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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10 - Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the quarterly period ended March 28, 1999
[ ] 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 28, 1999 - 31,726,721
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<PAGE>
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated statements of operations -
- Consolidated balance sheets -
- Consolidated statements of cash flows -
- Notes to consolidated financial statements -
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -
Item 3. Quantitative and Qualitative Disclosures About
Market Risk -
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8 - K -
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(unaudited)
Three Months Ended
--------------------------
Mar 28, Mar 29,
1999 1998
Net revenues $ 50,139 $ 34,295
Cost of revenues 10,974 8,135
------------ ------------
Gross profit 39,165 26,160
Other costs and expenses:
Research and development 11,558 6,016
Marketing, general and administrative 9,464 6,122
------------ ------------
Income from operations 18,143 14,022
Interest income, net 1,056 824
------------ ------------
Income before provision for income taxes 19,199 14,846
Provision for income taxes 6,726 5,197
------------ ------------
Net income $ 12,473 $ 9,649
============ ============
Basic net income per share $ 0.38 $ 0.31
============ ============
Diluted net income per share $ 0.35 $ 0.29
============ ============
Shares used to calculate:
Basic net income per share 32,806 31,524
Diluted net income per share 35,596 33,701
See notes to consolidated financial statements.
<PAGE>
PMC-Sierra, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Mar 28, Dec 27,
1999 1998
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 104,759 $ 33,943
Short-term investments - 50,893
Accounts receivable, net 24,292 26,227
Inventories 5,008 3,617
Prepaid expenses and other current assets 3,948 3,840
Short-term deposits for wafer fabrication capacity - 4,000
----------- -----------
Total current assets 138,007 122,520
Property and equipment, net 33,060 31,595
Goodwill and other intangible assets, net 18,477 19,629
Investments and other assets 4,732 4,434
Deposits for wafer fabrication capacity 19,120 19,120
----------- -----------
$ 213,396 $ 197,298
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 11,155 $ 8,964
Accrued liabilities 17,169 14,618
Deferred income 14,380 12,517
Accrued income taxes 8,952 13,897
Current portion of obligations under capital
leases and long-term debt 4,780 4,909
----------- -----------
Total current liabilities 56,436 54,905
Deferred income taxes 2,818 2,851
Noncurrent obligations under capital leases
and long-term debt 4,228 5,223
Special shares convertible into PMC common stock 7,550 8,387
Stockholders' equity:
Common stock, par value $0.001 32 31
Additional paid in capital 185,355 181,397
Accumulated deficit (43,023) (55,496)
----------- -----------
Total stockholders' equity 142,364 125,932
----------- -----------
$ 213,396 $ 197,298
=========== ===========
See notes to consolidated financial statements.
<PAGE>
PMC-Sierra, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
------------------------
Mar 28, Mar 29,
1999 1998
Cash flows from operating activities:
Net income $ 12,473 $ 9,649
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of plant and equipment 3,851 2,056
Amortization of intangibles 871 323
Changes in operating assets and liabilities
Accounts receivable 1,935 (2,499)
Inventories (1,391) (1,059)
Prepaid expenses and other (125) 379
Accounts payable and accrued expenses (236) (2,153)
Deferred income 1,863 2,058
Net liabilities associated with
discontinued operations - (52)
----------- -----------
Net cash provided by operating activities 19,241 8,702
----------- -----------
Cash flows from investing activities:
Proceeds from sales and maturities of
short-term investments 50,893 40,460
Purchases of short-term investments - (2,108)
Proceeds from refund of wafer fabrication deposits 4,000 4,000
Purchases of plant and equipment (5,316) (2,734)
----------- -----------
Net cash provided by investing activities 49,577 39,618
----------- -----------
Cash flows from financing activities:
Repayment of notes payable and long-term debt 16 -
Principal payments under capital lease obligations (1,140) (1,125)
Proceeds from issuance of common stock 3,122 2,048
----------- -----------
Net cash provided by financing activities 1,998 923
----------- -----------
Net increase in cash and cash equivalents 70,816 49,243
Cash and cash equivalents, beginning of the period 33,943 27,906
----------- -----------
Cash and cash equivalents, end of the period $ 104,759 $ 77,149
=========== ===========
See notes to consolidated financial statements.
<PAGE>
PMC-SIERRA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. Summary of Significant Accounting Policies
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 27, 1998. The results of operations for the interim period are not
necessarily indicative of results to be expected in future periods.
