proxy, shall have power to adjourn the meeting in
accordance with Section 2.8 of these bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the Certificate of Incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.
If a quorum be initially present, the stockholders may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
2.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time and place, unless these
bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the Corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the Certificate of
incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or the Certificate of Incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the Certificate of Incorporation or these bylaws.
<PAGE>
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the Board of Directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the Corporation after the record date.
If the Board of Directors does not so fix a record date, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
The record date for any other purpose shall be as provided in Section
8.1 of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the Secretary
of the Corporation, but no such proxy shall be voted or acted upon after three
(3) years from its date unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.
2.13 ORGANIZATION
The President, or in the absence of the President, the Chairman of the
Board, or, in the absence of the President and the Chairman of the Board, one of
the Corporation's vice presidents, shall call the meeting of the stockholders to
order, and shall act as chairman of the meeting. In the absence of the
President, the Chairman of the Board, and all of the vice presidents, the
stockholders shall appoint a chairman for such meeting. The chairman of any
meeting of stockholders shall determine the order of business and the procedures
at the meeting, including such matters as the regulation of the manner of voting
and the conduct of business. The Secretary of the Corporation shall act as
secretary of all meetings of the stockholders, but in the absence of the
Secretary at any meeting of the stockholders, the chairman of the meeting may
appoint any person to act as secretary of the meeting.
<PAGE>
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the Corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the Certificate of Incorporation and these bylaws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the Corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
Board of directors.
3.2 NUMBER OF DIRECTORS
The Board of Directors shall be six until changed by an amendment to
this bylaw, duly adopted by the Board of Directors or by the stockholders, or by
a duly adopted amendment to the Certificate of Incorporation.
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.
3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the
Chairman of the Board, the President, the Secretary or the Board of Directors,
unless the notice specifies a later time for that
<PAGE>
resignation to become effective. If the resignation of a director is effective
at a future time, the Board of Directors may elect a successor to take office
when the resignation becomes effective.
Vacancies in the Board of Directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote of
the stockholders or by court order may be filled only by the affirmative vote of
a majority of the shares represented and voting at a duly held meeting at which
a quorum is present (which shares voting affirmatively also constitute a
majority of the required quorum). Each director so elected shall hold office
until the next annual meeting of the stockholders and until a successor has been
elected and qualified.
Unless otherwise provided in the Certificate of Incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the Certificate of Incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
Corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the Certificate of Incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the Board of Directors may be held at any place
within or outside the State of Delaware that has been designated from time to
time by resolution of the Board. In the absence of
<PAGE>
such a designation, regular meetings shall be held at the principal executive
office of the Corporation. Special meetings of the Board may be held at any
place within or outside the State of Delaware that has been designated in the
notice of the meeting or, if not stated in the notice or if there is no notice,
at the principal executive office of the Corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the Board of Directors may be held without notice
if the times of such meetings are fixed by the Board of Directors. If any
regular meeting day shall fall on a legal holiday, then the meeting shall be
held next succeeding full business day.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the Board of Directors for any purpose or purposes
may be called at any time by the Chairman of the Board, the President, any vice
president, the Secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the Corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
Corporation.
3.8 QUORUM
A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in Section
3.10 of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the Board of Directors, subject to the provisions of the
Certificate of Incorporation and other applicable law.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
<PAGE>
3.9 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meet ing, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the Board of Directors.
3.10 ADJOURNMENT
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting need not
be given unless the meeting is adjourned for more than twenty-four (24) hours.
If the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the Board of Directors
may be taken without a meeting, provided that all members of the Board
individually or collectively consent in writing to that action. Such action by
written consent shall have the same force and effect as a unanimous vote of the
Board of Directors. Such written consent and any counterparts thereof shall be
filed with the minutes of the proceedings of the Board.
3.13 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if
any, for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the Board of Directors. This Section 3.13 shall not
be construed to preclude any director from serving the Corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensa tion
for those services.
