----------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10 - Q/A - 1
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the quarterly period ended June 28, 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 June 28, 1998 - 30,672,754
----------------------------------------------
<PAGE>
This Amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form
10-Q, as filed by the Registrant for the quarter ending June 28, 1998, and is
being filed to reflect the restatement of the Registrant's condensed
consolidated financial statements. See "Restatement of Quarterly Financial
Statements" in Notes to the Consolidated Financial Statements for a discussion
of the basis for such restatement.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated statements of operations (restated)
- Consolidated balance sheets (restated)
- Consolidated statements of cash flows (restated)
- Notes to consolidated financial statements (restated)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (restated)
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote by Stockholders
Item 5. Other Information - Description of Capital Stock
Item 6. Exhibits and Reports on Form 8 - K
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
----------------------- ------------------------
Jun 28, Jun 30, Jun 28, Jun 30,
1998 1997 1998 1997
(restated - (restated -
see note 2) see note 2)
<S> <C> <C> <C> <C>
Net revenues $ 39,975 $ 34,064 $ 74,270 $ 67,638
Cost of revenues 9,968 9,613 18,103 19,464
----------- ----------- ----------- -----------
Gross profit 30,007 24,451 56,167 48,174
Other costs and expenses:
Research and development 7,820 5,308 13,836 11,348
Marketing, general and administrative 7,435 6,614 13,557 12,915
Acquisition of in process research and development 39,176 - 39,176 -
----------- ----------- ----------- -----------
Income (loss) from operations (24,424) 12,529 (10,402) 23,911
Interest income, net 750 232 1,574 157
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes (23,674) 12,761 (8,828) 24,068
Provision for income taxes 5,639 3,829 10,836 6,656
----------- ----------- ----------- -----------
Net income (loss) $ (29,313) $ 8,932 $ (19,664) $ 17,412
=========== =========== =========== ===========
Basic net income (loss) per share $ (0.92) $ 0.29 $ (0.62) $ 0.56
=========== =========== =========== ===========
Diluted net income (loss) per share $ (0.92) $ 0.28 $ (0.62) $ 0.54
=========== =========== =========== ===========
Shares used to calculate:
Basic net income(loss) per share 31,829 30,918 31,677 30,846
Diluted net income (loss) per share 31,829 32,374 31,677 32,135
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PMC-Sierra, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Jun 28, Dec 28,
1998 1997
(unaudited)
(restated -
see note 2)
ASSETS:
Current assets:
Cash and cash equivalents $ 60,872 $ 27,906
Short-term investments - 41,334
Accounts receivable, net 20,858 15,103
Inventories 6,212 3,199
Prepaid expenses and other current assets 3,986 1,958
Short-term deposits for wafer fabrication capacity - 4,000
----------- -----------
Total current assets 91,928 93,500
Property and equipment, net 26,430 19,699
Goodwill and other intangible assets, net 26,136 8,635
Investments and other assets 4,517 4,424
Deposits for wafer fabrication capacity 23,120 23,120
----------- -----------
$ 172,131 $ 149,378
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 9,434 $ 7,421
Accrued liabilities 22,454 13,751
Accrued income taxes 10,154 8,780
Current portion of obligations under capital leases
and long-term debt 5,093 4,652
Net liabilities of discontinued operations 249 301
----------- -----------
Total current liabilities 47,384 34,905
Deferred income taxes 3,958 4,023
Noncurrent obligations under capital leases and
long-term debt 7,645 9,092
Special shares convertible into PMC common stock 8,758 10,793
Shareholders' equity:
Common stock, par value $0.001 30 30
Additional paid in capital 176,638 143,153
Accumulated deficit (72,282) (52,618)
----------- -----------
Total shareholders' equity 104,386 90,565
----------- -----------
$ 172,131 $ 149,378
=========== ===========
See notes to consolidated financial statements.