Inventories. Inventories are stated at the lower of cost (first-in, first out)
or market (estimated net realizable value). All figures are in thousands.
Mar 28, Dec 27,
1999 1998
Work-in-progress $ 2,008 $ 1,761
Finished goods 3,000 1,856
----------- -----------
$ 5,008 $ 3,617
=========== ===========
Recently issued accounting standards. In June 1998, the FASB issued Statement of
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. The Company expects to adopt the new Statement effective January 1,
2000. The Statement will require the recognition of all derivatives on the
Company's consolidated balance sheet at fair value. The Company anticipates that
the adoption of this Statement will not have a significant effect on its results
of operations or financial position.
NOTE 2. Segment Information
The Company has two operating segments: networking and non-networking products.
The networking segment consists of internetworking semiconductor devices and
related technical service and support to equipment manufacturers for use in
their communications and networking equipment. The non-networking segment
includes custom user interface products. The Company is supporting these
products for existing customers, but has decided not to develop any further
products of this type.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on gross margins from operations of the two segments.
<PAGE>
Three Months Ended
---------------------------
Mar 28, Mar 29,
1999 1998
Networking
Net revenues $ 47,145 $ 27,854
Gross profit 37,753 23,302
Non- Networking
Net revenues 2,994 6,441
Gross profit 1,412 2,858
Total gross profit 39,165 26,160
All the figures in this note are in thousands.
NOTE 3. Net Income Per Share.
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share amounts):
Three Months Ended
----------------------
Mar 28, Mar 29,
1999 1998
Numerator:
Net income $ 12,473 $ 9,649
========== ==========
Denominator:
Basic weighted average common shares outstanding (1) 32,806 31,524
---------- ----------
Effect of dilutive securities:
Stock options 2,768 2,158
Stock warrants 22 19
---------- ----------
Shares used in calculation of net income per share 35,596 33,701
========== ==========
Basic net income per share $ 0.38 $ 0.31
Diluted net income per share $ 0.35 $ 0.29
(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic net
income per share.
NOTE 4. Subsequent Event.
As a result of the recent merger on April 1, 1999 of I.C. Works, Inc. and
Cypress Semiconductor Corporation, PMC is to receive approximately 923,000
common shares of Cypress Semiconductor Corporation in exchange for the Company's
investment in I.C. Works, Inc. which it purchased in 1996 and 1997.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Investors should read the following discussion 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 of Financial Condition
and Results of Operations in the Company's 1998 Annual Report on Form 10k. Our
discussions about PMC-Sierra include our subsidiary PMC-Sierra Ltd., a Canadian
corporation, and our other subsidiaries.
This portion of this report contains forward-looking statements relating to:
o revenues;
o gross margins;
o expenditures on research and development, and selling and administration; and
o capital resources sufficiency.
Actual results may differ from those projected in the forward-looking statements
for a number of reasons, including those described below in "Factors You Should
Consider Before Investing in PMC-Sierra."
Results of Operations
First Quarters of 1999 and 1998
Net Revenues ($000,000)
- -----------------------
First Quarter
------------------------
1999 1998 Change
Networking products $ 47.1 $ 27.9 69%
Non-networking products 3.0 6.4 (53)%
----------- -----------
Total net revenues $ 50.1 $ 34.3 46%
=========== ===========
Net revenues increased by 46% in the first quarter of 1999 compared to the same
quarter of 1998. Our networking revenue increased 69% in the same periods, which
more than offset the 53% decline in non-networking revenues.
Networking revenues increased as a result of additional demand for our
customers' broadband networking equipment products and our customers' increased
purchases of our standard merchant market chips over custom-made chips.
Non-networking revenue, which includes sales of custom semiconductors, declined
as a result of our 1996 decision to restructure our non-networking business. We
are supporting non-networking products for existing customers, but have decided
not to develop any further products of this type. We expect non-networking
revenues to continue to decline during 1999 compared to 1998.
<PAGE>
Gross Profit ($000,000)
- -----------------------
First Quarter
-------------------------
1999 1998 Change
Networking $ 37.8 $ 23.3 62%
Non-networking 1.4 2.9 (52)%
------------ -----------
Total gross profit $ 39.2 $ 26.2 50%
============ ===========
Percentage of net revenues 78% 76%
Total gross profit grew 50% from $26.2 million in the first quarter of 1998 to
$39.2 million in the same quarter of 1999. The increase in sales of higher gross
margin networking semiconductors more than offset the decline in gross profit
due to a reduction in non-networking sales.