3.14 APPROVAL OF LOANS TO OFFICERS
The Corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the Corporation or any of its
subsidiaries, including any officer or employee who is a director of the
Corporation or any of its subsidiaries, whenever, in the judgment of the
directors,
<PAGE>
such loan, guaranty or assistance may reasonably be expected to benefit the
Corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the Corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The Board of Directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the Board. The
Board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the Board, shall have and may exercise all
the powers and authority of the Board, but no such committee shall have the
power of authority to:
(a) amend the Certificate of Incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
as provided in Section 151(a) of the General Corporation Law of Delaware, fix
the designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation);
(b) adopt an agreement of merger or consolidation under
Sections 251 or 252 of the General Corporation Law of Delaware;
(c) recommend to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets;
(d) recommend to the stockholders a dissolution of the
Corporation or a revocation of a dissolution; or
(e) amend the bylaws of the Corporation; and, unless the Board
resolution estab lishing the committee, the bylaws or the Certificate of
Incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
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4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws, Section
3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the Board of
Directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the Board of Directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the Board of Directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The Board of Directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
4.3 COMMITTEE MINUTES.
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the Corporation shall be a president, a secretary, and
a chief financial officer. The Corporation may also have, at the discretion of
the Board of Directors, a chairman of the Board, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and such
other officers as may be appointed in accordance with the provisions of Section
5.3 of these bylaws. Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
The officers of the Corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the Board, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
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The Board of Directors may appoint, or may empower the President to
appoint, such other officers as the business of the Corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the Board of Directors may
from time to time determine.
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5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
Board of Directors at any regular or special meeting of the Board or, except in
case of an officer chosen by the Board of Directors, by any officer upon whom
such power of removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
Corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The Chairman of the Board, if such an officer be elected, shall, if
present, preside at meetings of the Board of Directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
Board of Directors or as may be prescribed by these bylaws. If there is no
President, then the Chairman of the Board shall also be the chief executive
officer of the Corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the Chairman of the Board, if there be such an officer,
the President shall be the chief executive officer of the Corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction, and control of the business and the officers of the Corporation. The
President shall preside at all meetings of the stockholders and, in the absence
or nonexistence of a chairman of the Board, at all meetings of the Board of
Directors. The President shall have the general powers and duties of manage ment
usually vested in the office of president of a corporation, and shall have such
other powers and duties as may be prescribed by the Board of Directors or these
bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the President, the vice presidents, if
any, in order of their rank as fixed by the Board of Directors or, if not
ranked, a vice president designated by the Board of Directors, shall perform all
the duties of the President and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the President. The vice presidents
shall have such other powers and
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perform such other duties as from time to time may be prescribed for them
respectively by the Board of Directors, these bylaws, the President or the
Chairman of the Board.
5.9 SECRETARY
The Secretary shall keep or cause to be kept, at the principal
executive office of the Corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors and stockholders. The minutes shall show the
time and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal
executive office of the Corporation or at the office of the Corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required to be given by law or
by these bylaws. The Secretary shall keep the seal of the Corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the Corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The Chief Financial Officer shall deposit all money and other valuables
in the name and to the credit of the Corporation with such depositaries as may
be designated by the Board of Directors. Chief Financial Officer shall disburse
the funds of the Corporation as may be ordered by the Board of Directors, shall
render to the President and directors, whenever they request it, an account of
all of his or her transactions as Chief Financial Officer and of the financial
condition of the Corporation, and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or these bylaws.
<PAGE>
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware as the same now exists or
may hereafter be amended, indemnify any person against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred in connection with any threatened, pending or completed
action, suit, or proceeding in which such person was or is a party or is
threatened to be made a party by reason of the fact that such person is or was a
director or officer of the Corporation. For purposes of this Section 6.1, a
"director" or "officer" of the Corporation shall mean any person (i) who is or
was a director or officer of the Corporation, (ii) who is or was serving at the
request of the Corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
Corporation or of another enterprise at the request of such predecessor
corporation.
The Corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
Board of Directors of the Corporation.