<PAGE>
<TABLE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended
---------------------------
Jun 28, Jun 30,
1998 1997
(restated -
see note 2)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (19,664) $ 17,412
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,519 4,088
Acquisition of in process research and development 39,176 -
Changes in assets and liabilities
Accounts receivable (4,492) (3,048)
Inventories (2,458) 5,221
Prepaid expenses and other (1,754) (1,533)
Accounts payable and accrued expenses 8,925 1,838
Accrued restructuring costs - (7,569)
Net assets/liabilities associated with discontinued operations (52) (160)
------------ ------------
Net cash provided by operating activities 25,200 16,249
------------ ------------
Cash flows from investing activities:
Proceeds from sales/maturities of short-term investments 43,442 12,039
Purchases of short-term investments (2,108) (19,138)
Proceeds from refund of wafer fabrication deposits 4,000 -
Investments in other companies - (3,000)
Payment for purchase of Integrated Telecom Technology, Inc.,
net of cash acquired (27,165) -
Purchase of other in process research and development (1,419) -
Proceeds from sale of equipment - 2,483
Purchases of plant and equipment (9,636) (3,303)
------------ ------------
Net cash provided by (used in) investing activities 7,114 (10,919)
------------ ------------
Cash flows from financing activities:
Repayment of notes payable and long-term debt (116) (1,157)
Proceeds from sale/leaseback of equipment - 1,107
Principal payments under capital lease obligations (2,461) (2,004)
Proceeds from issuance of common stock 3,229 2,530
------------ ------------
Net cash provided by financing activities 652 476
------------ ------------
Net increase in cash and cash equivalents 32,966 5,806
Cash and cash equivalents, beginning of the period 27,906 35,038
------------ ------------
Cash and cash equivalents, end of the period $ 60,872 $ 40,844
============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PMC-SIERRA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those
rules or regulations. The interim financial statements are unaudited, but
reflect all adjustments which are, in the opinion of management, necessary
to 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 and six months ended June 28, 1998 are not necessarily indicative
of results to be expected in future periods.
2. Restatement of Quarterly Financial Statements
Subsequent to the issuance of the Company's June 28, 1998 consolidated
financial statements, the Securities and Exchange Commission issued new
guidance related to the valuation of in process research and development
("IPR&D") in purchase transactions. The Company has considered the impact
of this new guidance on the valuation of purchased IPR&D and other
intangibles acquired in connection with the acquisition of Integrated
Telecom Technology, Inc. ("IGT") in May, 1998 (see note 3).
The Company's initial calculations to value the acquired IPR&D were based
upon a methodology that focused on the after-tax cash flows attributable to
the technology on an overall basis, without regard for stage of completion
of individual projects, and the selection of an appropriate rate of return
to reflect the risk associated with the stage of completion of the
technology. This methodology conformed to generally accepted accounting
principles applied in accordance with then established industry practice.
Based on a revaluation performed using the methodology set forth in the
SEC's September 1998 letter to the American Institute of Certified Public
Accountants (`AICPA'), the Company has adjusted the amount of purchase
price allocated to IPR&D. As a result of the revised valuation, the charge
for IPR&D was decreased by $11.7 to $37.8 million, the amount ascribed to
other intangible assets increased from $6.4 to $18.1 million and
amortization increased by $160,000 for the quarter.
<PAGE>
The restatement resulted in the following impact on the Company's
previously reported results of operations for the three and six month
periods ended June 28, 1998:
(in thousands except per share data)
Statement of Operations:
Three Months Six Months
Ended Ended
Jun 28, Jun 28,
1998 1998
Net loss
As previously reported (40,823) (31,174)
Adjustment related to acquired in-process R&D
and intangible assets 11,670 11,670
Adjustment related to additional amortization
of intangible assets (160) (160)
-------------- --------------
Restated (29,313) (19,664)
============== ==============
Net loss per share - basic and diluted
As previously reported $ (1.28) $ (0.98)
Adjustment related to acquired in-process R&D
and intangible assets 0.37 0.37
Adjustment related to additional amortization
of intangible assets (0.01) (0.01)
-------------- --------------
Restated $ (0.92) $ (0.62)
============== ==============
Balance Sheet: June 28, 1998
------------------------------
(as restated) (previously
reported)
Goodwill and other intangible assets, net 26,136 14,626
Total assets 172,131 160,621
Total shareholders' equity 104,386 92,876
<PAGE>
3. Acquisition of Integrated Telecom Technology
On May 20, 1998, the Company acquired Integrated Telecom Technology, Inc.
("IGT") in exchange for total consideration of $55.0 million consisting of
cash paid to IGT stockholders of $17.8 million, cash paid to IGT creditors
of $9.0 million and the issuance of approximately 415,000 shares of common
stock and options to purchase approximately 214,000 shares of common stock.