Gross profit as a percentage of sales increased from the first quarter of 1998
to the first quarter of 1999 as our relatively high gross margin networking
products comprised a higher percentage of total revenue.
Our networking gross profit as a percentage of sales is high relative to the
overall semiconductor industry because our products are extremely complex and
are sold in relatively low volumes. We believe that our gross profit as a
percentage of revenue will decline as our products mature, our customers
purchase in greater volumes, and should the market for our products grow.
We also expect networking gross margins to decline if reductions in production
costs do not sufficiently offset decreases in average selling prices of existing
networking products, or if increases in gross profit contributed by new higher
gross margin networking products do not sufficiently offset decreases in average
selling prices of existing networking products.
Operating Expenses ($000,000)
- -----------------------------
First quarter
-------------------------------
1999 1998 Change
Research and development $11.6 $6.0 93%
Percentage of net revenues 23% 17%
Marketing, general & administrative $9.5 $6.1 56%
Percentage of net revenues 19% 18%
First quarter 1999 research and development ("R&D") expenses of $11.6 million
represent a 93% increase over the $6.0 million in R&D expenses in the first
quarter of 1998. We increased our R&D spending in order to respond to a number
of opportunities presented by the growth in the Internet, data networking and
the convergence of voice and data communications.
<PAGE>
We incur R&D expenditures in an effort to attain technological leadership from a
multi-year perspective. This has caused R&D spending to fluctuate from quarter
to quarter. We expect 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.
Marketing, general and administrative expenses increased both in dollars and as
a percentage of income, from the first quarter of 1998 to the first quarter of
1999. These expenses increased as a result of our growing operations and the
timing of expenditures. We expect marketing, general and administrative expenses
to increase in future periods.
Interest Income (Expense), Net
- ------------------------------
Net interest income increased to $1.1 million in the first quarter of 1999 from
$0.8 million in last year's first 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. Our financial results include the amortization of
intangible assets that are not deductible for tax purposes. The first quarter of
1999 included $0.9 million of intangible amortization compared to $0.3 million
in the comparable period of 1998.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents and short term investments increased from $84.8
million at the end of 1998 to $104.8 million at March 28, 1999. During the first
quarter of 1999, operating activities provided $19.2 million in cash. The net
income of $12.5 million in the first quarter of 1999 includes non-cash charges
of $3.9 million in depreciation and $0.9 million in amortization.
During the first quarter of 1999, our investing activities included $50.9
million in proceeds from the redemption of short term investments, a $4.0
million refund of deposits held at one of our foundry suppliers, and $5.3
million in purchases of new plant and equipment. We used $1.1 million to repay
our debt and capital lease obligations and received proceeds of $3.1 million
from the issuance of common stock through our stock option and purchase plans.
As at March 28, 1999, our principal sources of liquidity included cash and cash
equivalents and short-term investments of $104.8 million. We also have a line of
credit agreement with a bank that allows us to borrow up to $15 million. We must
have the prior written consent of the bank before we may pay cash dividends, or
make material divestments. We expect to review this agreement in the second
quarter of 1999. There were no amounts outstanding under the line of credit at
the end of the first quarter of 1999.
We believe that existing sources of liquidity and anticipated funds from
operations will satisfy our projected working capital and capital expenditure
requirements through the end of 1999. We expect to spend approximately $28
million on new capital additions over the balance of 1999.
<PAGE>
FACTORS THAT YOU SHOULD CONSIDER BEFORE INVESTING IN PMC-SIERRA
- ---------------------------------------------------------------
Our company is subject to a number of risks - some are normal to the fabless
networking semiconductor industry, some are the same or similar to those
disclosed in previous SEC filings, and some may be present in the future. You
should carefully consider all of these risks and the other information in this
report before investing. The fact that certain risks are endemic to the industry
does not lessen the significance of the risk.
As a result of these risks, our business, financial condition or operating
results could be materially adversely affected. This could cause the trading
price of our common stock to decline, and you may lose part or all of your
investment.
OUR OPERATING RESULTS FLUCTUATE
- -------------------------------
Our operating results have fluctuated in the past and may fluctuate in the
future for any of the following reasons:
o our product introduction timing;
o our customers' inventory levels fluctuate;
o demand for our and our customers' products changes;
o our suppliers' product and capacity availability changes;
o our product manufacturing yields change;
o market acceptance or rejection of one or more of our products;
o our average selling prices change;
o our customers are acquired or divested;
o a networking industry downturn occurs;
o we are unable to acquire wafer or other manufacturing capacity;
o our competitors produce new products or technologies;
o our product and process development expenditures change; and
o our competitors change prices.