The Corporation shall pay the expenses (including attorney's fees)
incurred by a director or officer of the Corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the Corporation in advance of
the final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by the director or officer to repay all amounts
advanced if it should ultimately be determined that the director of officer is
not entitled to be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be
exclusive of any other rights which such person may have or hereafter acquire
under any statute, provision of the Corporation's Certificate of Incorporation,
these bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
<PAGE>
6.2 INDEMNIFICATION OF OTHERS
The Corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the Corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the Corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the Corporation, (ii) who is or was serving at
the request of the Corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
Corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the Corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The Corporation shall, either at its principal executive office or at
such place or places as designated by the Board of Directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power
<PAGE>
of attorney or such other writing that authorizes the attorney or other agent to
so act on behalf of the stockholder. The demand under oath shall be directed to
the Corporation at its registered office in Delaware or at its principal place
of business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine (and to make copies of)
the Corporation's stock ledger, a list of its stockholders and its other books
and records for a purpose reasonably related to his or her position as a
director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The Board of Directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the Corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The Chairman of the Board, if any, the President, any vice president,
the Chief Financial Officer, the Secretary or any assistant secretary of this
Corporation, or any other person authorized by the Board of Directors or the
President or a vice president, is authorized to vote, represent and exercise on
behalf of this Corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
Corporation. The authority herein granted may be exercised either by such person
directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
7.5 CERTIFICATION AND INSPECTION OF BYLAWS
The original or a copy of these bylaws, as amended or otherwise altered
to date, certified by the Secretary, shall be kept at the Corporation's
principal executive office and shall be open to inspection by the stockholders
of the Corporation, at all reasonable times during office hours.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) days before any such action. In that case, only
stockholders of record at the close
<PAGE>
of business on the date so fixed are entitled to receive the dividend,
distribution or allotment of rights, or to exercise such rights, as the case may
be, notwithstanding any transfer of any shares on the books of the Corporation
after the record date so fixed, except as otherwise provided in the General
Corporation Law of Delaware.
If the Board of Directors does not so fix a record date, then the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the Board adopts the applicable
resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the Board of Directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the Corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The Board of Directors, except as otherwise provided in these bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the Corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
The shares of the Corporation shall be represented by certificates,
provided that the Board of Directors of the Corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates and, upon request,
every holder of uncertificated shares, shall be entitled to have a certificate
signed by, or in the name of the Corporation by, the Chairman or vice-chairman
of the Board of Directors, or the President or vice-president, and by the
treasurer or an assistant treasurer, or the Secretary or an assistant secretary
of such corporation representing the number of shares registered in certificate
form. Any or all of the signatures on the certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if he or she were such officer,
transfer agent or registrar at the date of issue.
Certificates for shares shall be of such form and device as the Board
of Directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of
<PAGE>
issuance; the number of shares for which it is issued; a summary statement or
reference to the powers, designations, preferences or other special rights of
such stock and the qualifications, limitations or restrictions of such
preferences and/or rights, if any; a statement or summary of liens, if any; a
conspicuous notice of restrictions upon transfer or registration of transfer, if
any; a statement as to any applicable voting trust agreement; if the shares be
assessable, or, if assessments are collectible by personal action, a plain
statement of such facts.
Upon surrender to the Secretary or transfer agent of the Corporation of
a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The Corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the Corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the Corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
If the Corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the Corporation shall issue to represent
such class or series of stock a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the Corporation and canceled at the same time. The Board of
Directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the Board may require; the Board
may require indemnification of the Corporation secured by a bond or other
adequate security sufficient to protect the Corporation against any claim that
may be made
<PAGE>
against it, including any expense or liability, on account of the alleged loss,
theft or destruction of the certificate or the issuance of the replacement
certificate.
8.7 TRANSFER AGENTS AND REGISTRARS
The Board of Directors may appoint one or more transfer agents or
transfer clerks, and one or more registrars, each of which shall be an
incorporated bank or trust company -- either domestic or foreign, who shall be
appointed at such times and places as the requirements of the Corporation may
necessitate and the Board of Directors may designate.