The purchase price includes professional fees and other direct costs of the
acquisition totaling $850,000. IGT is a fabless semiconductor company
headquartered in Gaithersburg, MD with a development site in San Jose, CA.
IGT makes Asynchronous Transfer Mode (ATM) switching chipsets for wide area
network applications as well as ATM Segmentation-and-Reassembly and other
telecommunication chips. Upon consumation of the transaction, IGT was
merged with a wholly owned subsidiary of the Company.
The acquisition was recorded under the purchase method of accounting and
the final allocation among tangible and intangible assets and liabilities
is as follows:
Tangible assets $ 4,598
Intangible assets:
Developed and core technology 7,830
Assembled workforce 1,050
Goodwill 9,284
In process technology 37,757
Liabilities (4,669)
-----------
$ 55,850
===========
The revised valuation was based on management's estimates of the after tax
net cash flows and gives explicit consideration to the SEC's views on IPR&D
in purchase transactions. In making the allocation of purchase price to
IPR&D, the Company considered the present value of forecasted cash flows
and income that were expected to result from the projects in process at the
time of the acquisition, the status of these projects and their completion
costs and project risk. Specifically, the Company considered (1) the value
of core technology and ensured that the relative allocations to core
technology and in process technology were consistent with the relative
contributions of each of the final projects and (2) stage of completion of
the individual projects and ensured that the value considered only the
efforts completed as of the transaction date.
The revised amount allocated to IPR&D of $37.8 million was expensed upon
acquisition, as it was determined that the underlying projects had not
reached technological feasibility, had no alternative future use and
successful development was uncertain.
As at the acquisition date, IGT had three development projects which were
in process. These projects included an ATM switching chipset and two
different types of segmentation and reassembly chips ("SARs"). IGT had
developed SARs in the past and appropriate recognition was given in the
valuation to the developed and core technology underpinning the in process
SAR development projects. The SARs were estimated to be 66% and 83%
developed at the time of the acquisition. The ATM switching chipset was an
entirely new development effort and was estimated to be 78% complete at the
time of purchase. The Company will only benefit from the IPR&D and
intangible assets related to these projects when it begins shipping
products to customers. Failure to reach successful completion of these
projects could result in impairment of the associated capitalized
intangible assets and could require the Company to accelerate the time
period over which the intangibles are being amortized, which could have a
material and adverse affect on the Company's results of operations.
<PAGE>
The operating results of IGT have been included in the consolidated
statements since the date of acquisition. The following table presents the
unaudited pro forma results of operations for informational purposes
assuming that the Company had acquired IGT at the beginning of the 1998 and
1997 fiscal years. This information may not necessarily be indicative of
the future combined results of operations of the Company.
Six Months Ended
----------------------------
June 28, June 30,
1998 1997
(restated - (restated -
(in thousands, except for per share amounts) see note 2) see note 2)
Net revenues $78,579 $74,305
Net income $14,499 $14,168
Basic net income per share: $ 0.45 $ 0.45
Diluted net income per share: $ 0.42 $ 0.43
The pro forma results of operations give effect to certain adjustments,
including amortization of purchased intangibles and goodwill. The $37.8
million charge for purchased in process technology has been excluded from
the pro forma results, as it is a material non-recurring charge.
4. On May 1, 1998 a subsidiary of the Company acquired certain technology for
cash consideration of $1.4 million. This technology has not reached
technological feasibility and has no alternative future use. Accordingly,
this amount is included in the in process research and development expensed
in the three months ended June 28, 1998.
5. The components of inventories are as follows (in thousands):
Jun 28, Dec 28,
1998 1997
(unaudited)
Work-in-progress $ 2,103 $ 2,316
Finished goods 4,109 883
------------ ------------
$ 6,212 $ 3,199
============ ============
<PAGE>
6. 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 June 28, 1998 and June 30,
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>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in Part I - Item 1
of this Quarterly Report and the audited consolidated financial statements and
notes thereto and Management's Discussion and Analysis in the Company's 1997
Annual Report to Shareholders.