WE ANTICIPATE LOWER MARGINS ON MATURE AND HIGH VOLUME PRODUCTS
- --------------------------------------------------------------
Our gross and operating margins may change in the future as a result of any of
the following:
o changes in average selling prices;
o changes in production and wafer and other supply costs; and
o changes in our product mix.
We expect the average selling prices of our products to decline as they mature.
Historically, competition in the semiconductor industry has driven down the
average selling prices ("ASPs") of products. If we price our products too high,
our customers may use a competitor's product or an in-house solution. Thus, our
ASPs will generally fall with the industry norms. To maintain profit margins, we
must reduce our costs sufficiently to offset declines in ASPs, or successfully
sell proportionately more new products with higher ASPs. Yield or other
production problems, or shortages of supply may preclude us from lowering or
maintaining current operating costs. Also, competitive, market and other
pressures may not allow us to increase our sales of our higher ASP products.
<PAGE>
In addition, we are entering into the ethernet market of the networking
industry. This market is characterized by average volumes that are higher and
gross margins that are lower than the market in which we currently participate.
To maintain our current operating margins, we will have to sell higher volumes
of these chips than in our traditional markets. If we sell these chips in low
volumes, our operating margins may be adversely affected.
WE NEED TO SUCCESSFULLY DEVELOP AND INTRODUCE OUR NEW PRODUCTS
- --------------------------------------------------------------
The success of our new products depends on a number of factors, including:
o our definition of new products to meet customer requirements;
o our completion of product development and introduction of new products to
market in a timely manner;
o our ability to judge product demand;
o competitive pricing and performance levels; and
o suitable fabrication yields by our independent foundries.
Many of these factors are outside our control. We may not be able to effectively
accomplish those factors that are in our control.
Some of our products adhere to specifications developed by industry groups. For
example, in the second half of 1998, we introduced two packet-over-Sonet devices
based on specifications developed by an industry group. These specifications may
not reach sufficient acceptance by the market to allow our products commercial
success.
In September 1996, we entered into a new product area. We acquired in-process
research and development and developed technology relating to ethernet
switching. It is possible that ethernet products may not be sufficiently
accepted by the market to achieve commercial success.
In May 1998, we acquired in-process research and development and developed
technology related to ATM segmentation and reassembly as well at ATM switching.
It is possible that these products may not achieve volumes sufficient to assure
their commercial success.
WE OPERATE IN AN INDUSTRY SUBJECT TO RAPID TECHNOLOGICAL CHANGE
- ---------------------------------------------------------------
We sell products to a market whose characteristics include rapidly evolving
industry standards, product obsolescence, and new manufacturing and design
technologies. Our complex semiconductors require extensive design and testing
before prototypes can be manufactured. They often need to be redesigned because
manufacturing yields on prototypes are unacceptable or customers redefine their
products to meet changing industry standards. Many of the standards and
protocols for our products are based on high speed networking technologies that
have not been widely adopted or ratified by one of the standard setting bodies
in our customers' industry. Our customers often delay or alter their design
demands during this standard-setting process. In response, we must redesign our
products to suit these changing demands. Redesign usually delays the production
of our products. Our products may become obsolete due to these rapidly evolving
industry standards and customer preferences.
<PAGE>
WE DEPEND ON THE ATM TELECOMMUNICATIONS AND NETWORKING MARKET
- -------------------------------------------------------------
We focus a significant part of our business and research expenditures in the
Asynchronous Transfer Mode ("ATM") telecommunications and networking market. As
a result of our 1996 restructuring, revenues from non-networking products have
declined significantly over the last several years, making our results depend
primarily on ATM and related products. The percentage of net revenues to total
company sales derived from sales of ATM, T1/E1, DS3/E3 and SONET/SDH based
products amounted to 86% in 1998 compared to 67% in 1997.
The ATM market is in an early stage of deployment. If the industry adopts
industry standards that compete with ATM, our ATM products could be made
unmarketable or obsolete. The market for ATM equipment has not developed as
rapidly as industry observers had originally predicted, while alternative
networking technologies such as "packet-over-SONET" and "gigabit ethernet" have
developed to meet networking requirements.