8.8 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the Corporation may be adopted, amended
or repealed by the stockholders entitled to vote or by the Board of Directors of
the Corporation. The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their power
to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in
the book of bylaws with the original bylaws, in the appropriate place. If any
bylaw is repealed, the fact of repeal with the date of the meeting at which the
repeal was enacted or the filing of the operative written consent(s) shall be
stated in said book.
PMC-SIERRA, INC. (PORTLAND)
1996 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan
are:
- to attract and retain the best available personnel for
positions of substantial responsibility,
- to provide additional incentive to Employees and Consultants,
and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or Nonstatutory
Stock Options, as determined by the Administrator at the time of grant.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Administrator" means the Board or any of its
Committees as shall be administering the Plan, in accordance with Section 4 of
the Plan.
(b) "Applicable Laws" means the legal requirements
relating to the administration of stock option plans under state corporate and
securities laws and the Code.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as
amended.
(e) "Committee" means a Committee appointed by the Board
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of PMC-Sierra,
Inc.
(g) "Company" means PMC-Sierra, Inc. (Portland), a
Delaware corporation.
(h) "PMC" means PMC-Sierra, Inc., a Delaware corporation.
(i) "Consultant" means any person, including an advisor,
Sales Representative or Distributor engaged by the Company or a Parent or
Subsidiary to render services and who is compensated for such services, provided
that the term "Consultant" shall not include Directors who are paid only a
director's fee by the Company or who are not compensated by the Company for
their services as Directors.
<PAGE>
(j) "Continuous Status as an Employee, Consultant or
Outside Director" means that the employment, consulting or director relationship
with the Company or any Parent or Subsidiary is not interrupted or terminated.
Continuous Status as an Employee, Consultant or Outside Director shall not be
considered interrupted in the case of: (i) any leave of absence approved by the
Company, including sick leave, military leave, or any other personal leave;
provided, however, that for purposes of Incentive Stock Options, no such leave
may exceed ninety (90) days, unless reemployment upon the expiration of such
leave is guaranteed by contract (including certain Company policies) or statute;
provided, further, that on the ninety-first (91st) day of any such leave (where
reemployment is not guaranteed by contract or statute) the Optionee's Incentive
Stock Option shall cease to be treated as an Incentive Stock Option and will be
treated for tax purposes as a Nonstatutory Stock Option; or (ii) transfers
between locations of the Company or between the Company, its Parent, its
Subsidiaries or its successor.
(k) "Director" means a member of the Board or a member of
the board of directors of any Parent or Subsidiary of Company.
(l) "Disability" means total and permanent disability as
defined in Section 22(e)(3) of the Code.
(m) "Employee" means any person, including Officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(n) "Exchange Act" means the Securities Exchange Act of
1934, as amended.
(o) "Fair Market Value" means, as of any date, the value
of Common Stock determined as follows:
(i) If the Common Stock is listed on any
established stock exchange or a national market system, including without
limitation the National Market System of the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a
Share of Common Stock shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such system or exchange (or
the exchange with the greatest volume of trading in Common Stock) on the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ
System (but not on the National Market System thereof) or is regularly quoted by
a recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the day of determination, as
reported in The Wall Street Journal or such other source as the Administrator
deems reliable; or
<PAGE>
(iii) In the absence of an established market for
the Common Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(p) "Incentive Stock Option" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code and the regulations promulgated thereunder.
(q) "Nonstatutory Stock Option" means an Option not
intended to qualify as an Incentive Stock Option.
(r) "Notice of Grant" means a written notice evidencing
certain terms and conditions of an individual Option grant. The Notice of Grant
is part of the Option Agreement.
(s) "Officer" means a person who is an officer of the
Company within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(t) "Option" means a stock option granted pursuant to the
Plan.
(u) "Option Agreement" means a written agreement between
the Company and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions of the
Plan.
(v) "Option Exchange Program" means a program whereby
outstanding options are surrendered in exchange for options with a lower
exercise price.
(w) "Optioned Stock" means the Common Stock subject to an
Option.
(x) "Optionee" means an Employee, Consultant or Outside
Director who holds an outstanding Option.