During the second quarter, the Company acquired Integrated Telecom Technology,
Inc. ("IGT") in exchange for total consideration of $55.0 million consisting of
cash paid to IGT shareholders of $17.8 million, cash paid to IGT creditors of
$9.0 million, the issuance of approximately 415,000 shares of common stock and
options to purchase approximately 214,000 shares of common stock. The purchase
price includes professional fees and other direct costs of the acquisition of
$850,000. IGT is a fabless semiconductor company headquartered in Gaithersburg,
MD with a development site in San Jose, CA. The Company assumed current
liabilities totaling $3.1 million, interest-bearing obligations in the form of
capital leases of $1.6 million and received tangible assets of $4.6 million
resulting in tangible net liabilities of $0.1 million.
Subsequent to the issuance of the Company's June 28, 1998 consolidated financial
statements, the Securities and Exchange Commission (`SEC') issued new guidance
related to the valuation of in process research and development (`IPR&D') in
purchase transactions. The Company has considered the impact of this new
guidance on the valuation of purchased IPR&D and other intangibles acquired in
connection with the acquisition of Integrated Telecom Technology, Inc. (`IGT')
in May, 1998 (see note 3 to Consolidated Financial Statements). Based on a
revaluation performed using the new SEC methodology, the Company has adjusted
the amount of purchase price allocated to IPR&D. As a result of the revised
valuation, the charge for IPR&D was decreased by $11.7 to $37.8 million, the
amount ascribed to other intangible assets increased from $6.4 to $18.1 million
and amortization increased by $160,000 for the quarter.
The revised amount allocated to IPR&D of $37.8 million was expensed upon
acquisition, as it was determined that the underlying products had not reached
technological feasibility, had no alternative future use and successful
development was uncertain. The Company will begin to benefit from the IPR&D and
intangible assets related to these projects only when they begin shipping
products to customers. Failure to reach successful completion of these products
could result in impairment of the associated capitalized intangible assets and
could require the Company to accelerate the time period over which the
intangibles are being amortized, which could have a material and adverse affect
on the Company's results of operations.
Subsequent to the second quarter, development work on one of the three projects
in process at the time of the acquisition was terminated (see Operating Expenses
and Charges). The Company will file an amendment to its quarterly report on Form
10Q/A for its third quarter reflecting that impairment.
Certain statements in this Report constitute "forward-looking statements" with
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, and 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.
<PAGE>
Results of Operations
Second Quarters of 1998 and 1997
Net Revenues ($000,000)
- -----------------------
Second Quarter
-----------------------
1998 1997 Change
Networking products $32.6 $21.3 53%
User Interface 7.4 12.8 (42%)
----------- ----------
Total net revenues $40.0 $34.1 17%
=========== ==========
Second quarter networking product revenue increased 53% over last year's second
quarter. During the second quarter the Company acquired Integrated Telecom
Technology, Inc. ("IGT") which accounted for $1.3 million of the $32.6 million
in networking product revenue.
User interface revenue declined 42% in the second quarter compared to last
year's second quarter. All new product development related to user interface
products was discontinued following a third quarter 1996 strategic decision to
focus all of the Company's resources on networking products. Revenues related to
user interface products are expected to decline significantly in the coming
quarter but continue at meaningful levels into 1999.
Gross Profit ($000,000)
- -----------------------
Second Quarter
-----------------------
1998 1997 Change
Gross profit $30.0 $24.5 22%
Percentage of net revenues 75% 72%
Gross profit increased in dollars and as a percentage of net revenues in the
second quarter compared to the prior year's second quarter. 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 will decline if anticipated decreases in average selling prices of
existing networking products are not offset by commensurate reductions in
production costs. Gross margins associated with IGT products are, on average,
lower than the Company's internally developed networking products but higher
than user interface products.
<PAGE>
Operating Expenses and Charges ($000,000)
- -----------------------------------------
Second Quarter
-----------------------
1998 1997 Change
Research and development $7.8 $5.3 47%
Percentage of net revenues 20% 16%
In process research and development $39.2 -
Marketing, general & administrative $7.4 $6.6 12%
Percentage of net revenues 19% 19%
Research and development ("R&D") spending of $7.8 million in the second quarter
of 1998 is up significantly over last year's second quarter, both in dollars and
as a percentage of net revenues. In the near term the Company expects further
significant increases in the percentage of net revenues devoted to R&D spending
in order to respond to the array of opportunities presented by the growth of the
internet and data networking in general, as well as the convergence of voice and
data communications. Products developed by future incremental R&D spending will
be unlikely to result in incremental net revenues prior to the year 2000 because
of design and marketing lead times.