WE FACE FIERCE COMPETITION
- --------------------------
The markets for our products are intensely competitive and subject to rapid
technological change and price erosion. We may not be able to compete
successfully against current or future competitors.
We believe that our ability to compete successfully in these markets depends on:
o our product performance, quality and pricing;
o our, our competitors' and our customers' timing and success of new product
introductions;
o our ability to innovate;
o our ability to deliver working products on schedule;
o market acceptance of standards for which we have produced products;
o our ability to obtain adequate manufacturing capacity;
o our subcontractors' production efficiency;
o the rate at which our customers incorporate our products into their
designs; and
o our and our competitors' assertion of intellectual property rights.
We typically face competition at the design stage, where customers evaluate
alternative design approaches that require integrated circuits. Our competitors
have increasingly frequent opportunities to supplant our products in next
generation systems because of shortened product life and design-in cycles in
many of our customers' products.
<PAGE>
Our competitors are major domestic and international semiconductor companies,
many of which have substantially greater financial and other resources than us.
Emerging companies also provide significant competition in our segment of the
semiconductor market. Our competitors include Advanced Micro Circuits
Corporation, Broadcom, Conexant Systems, Cypress Semiconductor, Dallas
Semiconductor, Galileo Technology, Integrated Device Technology, Intel, Level
One Communications, Lucent Technologies, Motorola, MMC Networks, Siemens, Texas
Instruments, Transwitch and Vitesse Semiconductor. Over the next few years, we
expect additional competitors, some of which also may have greater financial and
other resources, to enter the market with new products. In addition, we are
aware of a number of venture-backed companies that each focus on a specific
portion of our broad range of products. These companies collectively could
represent future competition for many design wins, and subsequent product sales.
WE MUST HAVE ACCESS TO THE KEY SUPPLIERS ON WHICH WE RELY
- ---------------------------------------------------------
We do not own or operate a wafer fabrication facility. Two outside foundries
supply all our semiconductor device requirements. Our foundry suppliers also
produce products for themselves and other companies. We may not have access to
adequate capacity or certain process technologies. We have less control over
delivery schedules, manufacturing yields and costs than competitors with their
own fabrication facilities. If the foundries we use are unable or unwilling to
manufacture our products in required volumes, we may have to identify and
qualify acceptable additional or alternative foundries. This qualification
process could take six months or longer. We might not find enough capacity
quickly enough, if ever, to satisfy our production requirements.
Sub-assemblers in Asia assemble all of our semiconductor products. Raw material
shortages, political and social instability, assembly house service disruptions,
currency fluctuations, or other circumstances in the region could force us to
seek additional or alternative sources of supply or assembly. This could lead to
supply constraints or product delivery delays which, in turn, may result in the
loss of customers. We have less control over delivery schedules, assembly
processes, quality assurances and costs than competitors that do not outsource
these tasks.
A limited number of suppliers provide the computer aided design ("CAD") software
we use to design our products. Factors affecting the price, availability or
technical capability of these products could affect our ability to access
appropriate CAD tools for the development of highly complex products. In
particular, the CAD software industry has been the subject of extensive
intellectual property rights litigation, the results of which could materially
change in the pricing and nature of the software we use. We also have less
control over whether our software suppliers will be able to breach technical
barriers in time to fulfill with our needs.
OUR CUSTOMER BASE IS CONCENTRATED
- ---------------------------------
We depend on a limited number of customers for a major portion of our revenues.
Through direct, distributor and subcontractor purchases, Lucent Technologies
(including Ascend Communications) and Cisco Systems each accounted for more than
10% of our fiscal 1998 revenues. We do not have long-term volume purchase
commitments from any of our major customers. Our customers often shift buying
patterns as they manage inventory levels, decide to use competing products, or
change their orders for other reasons. If one or more customers were to delay,
reduce or cancel orders, our overall order levels may fluctuate greatly.
<PAGE>
OUR GLOBAL BUSINESS APPROACH SUBJECTS US TO ADDITIONAL RISKS
- ------------------------------------------------------------
We are subject to a number of risks of conducting business outside of the United
States.
Historically, international sales accounted for the following percentages of our
net revenues: 32% in 1998, 30% in 1997 and 46% in 1996. We expect international
sales will continue to represent a significant portion of our and our customers'
net revenues for the foreseeable future.