(y) "Outside Director" shall mean a Director who is not
an Employee of the Company.
(z) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(aa) "Plan" means this 1996 Stock Option Plan.
(bb) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or
any successor to Rule 16b-3, as in effect when discretion is being exercised
with respect to the Plan.
(cc) "Share" means a share of the Common Stock, as
adjusted in accordance with Section 12 of the Plan.
<PAGE>
(dd) "Subsidiary" means a "subsidiary corporation",
whether now or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of
Section 12 of the Plan, the maximum aggregate number of Shares which may be
optioned and sold under the Plan is 450,000 Shares. The Shares may be
authorized, but unissued, or reacquired Common Stock. However, should the
Company reacquire Shares which were issued pursuant to the exercise of an
Option, such Shares shall not become available for future grant under the Plan.
If an Option expires or becomes unexercisable without having
been exercised in full, or is surrendered pursuant to an Option Exchange
Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
the Plan, upon exercise of an Option, shall not be returned to the Plan and
shall not become available for future distribution under the Plan. For purposes
of the preceding sentence, voting rights shall not be considered a benefit of
Share ownership.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. If permitted
by Rule 16b-3, the Plan may be administered by different bodies with respect to
Directors, Officers who are not Directors, and Employees who are neither
Directors nor Officers.
(ii) Administration With Respect to Directors and
Officers Subject to Section 16(b). With respect to Option grants made to
Employees who are also Officers or Directors subject to Section 16(b) of the
Exchange Act, the Plan shall be administered by (A) the Board, if the Board may
administer the Plan in compliance with the rules governing a plan intended to
qualify as a discretionary plan under Rule 16b-3, or (B) a committee designated
by the Board to administer the Plan, which committee shall be constituted to
comply with the rules governing a plan intended to qualify as a discretionary
plan under Rule 16b-3. Once appointed, such Committee shall continue to serve in
its designated capacity until otherwise directed by the Board. From time to time
the Board may increase the size of the Committee and appoint additional members,
remove members (with or without cause) and substitute new members, fill
vacancies (however caused), and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by the
rules governing a plan intended to qualify as a discretionary plan under Rule
16b-3.
(iii) Administration With Respect to Other
Persons. With respect to Option grants made to Employees or Consultants who are
neither Directors nor Officers of the Company, the Plan shall be administered by
(A) the Board or (B) a committee designated by the Board, which committee shall
be constituted to satisfy Applicable Laws. Once appointed, such
<PAGE>
Committee shall serve in its designated capacity until otherwise directed by the
Board. The Board may increase the size of the Committee and appoint additional
members, remove members (with or without cause) and substitute new members, fill
vacancies (however caused), and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
Applicable Laws.
(b) Powers of the Administrator. Subject to the
provisions of the Plan, and in the case of a Committee, subject to the specific
duties delegated by the Board to such Committee, the Administrator shall have
the authority, in its discretion:
(i) to determine the Fair Market Value of the
Common Stock, in accordance with Section 2(n) of the Plan;
(ii) to select the Consultants and Employees to
whom Options may be granted hereunder;
(iii) to determine whether and to what extent
Options are granted hereunder;
(iv) to determine the number of shares of Common
Stock to be covered by each Option granted hereunder;
(v) to approve forms of agreement for use under
the Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vii) to reduce the exercise price of any Option
to the then current Fair Market Value if the Fair Market Value of the Common
Stock covered by such Option shall have declined since the date the Option was
granted;
(viii) to construe and interpret the terms of the
Plan and awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations relating to
sub-plans established for the purpose of qualifying for preferred tax treatment
under foreign tax laws;
(x) to modify or amend each Option (subject to
Section 14(c) of the Plan);
<PAGE>
(xi) to authorize any person to execute on behalf
of the Company any instrument required to effect the grant of an Option
previously granted by the Administrator;
(xii) to institute an Option Exchange Program;
(xiii) to determine the terms and restrictions
applicable to Options; and
(xiv) to make all other determinations deemed
necessary or advisable for administering the Plan.
