-----------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10 - Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the quarterly period ended March 29, 1998
[ ] Transition report pursuant to Section
13 or 15(d) of the Securities Exchange
Act of 1934.
For the Transition Period From ____ to ____
Commission File Number 0-19084
PMC-Sierra, Inc.
(Exact name of registrant as specified in its charter)
A Delaware Corporation - I.R.S. NO. 94-2925073
105-8555 BAXTER PLACE
BURNABY, BRITISH COLUMBIA, V5A 4V7
CANADA
Telephone (604) 415-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes ___X____ No _______
Common shares outstanding at March 29, 1998 - 30,139,902
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<PAGE>
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated statements of operations 3
- Consolidated balance sheets 4
- Consolidated statements of cash flows 5
- Notes to consolidated financial statements 6
- RISK FACTORS 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II - OTHER INFORMATION
Item 5. Change in Fiscal Year End 18
Item 6. Exhibits and Reports on Form 8 - K 18
<PAGE>
Part 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(unaudited)
Three Months Ended
------------------------
Mar 29, Mar 31,
1998 1997
Net revenues $ 34,295 $ 33,574
Cost of revenues 8,135 9,851
----------- -----------
Gross profit 26,160 23,723
Other costs and expenses:
Research and development 6,016 6,040
Marketing, general and administrative 6,122 6,301
----------- -----------
Income from operations 14,022 11,382
Interest income (expense), net 824 (75)
----------- -----------
Income before provision for income taxes 14,846 11,307
Provision for income taxes 5,197 2,827
----------- -----------
Net income $ 9,649 $ 8,480
=========== ===========
Basic net income per share $ 0.31 $ 0.28
----------- -----------
Diluted net income per share $ 0.29 $ 0.27
=========== ===========
Shares used to calculate:
Basic net income per share 31,524 30,774
Diluted net income per share 33,701 31,895
See notes to consolidated financial statements.
<PAGE>
<TABLE>
PMC-Sierra, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
Mar 29, Dec 28,
1998 1997
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 77,149 $ 27,906
Short-term investments 2,982 41,334
Accounts receivable, net 17,602 15,103
Inventories 4,258 3,199
Prepaid expenses and other current assets 1,717 1,958
Short-term deposits for wafer fabrication capacity - 4,000
------------ ------------
Total current assets 103,708 93,500
Property and equipment, net 20,377 19,699
Goodwill and other intangible assets, net 8,174 8,635
Investments and other assets 4,424 4,424
Deposits for wafer fabrication capacity 23,120 23,120
------------ ------------
$ 159,803 $ 149,378
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 6,251 $ 7,421
Accrued liabilities 16,702 13,751
Accrued income taxes 6,935 8,780
Current portion of obligations under
capital leases and long-term debt 4,515 4,652
Net liabilities of discontinued operations 249 301
------------ ------------
Total current liabilities 34,652 34,905
Deferred income taxes 3,992 4,023
Noncurrent obligations under capital leases and long-term debt 8,104 9,092
Special shares convertible into PMC common stock 9,503 10,793
Shareholders' equity:
Common stock, par value $0.001 30 30
Additional paid in capital 146,491 143,153
Accumulated deficit (42,969) (52,618)
------------ ------------
Total shareholders' equity 103,552 90,565
------------ ------------
$ 159,803 $ 149,378
============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Three Months Ended
--------------------------
Mar 29, Mar 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,649 $ 8,480
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,379 1,967
Changes in assets and liabilities
Accounts receivable (2,499) (299)
Inventories (1,059) 2,741
Prepaid expenses and other 379 251
Accounts payable and accrued expenses (95) (3,162)
Accrued restructuring costs - (2,244)
Net assets/liabilities associated with discontinued operations (52) (100)
------------ ------------
Net cash provided by operating activities 8,702 7,634
------------ ------------
Cash flows from investing activities:
Proceeds from sales/maturities of short-term investments 40,460 7,039
Purchases of short-term investments (2,108) (4,970)
Proceeds from refund of wafer fabrication deposits 4,000 -
Proceeds from sale of equipment - 1,012
Purchases of plant and equipment (2,734) (64)
------------ ------------
Net cash provided by investing activities 39,618 3,017
------------ ------------
Cash flows from financing activities:
Repayment of notes payable and long-term debt - (579)
Proceeds from sale/leaseback of equipment - 1,107
Principal payments under capital lease obligations (1,125) (927)
Proceeds from issuance of common stock 2,048 1,538
------------ ------------
Net cash provided by financing activities 923 1,139
------------ ------------
Net increase in cash and cash equivalents 49,243 11,790
Cash and cash equivalents, beginning of the period 27,906 35,038
------------ ------------
Cash and cash equivalents, end of the period $ 77,149 $ 46,828
============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PMC-SIERRA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those
rules or regulations. The interim financial statements are unaudited, but
reflect all adjustments which are, in the opinion of management, necessary
to present a fair statement of results for the interim periods presented.