We are subject to these risks to a greater extent than most companies because,
in addition to selling our products in a number of countries, a significant
portion of our research and development and manufacturing are conducted outside
of the United States. The majority of our development, test, marketing and
administrative functions occur in Canada and substantially all of our products
are manufactured and assembled by independent third parties in Asia.
Our international sales, research and development and manufacturing may subject
us to the following risks:
o changes to, or impositions of, legislative or regulatory requirements and
policy changes affecting the networking market;
o delays resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas, exchange rates and other trade barriers
and restrictions;
o foreign currency rate fluctuations because our development, test, marketing
and administrative costs are denominated in Canadian dollars, and our
selling costs are denominated in a variety of currencies;
o greater difficulty in accounts receivable collection;
o longer payment cycles;
o taxes;
o political, social and economic instability;
o hostilities and changes in diplomatic and trade relationships; and
o the burdens of complying with a variety of foreign laws and communications
standards.
WE DEPEND ON KEY PERSONNEL
- --------------------------
We must retain and hire key technical personnel to be successful. This is
particularly true with respect to those employees who are highly skilled at the
design and test functions used to develop high speed networking products and
related software. The competition for such employees is intense and we do not
have employment agreements in place with these key personnel. We issue common
stock options that are subject to vesting as employee incentives. These options,
however, are effective as retention incentives only if they have economic value.
OUR PRODUCTS EMPLOY PROPRIETARY TECHNOLOGY THAT WE MAY NOT BE ABLE TO PROTECT
- -----------------------------------------------------------------------------
To compete effectively, we must protect our proprietary information. We rely on
a combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and licensing arrangements to protect our
intellectual property rights. We hold several patents and have a number of
pending patent applications.
<PAGE>
We might not succeed in attaining patents from any of our pending applications.
Even if we are awarded patents, they may not provide any meaningful protection
or commercial advantage to us, as they may not be of sufficient scope or
strength, or may not be issued in all countries where our products can be sold.
In addition, our competitors may be able to design around our patents.
We develop, manufacture and sell our products in Asian and other countries that
may not protect our products or intellectual property rights to the same extent
as the laws of the United States. This makes piracy of our technology and
products more likely. Steps we take to protect our proprietary information may
not be adequate to prevent theft of our technology. We may not be able to
prevent our competitors from independently developing technologies that are
similar to or better than ours.
WE MAY BE LEFT WITH UNSALEABLE INVENTORY
- ----------------------------------------
We attempt to forecast and maintain a level of inventory in anticipation of
demand for our products. Anticipating demand is difficult because our customers
face volatile pricing and demand for their end-user networking equipment. If our
customers were to delay, cancel or otherwise change future ordering patterns, we
could be left with unwanted inventory.
OUR PRODUCTS EMPLOY PROPRIETARY TECHNOLOGY THAT MAY INFRINGE ON THE INTELLECTUAL
- --------------------------------------------------------------------------------
PROPERTY RIGHTS OF THIRD PARTIES
- --------------------------------
Vigorous protection and pursuit of intellectual property rights or positions
characterize the semiconductor industry. This often results in expensive and
lengthy litigation. We, as well as our customers or suppliers, may be accused of
infringing on patents or other intellectual property rights owned by third
parties. This has happened in the past. An adverse result in any litigation
could force us to pay substantial damages, stop manufacturing, using and selling
the infringing products, spend significant resources to develop non-infringing
technology, discontinue using certain processes or obtain licenses to the
infringing technology. In addition, we may not be able to develop non-infringing
technology, nor might we be able to find appropriate licenses on reasonable
terms.
Patent disputes in the semiconductor industry are often settled through
cross-licensing arrangements. Because we currently do not have a substantial
portfolio of patents, we may not be able to settle an alleged patent
infringement claim through a cross-licensing arrangement. We are therefore more
exposed to third party claims than some of our competitors and customers.
In the past, our customers have been required to obtain licenses from and pay
royalties to third parties for the sale of systems incorporating our
semiconductor devices. Until December of 1997, we indemnified our customers up
to the dollar amount of their purchases of our products found to be infringing
on technology owned by third parties. Customers may also make claims against us
with respect to infringement.
Furthermore, we may initiate claims or litigation against third parties for
infringing our proprietary rights or to establish the validity of our
proprietary rights. This could consume significant resources and divert the
efforts of our technical and management personnel, regardless of the
litigation's outcome.
<PAGE>
WE MAY BE INVOLVED IN ACQUISITIONS
- ----------------------------------
We may acquire products, technologies or businesses from third parties.