(c) Effect of Administrator's Decision. The
Administrator's decisions, determinations and interpretations shall be final and
binding on all Optionees and any other holders of Options.
5. Eligibility.
(a) Nonstatutory Stock Options may be granted to
Employees and Consultants. Incentive Stock Options may be granted only to
Employees. Options may also be granted to Outside Directors but only in
accordance with the provisions of Section 5(b) hereof. Subject to Section 5(b)
with respect to Outside Directors, if otherwise eligible, an Optionee who has
been granted an Option may be granted additional Options.
(b) The provisions set forth in this Section 5(b) shall
not be amended more than once every six months, other than to comport with
changes in the Code, the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder.
6. Limitations.
(a) Each Option shall be designated in the Notice of
Grant as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of Shares subject to an Optionee's incentive stock options
granted by the Company, any Parent or Subsidiary, which become exercisable for
the first time during any calendar year (under all plans of the Company or any
Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares shall be determined as of the time of grant.
(b) Neither the Plan nor any Option shall confer upon an
Optionee any right with respect to continuing the Optionee's employment or
consulting relationship with the Company, nor shall they interfere in any way
with the Optionee's right or the Company's right to terminate such employment or
consulting relationship at any time, with or without cause.
<PAGE>
(c) The following limitations shall apply to grants of
Options to Employees:
(i) No Employee shall be granted, in any fiscal
year of the Company, Options to purchase more than 450,000 Shares.
(ii) The foregoing limitation shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 12(a).
(iii) If an Option is canceled (other than in
connection with a transaction described in Section 12), the canceled Option will
be counted against the limit set forth in Section 6(c)(i). For this purpose, if
the exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 18 of the Plan, the Plan
shall become effective upon the earlier to occur of its adoption by the Board or
its approval by the stockholders of the Company as described in Section 18 of
the Plan. It shall continue in effect for a term of ten (10) years unless
terminated earlier under Section 14 of the Plan.
8. Term of Option. The term of each Option shall be stated in the
Notice of Grant; provided, however, that in the case of an Incentive Stock
Option, the term shall be ten (10) years from the date of grant or such shorter
term as may be provided in the Notice of Grant. Moreover, in the case of an
Incentive Stock Option granted to an Optionee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the term of the Incentive Stock Option shall be five (5) years from
the date of grant or such shorter term as may be provided in the Notice of
Grant.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the
time the Incentive Stock Option is granted, owns stock representing more than
ten percent (10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per Share exercise price shall be no less than
110% of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than
an Employee described in paragraph (A) immediately above, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
<PAGE>
(ii) the case of a Nonstatutory Stock Option,
the per Share exercise price shall be determined by the Administrator.
(b) Waiting Period and Exercise Dates. At the time an
Option is granted, the Administrator shall fix the period within which the
Option may be exercised and shall determine any conditions which must be
satisfied before the Option may be exercised. In so doing, the Administrator may
specify that an Option may not be exercised until the completion of a service
period.
(c) Form of Consideration. The Administrator shall
determine the acceptable form of consideration for exercising an Option,
including the method of payment. In the case of an Incentive Stock Option, the
Administrator shall determine the acceptable form of consideration at the time
of grant. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six months on the date of surrender, and (B) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised;
(v) delivery of a properly executed exercise
notice together with such other documentation as the Administrator and the
broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price;
(vi) a reduction in the amount of any Company
liability to the Optionee, including any liability attributable to the
Optionee's participation in any Company-sponsored deferred compensation program
or arrangement;
(vii) any combination of the foregoing methods of
payment; or
(viii) such other consideration and method of
payment for the issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
<PAGE>
(a) Procedure for Exercise; Rights as a stockholder. Any
Option granted hereunder shall be exercisable according to the terms of the Plan
and at such times and under such conditions as determined by the Administrator
and set forth in the Option Agreement.
An Option may not be exercised for a fraction of a
Share.