The Company incurs R&D expenditures in order to attain technological leadership
from a multi-year perspective. Such funding has resulted in fluctuations 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.
In process research and development expenses of $39.2 million were recorded in
the second quarter of 1998 with $37.8 million related to the acquisition of IGT
and $1.4 million related to the acquisition of technology which has not reached
technological feasibility and has no alternative future use. In the Company's
original second quarter report on Form 10Q, the Company recorded a charge for
purchased IPR&D of $49.4 million in connection with the acquisition of IGT. The
revised charge gives explicit consideration to the valuation methodology set
forth in the SEC's September 1998 letter to the AICPA.
The $37.8 million charge for IPR&D in the IGT acquisition is an allocation based
on the estimated fair value of the risk-adjusted cash flows related to three
incomplete development projects. At the date of acquisition, these projects had
not yet reached technological feasibility, had no alternative future use and
successful development was uncertain. Accordingly, these costs were expensed as
of the acquisition date and were recorded as a one-time charge to earnings in
the second quarter of 1998.
As at the acquisition date, IGT had three development projects which were in
process. These projects included an ATM switching chipset and two different
types of segmentation and reassembly chips ("SARs"). IGT had developed SARs in
the past and appropriate recognition was given in the valuation to the developed
technology underpinning the in process SAR development projects. The SARs were
estimated to be 66% and 83% developed at the time of the acquisition. The
switching chipset was an entirely new development effort and was estimated to be
78% complete at the time of purchase.
<PAGE>
Remaining development efforts for these in process projects will include various
phases of design, development, and testing. At the time of acquisition, the
Company anticipated completion dates for the projects of approximately six to
nine months, after which time the Company expected to begin generating economic
benefits from the technologies. Subsequent to the second quarter, development of
the SAR judged to be 66% complete at the time of the acquisition was terminated.
Failure to reach successful completion of these products could result in
impairment of the associated capitalized intangible assets and could require the
Company to accelerate the time period over which the intangibles are being
amortized, which could have a material and adverse affect on the Company's
results of operations.
Marketing, general & administration expenses were higher in the second quarter
of 1998 than the comparable period in 1997, but approximately equal as a
percentage 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 could cause these costs
to increase as a percentage of net revenues.
Interest Income (Expense), Net
- ------------------------------
Net interest income increased to $750,000 in the second quarter of 1998 from
$232,000 in last year's second quarter 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.
<PAGE>
First Six Months of 1998 and 1997
Net Revenues ($000,000)
- -----------------------
First six months
-----------------------
1998 1997 Change
Networking products $60.5 $36.8 64%
User Interface 13.8 30.8 (55%)
----------- ----------
Total net revenues $74.3 $67.6 10%
=========== ==========
During the third quarter of 1996 the Company made a strategic decision to focus
on networking products and to discontinue development of user interface
products. Accordingly, the total increase in net revenues for the first half of
1998 compared to the prior year is 10%. Networking products grew from 54% of
total net revenues in the first half of 1997 to 81% in the first six months of
1998. All sales of the Company's products are denominated in U.S. dollars.
Gross Profit ($000,000)
- -----------------------
First six months
-----------------------
1998 1997 Change
Gross profit $56.2 $48.2 17%
Percentage of net revenues 76% 71%
Gross profit increased in both dollars and as a percentage of net revenues in
the first half of 1998 compared to the first half of 1997. Increased sales of
higher gross margin networking products more than offset the decline in gross
profit due to lower net revenues from the Company's User Interface products.
Operating Expenses and Charges ($000,000)
- -----------------------------------------
First six months
------------------------
1998 1997 Change
Research and development $13.8 $11.3 22%
Percentage of net revenues 19% 17%
In process research and development $39.2 -
Marketing, general & administrative $13.6 $12.9 5%
Percentage of net revenues 18% 19%
R&D expenses increased in both dollars and as a percentage of net revenues in
the first half of 1998 compared to the same period in 1997. All of the R&D
spending in 1998 and substantially all of the 1997 spending is related to the
Company's networking products.