Management may be diverted from our operations while they identify and negotiate
these acquisitions and integrate an acquired entity into our operations. Also,
we may be forced to develop expertise outside our existing businesses, and
replace key personnel who leave due to an acquisition. An acquisition could
absorb substantial cash resources, require us to incur or assume debt
obligations, or issue additional equity. If we issue more equity, we may dilute
our common stock with securities that have a senior interest.
Acquired entities also may have unknown liabilities, and the combined entity may
not achieve the results that were anticipated at the time of the acquisition.
Since the Financial Accounting Standards Board has made in-process R&D
write-offs impractical, an acquisition that is accounted for as a purchase could
involve the amortization of goodwill over a number of years. This was the
accounting method used to record our acquisition of a networking business in
1994, certain assets of Bipolar Integrated Technology in September 1996, and the
acquisition of Integrated Telecom Technology in May 1998.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE
- --------------------------------------------
We must continue to make significant investments in research and development,
capital equipment and facilities for our operations. Our future capital
requirements will depend on many factors, including product development, working
capital investments, and acquisitions of businesses, products or technologies.
We may need to raise additional funds through public or private debt or equity
financing to fund our operations. If we raise funds by issuing equity
securities, the percentage ownership of current stockholders will be reduced and
the new equity securities may have priority rights to your investment. We may
not obtain sufficient financing on terms we or you will find favorable. We may
delay, limit or eliminate some or all of our proposed operations if adequate
funds are not available.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
- --------------------------------------------------------
In the past, our common stock price has fluctuated substantially. The reasons
this may continue include the following:
o our or our competitors' new product announcements;
o quarterly fluctuations in the financial results of our company and other
companies in the semiconductor, networking or computer industries;
o conditions in the networking or semiconductor industry; and
o investor sentiment toward technology stocks.
In addition, increases in our stock price and expansion of our price-to-earnings
multiple may have made our stock attractive to momentum investors who often
shift funds into and out of stocks rapidly, exacerbating price fluctuations in
either direction.
<PAGE>
YEAR 2000 COMPUTER SYSTEMS ISSUES
- ---------------------------------
The approach of the year 2000 presents significant issues for many financial,
information, and operational systems. Many systems in use today may not be able
to interpret dates after December 31, 1999 appropriately, because such systems
allow only two digits to indicate the year in a date. As a result, such systems
are unable to distinguish January 1, 2000, from January 1, 1900, which could
have adverse consequences on the operations of the entity.
Our State of Readiness
We have designated specific individuals to identify and resolve year 2000 issues
associated with our internal information technology (IT) systems, our internal
non-IT systems, and material third party relationships. We have completed the
identification of and are implementing our plans to address our year 2000
issues.
We use commercially available standard software for our critical operating and
design functions. Our primary software vendors have provided program updates
that are intended to rectify the year 2000 issues related to their software. We
upgraded all primary software by the second quarter of 1998. In addition, we are
currently implementing an enterprise-wide software system for operational
reasons. This system is scheduled to be fully implemented in the remainder of
1999 and is year 2000 compliant.
We have secondary design and operating software that is not year 2000 compliant.
We have identified and intend to install or develop patches or workaround
solutions for this software during 1999.
We use other technology, such as semiconductor testers, which are not year 2000
compliant. These systems do not interface with our critical operating
applications. We have identified these systems and expect to conclude modifying
or replacing them in 1999.
The total cost of the software upgrade for our primary operating and financial
applications, the cost to purchase and install our other non-critical software,
and the cost for the modification and replacement of our other technology is
expected to be immaterial.
As of March 28, 1999, our year 2000 procedures are proceeding as planned. Costs
of these procedures to date plus expected costs to completion are expected to be
immaterial.
Our Year 2000 Risk
Our greatest year 2000 exposure comes from our product manufacturing, packaging
and delivery suppliers. Our worst case scenario would be if one or more critical
suppliers fail to become year 2000 compliant and fail to develop acceptable
workaround solutions. The majority of our product manufacturing, packaging and
delivery is outsourced to two wafer fabrication companies, three assembly
companies and one shipping company, respectively. These suppliers are generally
much larger than our company and we have little influence on their year 2000
preparedness schedules. While we have received written communication from our
critical suppliers that they have developed an action plan to address their year
2000 issues, we cannot be certain that these plans will be implemented or be
effective.