An Option shall be deemed exercised when the Company
receives: (i) written notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the stock certificate evidencing such Shares is issued (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly after the Option is exercised. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
Exercising an Option in any manner shall decrease the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Employment, Consulting or Outside
Director Relationship. Upon termination of an Optionee's Continuous Status as an
Employee, Consultant or Outside Director (but not in the event of a change of
status from Employee to Consultant or Outside Director (in which case an
Employee's Incentive Stock Option shall automatically convert to a Nonstatutory
Stock Option on the ninety-first (91st) day following such change of status) or
from Consultant or Outside Director to Employee), other than upon the Optionee's
death or Disability, the Optionee may exercise his or her Option, but only
within such period of time as is specified in the Notice of Grant, and only to
the extent that the Optionee was entitled to exercise it at the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant). In the absence of a specified time
in the Notice of Grant, the Option shall remain exercisable for 90 days
following the Optionee's termination of Continuous Status as an Employee or
Consultant. In the case of an Incentive Stock Option, such period of time shall
not exceed ninety (90) days from the date of termination. If, at the date of
termination, the Optionee is not entitled to exercise his or her entire Option,
the Shares covered by the unexercisable portion of the Option shall revert to
the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
Notwithstanding the foregoing, Options granted in connection with the
acquisition of assets of Bipolar Integrated Technology, Inc. shall be governed
by the provisions concerning events upon termination of Employment stated in the
option agreements evidencing such Options.
<PAGE>
(c) Disability of Optionee. In the event that an
Optionee's Continuous Status as an Employee or Consultant terminates as a result
of the Optionee's Disability, the Optionee may exercise his or her Option at any
time within twelve (12) months from the date of such termination, but only to
the extent that the Optionee was entitled to exercise it at the date of such
termination (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant). If, at the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an
Optionee, the Option may be exercised at any time within twelve (12) months
following the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Notice of Grant), by the Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent that the Optionee was entitled to
exercise the Option at the date of death. If, at the time of death, the Optionee
was not entitled to exercise his or her entire Option, the Shares covered by the
unexercisable portion of the Option shall immediately revert to the Plan. If,
after death, the Optionee's estate or a person who acquired the right to
exercise the Option by bequest or inheritance does not exercise the Option
within the time specified herein, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
(e) Rule 16b-3. Options granted to individuals subject to
Section 16 of the Exchange Act ("Insiders") must comply with the applicable
provisions of Rule 16b-3 and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum exemption
from Section 16 of the Exchange Act with respect to Plan transactions.
11. Non-Transferability of Options. An Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee.
12. Adjustments Upon Changes in Capitalization, Dissolution,
Merger, Asset Sale or Change of Control.
(a) Changes in Capitalization. Subject to any required
action by the stockholders of the Company, the number of shares of Common Stock
covered by each outstanding Option, and the number of shares of Common Stock
which have been authorized for issuance under the Plan but as to which no
Options have yet been granted or which have been returned to the Plan upon
cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not
<PAGE>
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect shall
be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the
proposed dissolution or liquidation of the Company, to the extent that an Option
has not been previously exercised, it will terminate immediately prior to the
consummation of such proposed action. The Board may, in the exercise of its sole
discretion in such instances, declare that any Option shall terminate as of a
date fixed by the Board and give each Optionee the right to exercise his or her
Option as to all or any part of the Optioned Stock, including Shares as to which
the Option would not otherwise be exercisable.