These financial statements should be read in conjunction with the financial
statements and the notes thereto in the Company's Annual Report on Form
10-K for the year ended December 28, 1997. The results of operations for
the three months ended March 29, 1998 are not necessarily indicative of
results to be expected in future periods.
2. The components of inventories are as follows (in thousands):
Mar 29, Dec 28,
1998 1997
(unaudited)
Work-in-progress $ 2,988 $ 2,316
Finished goods 1,270 883
------------ ------------
$ 4,258 $ 3,199
============ ============
3. Recently Issued Accounting Standards
- - Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income".
SFAS No. 130 requires disclosure of comprehensive income in interim periods
and additional disclosures of the components of comprehensive income on an
annual basis. Comprehensive income includes all changes in equity during a
period except those resulting from investments by and distributions to the
Company's shareholders. For the quarters ended March 31, 1998 and 1997,
there were no material differences between the Company's comprehensive
income and net income.
- - In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major
customers. Adoption of this statement will not impact the Company's
consolidated financial position, results of operations or cash flows. The
Company will adopt this statement in its financial statements for the year
ending December 27, 1998.
<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. 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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
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 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. The Company recently announced the
signing of a definitive agreement to purchase Integrated Telecom Technology,
Inc. If that acquisition receives regulatory approval, it will result in a
significant one-time write-off of in-process research and development as well as
the amortization of intangibles over a number of 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.
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.
<PAGE>
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.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
First Quarters of 1998 and 1997
Net Revenues ($000,000)
- -----------------------
First First
Quarter Quarter
1998 Change 1997
---- ------ ----
Net revenues
Networking products $27.9 80% $15.5
User Interface $6.4 (65%) 18.1
------ ------
Total net revenues $34.3 2% $33.6
====== ======
First quarter networking semiconductor revenues were $27.9 million, up 80% from
the prior year first quarter. Networking semiconductor revenues have increased
in each of the last five quarters. The largest quarterly percentage increase was
between first and second quarter of 1997 when such revenues increased 37%. The
smallest quarterly percentage increase was between last year's third and fourth
quarters when networking semiconductor revenues increased 3%. Networking
semiconductor revenues in the first quarter of 1998 increased 12% over the
fourth quarter of 1997. In the near term the Company expects increasing revenues
from its networking semiconductor products. Because the Company is a supplier in
a dynamic and changing industry, the Company expects to see future variations,
when viewed from a quarterly results perspective, in its long term growth rate,
similar to the variations it has experienced in the past year.
The significant growth in revenues from networking semiconductors was largely
offset by a $11.7 million decline in revenues related to non-networking
products. In the third quarter of 1996 the Company made a strategic decision to
exit its modem chipset business, restructure its other non-networking business
and focus on networking semiconductors. In the first quarter of 1997, user
interface revenues still included the sale of modem chipsets. User interface
revenues in the first quarter of 1998 were predominantly related to specialty
chips which the Company believes will continue at meaningful levels into 1999.
The Company has discontinued all further development of follow-on products in
this area and expects User Interface revenues to stop altogether as current
customers do their next product design.
<PAGE>
Gross Profit ($000,000)
- -----------------------
First First
Quarter Quarter
1998 Change 1997
---- ------ ----
Gross profit $26.2 (11%) $23.7
Percentage of net revenues 76% 71%
Total gross profit increased $2.5 million in the first quarter of 1998 compared
to the prior year's first quarter. Gross profit also increased as a percentage
of net revenues. Increased sales of higher gross margin networking products more
than offset a decline in gross profit due to lower revenues from the Company's
user interface products.
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.
Operating Expenses and Charges ($000,000)
- -----------------------------------------
First First
Quarter Quarter
1998 Change 1997
---- ------ ----
Research and development $6.0 0% $6.0
Percentage of net revenues 18% 18%
Marketing, general & administrative $6.1 (3%) $6.3
Percentage of net revenues 18% 19%
Operating expenses measured in dollars and as a percentage of net revenues did
not change substantially in the first quarter of 1998 from the first quarter of
1997. In the first quarter of 1997 a portion of the research and development
expense was related to user interface products while in the first quarter of
1998, substantially all of the expense is related to networking semiconductors.
The Company expects research and development ("R&D") costs to increase in the
near term in dollars and as a percentage of net revenues.
The Company funds R&D expenditures to attain technological leadership with a
multi-year perspective. Such funding has resulted in fluctuation in R&D spending
from period to period in the past. The Company expects such fluctuations,
particularly when measured as a percentage of net revenues, to occur in the
future, primarily due to the timing of expenditures and changes in the level of
net revenues.