<PAGE>
Marketing, general & administrative expenses increased in dollars and decreased
as a percentage of net revenues in the first half of 1998 compared to the first
half of 1997.
Liquidity and Capital Resources
The Company's cash and cash equivalents and short term investments declined from
$69.2 million on December 28, 1997 to $60.9 million on June 28, 1998. During the
first six months of 1998 the Company's operating activities provided $25.2
million in cash. Significant investing activities included $27.2 million related
to the Company's purchase of IGT, $9.6 million of purchases of plant and
equipment and $1.4 million related to the purchase of other in process research
and development. During the first half of 1998 the Company received a refund of
$4.0 million of foundry deposits based on its 1997 wafer purchases.
As of June 28, 1998, the Company's principal sources of liquidity included cash
and cash equivalents of $60.9 million and an unused $15.0 million revolving
credit facility put in place during the quarter. The Company believes that
existing cash and cash equivalents, anticipated funds from operations and access
to its revolving line of credit will satisfy the Company's projected working
capital requirements, anticipated capital expenditures and capital lease
payments for the foreseeable future. The Company expects to purchase, or arrange
capital leases for approximately $10 - 12 million of new capital expenditures
over the balance of 1998.
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.
<PAGE>
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
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.
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 general conditions
of the networking industry, 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 years,
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.
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.
<PAGE>
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, political and social instability, 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.
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.
<PAGE>
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.
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, the acquisition of certain assets of Bipolar Integrated Technology,
("Bit") in September 1996, and the recent acquisition of Integrated Telecom
Technology, Inc. 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, which could have a material adverse effect on the
Company.
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
networking or 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 has identified all
significant applications that will require modification to ensure year 2000
compliance. The Company uses commercially available standard software for its
critical operating and financial applications. One vendor of critical software
used by the Company has provided a program update, which is intended to rectify
the year 2000 issues related to this software. This update was installed in the
second quarter of 1998. Updates for the Company's other non-critical software
are available at the current time and, if new versions of the software are not
already purchased, are planned for installation in 1999. If the Company's
vendors' updates do not successfully rectify the year 2000 issues related to
their software, 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. In the event that the current systems need to be entirely replaced,
the Company estimates that it would cost approximately $2 million to acquire and
implement new systems. Any new systems would be capitalized and subsequently
depreciated.
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 company has
received written communication from its critical suppliers that they have
developed an action plan to address the issues related to the year 2000. The
failure of significant suppliers or customers of the Company to become year 2000
compliant could have a material effect on 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.
<PAGE>
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 20, 1998 the Company issued 414,635 shares of its Common Stock to
stockholders of Integrated Telecom Technology, Inc. ("IGT") in connection with
the acquisition of IGT by the Company. The total consideration paid for the
acquisition of IGT was approximately $55 million, comprised of the shares
issued, cash payments and options to purchase 214,414 shares of the Company's
Common Stock that were issued to option holders of IGT and registered on a
registration statement on Form S-8.
The issuance of the shares was made as a non-public offering in reliance on the
exemption from registration under Section 4(2) of the Securities Act. The shares
were offered (without public solicitation) and issued to a limited number of
purchasers who represented their intention to acquire the shares for investment
only and not with a view to the distribution thereof. Appropriate legends were
affixed to the stock certificates. All the purchasers received, or had access
to, adequate information about the Company. On June 3, 1998 the Company filed a
registration statement on Form S-3 covering the resale of the shares, which was
later declared effective by the SEC.
Item 4. SUBMISSION OF MATTERS TO A VOTE BY STOCKHOLDERS
The Annual Meeting of Stockholders of PMC-Sierra, Inc. was held on May 27, 1998
for the purposes of electing directors of the Company, approving an amendment to
the Company's 1994 Incentive Stock Plan to increase the number of shares of
Common Stock reserved for issuance by 1,100,000 shares, approving an amendment
to the Company's 1991 Employee Stock Purchase Plan to increase the number of
shares of Common Stock reserved for issuance by 250,000 shares, approving an
amendment to the Company's 1994 Incentive Stock Plan to increase the number of
shares of Common Stock reserved for issuance on January 1 of each year
(beginning January 1, 1999) by the lesser of (i) 4% of the outstanding shares on
such date, (ii) 2,000,000 shares, or (iii) an amount determined by the Board of
Directors, approving an amendment to the Company's 1991 Employee Stock Purchase
Pan to increase the number of shares of Common Stock reserved for issuance on
January 1 of each year (beginning January 1, 1999) by the lesser of (i) 1% of
the outstanding shares on such date, (ii) 500,000 shares, or (iii) an amount
determined by the Board of Directors, approving an amendment to the Company's
Certificate of Incorporation to increase the authorized number of shares of
Common Stock by 50,000,000 shares to a total of 100,000,000 shares, and to
ratify the appointment of Deloitte & Touche LLP as the Company's independent
auditors for the 1998 fiscal year.