(c) Merger or Asset Sale. In the event of a merger of the
Company with or into another corporation, or the sale of substantially all of
the assets of the Company, each outstanding Option that was granted as
substitution of non-qualified options to purchase common stock of Bipolar
Integrated Technology, Inc. shall become exercisable immediately upon the
closing of such transaction as to all or a portion of the Optioned Stock,
including Shares as to which it would not otherwise be exercisable. Any other
outstanding Option and each Stock Purchase Right shall be assumed or an
equivalent option or right shall be substituted by the successor corporation or
a Parent or Subsidiary of the successor corporation. The Administrator may, in
lieu of such assumption or substitution, provide for the Optionee to have the
right to exercise the Option or Stock Purchase Right as to all or a portion of
the Optioned Stock, including Shares as to which it would not otherwise be
exercisable. If the Administrator makes an Option or Stock Purchase Right
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Administrator shall notify the Optionee that the Option or
Stock Purchase Right shall be fully exercisable for a period of fifteen (15)
days from the date of such notice, and the Option or Stock Purchase Right will
terminate upon the expiration of such period. For the purposes of this
paragraph, the Option or Stock Purchase Right shall be considered assumed if,
following the merger or sale of assets, the option or right confers the right to
purchase, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets was not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
<PAGE>
13. Date of Grant. The date of grant of an Option shall be, for
all purposes, the date on which the Administrator makes the determination
granting such Option, or such other later date as is determined by the
Administrator. Notice of the determination shall be provided to each Optionee
within a reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time
amend, alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Company shall obtain
stockholder approval of any Plan amendment to the extent necessary to comply
with Section 422 of the Code (or any successor rule or statute or other
applicable law, rule or regulation, including the requirements of any exchange
or quotation system on which the Common Stock is listed or quoted). Such
stockholder approval, if required, shall be obtained in such a manner and to
such a degree as is required by the applicable law, rule or regulation.
(c) Effect of Amendment or Termination. No amendment,
alteration, suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee and
the Company.
15. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, Applicable Laws,
and the requirements of any stock exchange or quotation system upon which the
Shares may then be listed or quoted, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the
exercise of an Option, the Company may require the person exercising such Option
to represent and warrant at the time of any such exercise that the Shares are
being purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
<PAGE>
16. Liability of Company.
(a) Inability to Obtain Authority. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
(b) Grants Exceeding Allotted Shares. If the Optioned
Stock covered by an Option exceeds, as of the date of grant, the number of
Shares which may be issued under the Plan without additional stockholder
approval, such Option shall be void with respect to such excess Optioned Stock,
unless stockholder approval of an amendment sufficiently increasing the number
of Shares subject to the Plan is timely obtained in accordance with Section
14(b) of the Plan.
17. Reservation of Shares. The Company, during the term of this
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.
PMC-SIERRA, INC.
LIST OF SUBSIDIARIES
1. PMC-Sierra Ltd., organized under the laws of Canada, doing business only
under its official name.
2. PMC-Sierra, Inc. (Portland), organized under the laws of Delaware, doing
business only under its official name.
3. PMC-Sierra, Inc. (U.S.), organized under the laws of Washington, doing
business only under its official name.
4. Sierra Semiconductor B.V., organized under the laws of The Netherlands,
doing business only under its official name.
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 Nos. 33-86930, 33-90392, 33-96620, 33-97490 and 333-15519), and in the
Registration Statements (Form S-8 Nos. 33-41027, 33-80988, 333-13387, 33-80992,
33-94790, 333-13359, 333-34671 and 333-13357) pertaining to the 1991 Employee
Stock Purchase Plan, the 1994 Incentive Stock Plan, and the PMC-Sierra, Inc.
(Portland) 1996 Stock Option Plan of PMC-Sierra, Inc. (formerly Sierra
Semiconductor Corporation) and in the related Prospectuses, of our report dated
January 22, 1997, with respect to the consolidated financial statements and
schedule of PMC-Sierra, Inc. (formerly Sierra Semiconductor Corporation)
included in this Annual Report (Form 10-K) for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
San Jose, California
March 19, 1998
CONSENT OF DELOITTE & TOUCHE, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 Nos. 33-86930, 33-90392, 33-96620, 33-97490 and 333-15519), and in the
Registration Statements (Form S-8 Nos. 33-41027, 33-80988, 333-13387, 33-80992,
33-94790, 333-13359, 333-34671, 333-13357) pertaining to the 1991 Employee Stock
Purchase Plan, the 1994 Incentive Stock Plan and the PMC-Sierra, Inc. (Portland)
1996 Stock Option Plan of PMC-Sierra, Inc. and in the related Prospectuses, of
our report dated January 22, 1998, with respect to the consolidated financial
statements and schedule of PMC-Sierra, Inc. included in this Annual Report (Form
10-K) for the year ended December 31, 1997.
/s/ Deloitte & Touche
Vancouver, B.C.
March 16, 1998