<PAGE>
If our suppliers are unable to manufacture our products as a result of year 2000
issues, we may be forced to find and qualify other year 2000 compliant
suppliers. This qualification process could take six months or longer. We may
not find sufficient capacity quickly enough to satisfy our production
requirements, as we would expect that the many other companies with
manufacturing models similar to ours would be vying for production capacity.
We are also exposed to customers who may not be year 2000 compliant. If one or
more of our customers' operations is interrupted due to year 2000 issue
non-compliance, our revenues from these customers could be materially impacted.
Our Contingency Plans
While we do not have a formal contingency plan, we are monitoring our critical
suppliers to ensure they complete their year 2000 plans as scheduled. We would
implement a formal contingency plan should any of our critical suppliers
indicate that there would be any delays resulting from their own year 2000
plans. Such a plan could entail contacting and qualifying other potentially year
2000 compliant suppliers and stocking additional inventory to cover short term
operating needs. We can not ensure that this contingency plan would be effective
or completed in a timely manner.
SPECIAL NOTE ON FORWARD LOOKING STATEMENTS
- ------------------------------------------
Some statements in this report constitute "forward looking statements" within
the meaning of the federal securities laws. Our results, performance or
achievements may be materially different from those expressed or implied by
these statements. Our forward looking statements include projections relating to
trends in markets, long and short term revenues and gross margins. They also
include projections related to future expenditures on research and development,
marketing, general and administrative expense, new accounting pronouncements and
the year 2000 issue along with the impact of these issues. We may not, nor are
we obliged to, release revisions to forward-looking statements to reflect
subsequent events.
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion regarding our risk management activities contains
"forward-looking statements" that involve risks and uncertainties. Actual
results may differ materially from those projected in the forward-looking
statements.
We are exposed to foreign currency fluctuations through our operations in Canada
and elsewhere. In our effort to hedge this risk, we typically forecast our
operational currency needs, purchase such currency on the open market at the
beginning of an operational period, and classify these funds as a hedge against
operations. We usually limit the operational period to less than 3 months to
avoid undue exposure of our asset position to further foreign currency
fluctuation. While we expect to utilize this method of hedging our foreign
currency risk in the future, we may change our hedging methodology and utilize
foreign exchange contracts which are currently available under our operating
line of credit agreement.
Occasionally, we may not be able to correctly forecast our operational needs. If
our forecasts are overstated or understated during periods of currency
volatility, we could experience unanticipated currency gains or losses. At the
end of the first quarter of 1999, we did not have significant foreign currency
denominated net asset or net liability positions, and we had no outstanding
foreign exchange contracts.
We maintain investment portfolio holdings of various issuers, types, and
maturity dates with various banks and investment banking institutions. We
sometimes hold investments beyond 120 days, and the market value of these
investments on any day during the investment term may vary as a result of market
interest rate fluctuations. We do not hedge this exposure because short-term
fluctuations in interest rates would not likely have a material impact on
interest earnings. We classify our investments as available-for-sale or
held-to-maturity at the time of purchase and re-evaluate this designation as of
each balance sheet date. We had no outstanding short term investments at the end
of the first quarter of 1999. In the future, we expect to hold the short-term
investments we buy through to maturity.
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule
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 10, 1999 /S/ JOHN W. SULLIVAN
------------ ------------------------------
John W. Sullivan
Vice President, Finance
(duly authorized officer)
Chief Financial Officer
(principal accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FILED FOR THE QUARTER ENDED MARCH 28, 1999 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-26-1999
<PERIOD-START> Dec-28-1998
<PERIOD-END> Mar-28-1998
<CASH> 104,759
<SECURITIES> 0
<RECEIVABLES> 24,292
<ALLOWANCES> 0
<INVENTORY> 5,008
<CURRENT-ASSETS> 138,007
<PP&E> 66,568
<DEPRECIATION> (33,508)
<TOTAL-ASSETS> 213,396
<CURRENT-LIABILITIES> 56,436
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 142,332
<TOTAL-LIABILITY-AND-EQUITY> 213,396
<SALES> 50,139
<TOTAL-REVENUES> 50,139
<CGS> 10,974
<TOTAL-COSTS> 10,974
<OTHER-EXPENSES> 21,022
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<INTEREST-EXPENSE> 180
<INCOME-PRETAX> 19,199
<INCOME-TAX> 6,726
<INCOME-CONTINUING> 12,473
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<EXTRAORDINARY> 0
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<NET-INCOME> 12,473
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