All nominees for directors were elected, both amendments to the Company's 1994
Incentive Stock Plan were approved, both amendments to the Company's 1991
Employee Stock Purchase Plan were approved, the amendment to the Company's
Certificate of Incorporation was approved, the appointment of Deloitte & Touche
LLP as the Company's independent auditors for the 1998 fiscal year was ratified.
The voting on each matter is set forth below:
<PAGE>
To elect Directors of the Company to serve for the ensuing year and until the
next Annual meeting or the Election of their successors.
Nominee: For Withheld
- -------- --- --------
Robert L. Bailey 27,309,539 207,874
Alexandre Balkanski 27,306,059 207,874
Colin Beaumont 27,306,425 207,874
James V. Diller 27,296,448 207,874
Frank L. Marshall 27,308,622 207,874
Proposal to approve an amendment to the Company's 1994 Incentive Stock Plan
("Stock Plan") to increase the number of shares of Common Stock reserved for
issuance by 1,100,000 shares.
For Against Abstain Broker non-vote
13,731,099 9,697,435 38,895 4,046,698
Proposal to approve an amendment to the company's 1991 Employee Stock Purchase
Plan ("ESPP") to increase the number of shares of Common Stock reserved for
issuance by 250,000 shares.
For Against Abstain Broker non-vote
22,775,442 212,906 479,081 4,046,698
Proposal to approve an annual increase to the Stock Plan (beginning January 1,
1999) by the lesser of 4% of the outstanding shares, 2,000,000 shares or as
determined by the Board.
For Against Abstain Broker non-vote
13,936,832 9,368,447 54,872 4,153,976
Proposal to approve an annual increase to the ESPP (beginning January 1, 1999)
by the lesser of 1% of the outstanding shares, 500,000 shares or as determined
by the Board.
For Against Abstain Broker non-vote
20,436,236 2,542,029 489,164 4,046,698
<PAGE>
Proposal to approve an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock by 50,000,000 shares
to a total of 100,000,000 shares.
For Against Abstain Broker non-vote
25,607,352 1,320,392 479,105 107,278
Proposal to ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the 1998 fiscal year.
For Against Abstain Broker non-vote
27,039,636 10,964 463,527 0
Item 5. OTHER INFORMATION - DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares of
Common Stock, par value $0.001, and 5,000,000 shares of Preferred Stock, par
value $0.001.
The following summary of certain provisions of the Common Stock and Preferred
Stock does not purport to be complete though the Company believes it contains
all the material provisions, and is subject to, and qualified in its entirety
by, the provisions of the Company's Certificate of Incorporation and by the
provisions of applicable law.
Common Stock
- ------------
The Company's Common Stock is registered under Section 12(g) of the Exchange
Act. Subject to preferences that may be applicable to any outstanding Preferred
Stock which may be issued in the future, the holders of Common Stock are
entitled to receive ratably such non-cumulative dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
available to the Common Stock. The holders of Common Stock are entitled to one
vote per share on all matters to be voted upon by the stockholders, except that
stockholders may, in accordance with Section 214 of the Delaware General
Corporation Law, cumulate their votes in the election of directors. In the event
of liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to liquidation preferences, if any, of Preferred Stock
which may be issued in the future. All outstanding shares of Common Stock are
fully paid and non-assessable.
<PAGE>
Preferred Stock
- ---------------
Pursuant to the Company's Certificate of Incorporation, the Board of Directors
of the Company has the authority to issue up to 5,000,000 shares of Preferred
Stock in one or more series, to fix the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Stock, and to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
stockholders. Such issued Preferred Stock could adversely effect the voting
power and other rights of the holders of Common Stock. The issuance of Preferred
Stock may also have the effect of delaying, deferring or preventing a change in
control of the Company. At present, there are no outstanding shares of Preferred
Stock.