A substantial portion of the Company's marketing, general & administrative
expense is fixed in the short term. While it is the Company's long term goal to
reduce these costs as a percentage of net revenues during periods of rising
sales, a decline in net sales would cause these costs to increase as a
percentage of net revenues.
Interest Income (Expense), Net
- ------------------------------
Net interest income increased to $824,000 in the first quarter of 1998 from a
net expense of $75,000 in the comparable period in 1997 primarily due to higher
cash balances available to invest and earn interest and reduced interest expense
due to a lower level of capital leases.
Provision for Income Taxes
- --------------------------
The provision for income taxes consists primarily of estimated taxes on Canadian
and other foreign operations.
Liquidity and Capital Resources
- -------------------------------
The Company's cash and cash equivalents and short term investments increased
from $69.2 million on December 31, 1997 to $80.1 million on March 29, 1998.
During the first quarter of 1998 the Company's operating activities provided
$8.7 million in cash which included $9.6 million in net income and $2.4 million
in depreciation and amortization as well as a $2.5 million increase in accounts
receivable and a $1.1 million increase in inventory. Cash flows from investing
activities included a $4.0 million refund of wafer fabrication deposits related
to the Company's wafer purchases from one of its foundry suppliers in 1997 and
$2.7 million in new equipment purchases. Financing cash flows during the first
quarter included $2.0 million from the issuance of common stock less $1.1
million used to make principal payments under capital lease obligations.
In April of 1998 the Company announced that it had reached a definitive
agreement to purchase Integrated Telecom Technology, Inc. ("IgT") subject to
regulatory and IgT shareholder approval. The agreement anticipates a purchase
for $55 million with approximately half of the consideration in cash and half in
PMC-Sierra stock and options. The cash components of the transaction will come
from the Company's current cash and cash equivalents.
As of March 29, 1998, the Company's principal sources of liquidity included cash
and cash equivalents and short term investments of $80.1 million. The Company
believes that existing cash and cash equivalents, short-term investments, and
anticipated funds from operations will satisfy the Company's projected working
capital requirements, anticipated capital expenditures, debt repayments through
fiscal 1998 and the acquisition of IgT. The Company expects to purchase or
arrange capital leases for approximately $18.3 million over the balance of 1998.
The Company had a $10 million line of credit with a bank which expired on March
31, 1998. The Company expects to replace that line during the second quarter.
The Company's future capital requirements will depend on many factors,
including, among others, product development and acquisitions of complementary
businesses, products or technologies. To the extent that existing resources and
the 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 shareholders
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.
PART II - OTHER INFORMATION
Item 5. Change in Fiscal Year End
On April 22, 1998 the Company changed its fiscal year. The fiscal year will now
end on the last Sunday of the calendar year. Previously the Company's fiscal
year ended on the Sunday closest to December 31.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
11 Calculation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on April 22, 1998 to
disclose the Company's signing of a definitive agreement dated
April 15, 1998 to purchase Integrated Telecom Technology, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PMC-SIERRA, INC.
(Registrant)
Date: May 7, 1998 /S/ JOHN W. SULLIVAN
----------- ------------------------------
John W. Sullivan
Vice President, Finance
Chief Financial Officer
(Principal Accounting Officer)
PMC-Sierra, Inc.
CALCULATION OF EARNINGS PER SHARE
(in thousands, except for per share amounts)
(unaudited)
Three Months Ended
----------------------
Mar 29, Mar 31,
1998 1997
Numerator:
Net income $ 9,649 $ 8,480
========== ==========
Denominator:
Basic weighted average common shares outstanding (1) 31,524 30,774
---------- ----------
Effect of dilutive securities:
Stock options 2,158 1,110
Stock warrants 19 11
---------- ----------
Shares used in calculation of net income per share 33,701 31,895
========== ==========
Basic net income per share $ 0.31 $ 0.28
Diluted net income per share $ 0.29 $ 0.27
(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic
net income per share.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FILED FOR THE QUARTER ENDED MARCH 29, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-27-1998
<PERIOD-START> Dec-29-1997
<PERIOD-END> Mar-29-1998
<CASH> 77,149
<SECURITIES> 2,982
<RECEIVABLES> 17,602
<ALLOWANCES> 0
<INVENTORY> 4,258
<CURRENT-ASSETS> 103,708
<PP&E> 37,759
<DEPRECIATION> (17,382)
<TOTAL-ASSETS> 159,803
<CURRENT-LIABILITIES> 34,652
<BONDS> 0
0
0
<COMMON> 30
<OTHER-SE> 103,522
<TOTAL-LIABILITY-AND-EQUITY> 159,803
<SALES> 34,295
<TOTAL-REVENUES> 34,295
<CGS> 8,135
<TOTAL-COSTS> 8,135
<OTHER-EXPENSES> 12,138
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 257
<INCOME-PRETAX> 14,846
<INCOME-TAX> 5,197
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<NET-INCOME> 9,649
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</TABLE>