Rights of Holders of Special Shares of PMC-Sierra, Ltd.
- -------------------------------------------------------
The Special Shares of PMC-Sierra, Ltd. are redeemable for Common Stock of the
Company. Special Shares do not have voting rights in the Company, but in all
other respects they represent the economic and functional equivalent of the
Common Stock of the Company for which they can be redeemed. Under applicable
law, each class of Special Shares will have class voting rights in certain
circumstances with respect to transactions that affect the rights of the class
and for certain extraordinary corporate transactions. Two kinds of Special
Shares are outstanding: A Special Shares and B Special Shares.
<PAGE>
Delaware Law
- ------------
Section 203 of the Delaware General Corporation Law, from which the Company has
not opted out in its Certificate of Incorporation, restricts certain "business
combinations" with "interested stockholders" for three years following the date
that a person or entity becomes an interested stockholder, unless the Company's
Board of Directors approves the business combination and/or certain other
requirements are met.
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
- 3.1C Certificate of Amendment to Certificate of
Incorporation of PMC-Sierra, Inc. filed on June 4,
1998.
- 10.23 Revolving Operating Line of Credit Agreement between
PMC-Sierra, Inc. and CIBC Inc. dated 21st day of May
1998.
- 10.24 Revolving Operating Line of Credit Agreement between
PMC-Sierra, Ltd. and CIBC dated 21st day of May, 1998
- 10.25 Pledge Agreement between PMC-Sierra, Inc. and CIBC
Inc. with respect to shares of PMC-Sierra Ltd. dated
11th day of March, 1998.
- 10.26 Pledge Agreement between PMC-Sierra, Inc and CIBC,
Inc. with respect to shares of PMC-Sierra
International Inc. dated 27th day of April, 1998.
- 10.27 Guarantee Agreement between PMC-Sierra, Inc. and CIBC
dated 27th day of April, 1998.
- 10.28 1998 PMC-Sierra (Maryland), Inc. Stock Option Plan
- 11.1 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 20, 1998 to
disclose the Company's signing of a definitive agreement dated
April 15, 1998 to purchase Integrated Telecom Technology, Inc.
- A Current Report on Form 8-K was filed on June 3, 1998 to
disclose the Company's completion of the purchase of
Integrated Telecom Technology, Inc. ("IGT"), together with
audited balance sheets of IGT as of December 31, 1996 and
December 31, 1997 and audited statements of operations,
stockholders' deficiency and cash flows for the years ended
December 31, 1996 and December 31, 1997.
- An amended Current Report on Form 8-K was filed on June 22,
1998 to file the unaudited balance sheet of IGT as of March 31
1998, the unaudited statements of operations and cash flows
for the 3 months ended March 31 1998 and March 31, 1997, the
unaudited combined balance sheet of the Company and IGT as of
March 31, 1998 and the unaudited pro forma combined statements
of operations for the 3 months ended March 31, 1998 and for
the year ended December 31, 1997.
<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: February 10, 1999 /S/ JOHN W. SULLIVAN
----------------- ------------------------------
John W. Sullivan
Vice President, Finance
(Duly Authorized Officer)
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
--------------------------
Jun 28, Jun 30,
1998 1997
(restated -
see note 2)
Numerator:
Net income (loss) $ (29,313) $ 8,932
============= ============
Denominator:
Basic weighted average common shares outstanding (1) 31,829 30,918
------------- ------------
Effect of dilutive securities:
Stock options - 1,442
Stock warrants - 14
------------- ------------
Shares used in calculation of net income per share 31,829 32,374
============= ============
Basic net income (loss) per share $ (0.92) $ 0.29
Diluted net income (loss) per share $ (0.92) $ 0.28
(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 JUNE 28, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> JUN-28-1998
<CASH> 60,872
<SECURITIES> 0
<RECEIVABLES> 20,858
<ALLOWANCES> 0
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<CURRENT-ASSETS> 91,928
<PP&E> 46,342
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0
0
<COMMON> 30
<OTHER-SE> 104,356
<TOTAL-LIABILITY-AND-EQUITY> 172,131
<SALES> 74,270
<TOTAL-REVENUES> 74,270
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<TOTAL-COSTS> 18,103
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